What affects finding and applying knowledge from the outside world?

Hi, there. I’m Dr. Matt Hughes. I’m Reader in Entrepreneurial Management here at Durham University Business School, and my area of expertise is firm level entrepreneurship and innovation. And I also concentrate specifically on network relationships and how firms can use networks to increase knowledge, resources, and obviously, it’s to innovate. And this, of course, speaks to open innovation. And as part of this first video, we’re going to talk about what is absorptive capacity, why it’s important, and what does it mean for open innovation. So what is absorptive capacity? Absorptive capacity is essentially a firm’s ability to acquire, assimilate, transform, and exploit new knowledge.

Without it, the firm has no way of filtering the information that comes across in the world and particularly through its relationships. So in relationships, you will encounter lots and lots of information. So that information then needs to be filtered to understand what is valuable, and then how you’re going to use that to advance your activities, specifically innovation activities. So you need to think about– in this sense– how do you decide what’s important and what’s not? How do you decide what’s a strategic value and what’s not? OK, so why is absorptive capacity important? So, originally, absorptive capacity was thought of as simply the firm’s stock of prior knowledge.

So that means the learnings that you as an organisation have built up over time, the knowledge, and the experience that became your body of prior knowledge. And that’s what you were using to filter out information that you were encountering in the world. Now the problem with this is that you’re almost immediately biased to screen out information based on what is already known. So that means you’re much more likely to filter out information that is novel and then doesn’t fit within that prior knowledge. So for open innovation, this is clearly bad because we risk ignoring information that doesn’t fit.

So if we filter out information that is novel, we’re not really going to be challenging our worldview or extending what we do or looking at things from a different perspective. Now this is why it’s believed that entrepreneurial firms, for example, have learning advantages compared to established firms because they don’t have the prior stock of knowledge. They don’t have this closed world view of how things are meant to be done or what information means when they encounter it. So we need to be able to acquire new knowledge, assimilate that to see the world with fresh eyes. So it’s better to think of it then in terms of a capability or process instead.

So what are the activities that we can use to collect, connect, and then integrate knowledge within the firm? And then what are the selection and retention routines that we can use to transfer that knowledge into our innovation activities? So what’s this mean for open innovation? Well, the filtering of knowledge on the one hand versus setting routines to truly learn explains why established firms often lack a willingness and an ability to cannibalise existing products in favour of new ones. And this is something that’s been called the incumbents curse. It’s the situation where the firm becomes too wedded to what it knows from the past that it’s unable to innovate in new directions moving forward.

So to innovate new things, we need to be able to expand our worldview. We need to be able to acquire information from our relationships, but then truly learn from it. This is what really allows us to increase the power of innovation internally, but also then increase the power of the innovation that’s possible through our networks of relationships. However, be very careful though. We need absorptive capacity to filter that information and understand it. Remember that through relationships, we can encounter a considerable amounts of knowledge.

And if we don’t have a way of filtering and then understanding the knowledge and then applying it to our innovation, then we risk only tapping superficial knowledge or worse, still, just trusting the value of the knowledge that we encounter. So this, again, is why absorptive of capacity is so important for open innovation. There’s two key components that I want to reemphasize following this video. First is we need absorptive capacity to filter information. This is still important because we will encounter lots and lots of information through our relationships and particularly in open innovation relationships.

Then, on the other hand, we need to make sure that we’re setting in processes and activities to connect and integrate new knowledge into the firm and then selection and retention routines that allow us to take that new knowledge and apply it to innovation. It’s not just about vacuuming up information, filtering it, and then thinking how to be used. We need to integrate it with what we do and apply it to our innovation. So this, in this way, we can apply this to innovation activities within our business and with our partners.