2004 Pavlou b

7/17/2019 2004 Pavlou b

1/192

IT-ENABLED DYNAMIC CAPABILITIES IN NEW PRODUCT DEVELOPMENT:

BUILDING A COMPETITIVE ADVANTAGE IN TURBULENT ENVIRONMENTS

by

Pavlos A. Pavlou

A Dissertation Presented to the

FACULTY OF THE GRADUATE SCHOOL

UNIVERSITY OF SOUTHERN CALIFORNIA

In Partial Fulfillment o f the

Requirements for the Degree

DOCTOR OF PHILOSOPHY

(BUSINESS ADMINISTRATION)

May 2004

Copyright 2004 Pavlos A. Pavlou

pro duc ed with perm ission o f the copyright own er. Further reproduction prohibited without permissio n.

7/17/2019 2004 Pavlou b

2/192

UMI Number: 3140534

Copyright 2004 by

Pavlou, Pavlos A.

All rights reserved.

INFORMATION TO USERS

The quality of this reproduction is dependent upon the quality of the copy

submitted. Broken or indistinct print, colored or poor quality illustrations and

photographs, print bleed-through, substandard margins, and improper

alignment can adversely affect reproduction.

In the unlikely event that the author did not send a complete manuscript

and there are missing pages, these will be noted. Also, if unauthorized

copyright material had to be removed, a note will indicate the deletion.

UMIUMI Microform 3140534

Copyright 2004 by ProQuest Information and Learning Company.

All rights reserved. This microform edition is protected against

unauthorized copying under Title 17, United States Code.

ProQuest Information and Learning Company

300 North Zeeb RoadP.O. Box 1346

Ann Arbor, Ml 48106-1346

rod uce d with permission o f the copyright owner. Further reproduction prohibited without permission.

7/17/2019 2004 Pavlou b

3/192

ACKNOWLEDGEMENTS

This dissertation study is partially sponsored by the SAP America annual dissertation

competition award, administered by the e-Business Research Center (eBRC) at Penn State University. I

would like to thank my dissertation advisor Omar El Sawy and the members of my dissertation

committee - Delores Conway, Janet Fulk, Christoph Schlueter-Langdon, and David W. Stewart - for

their valuable help and guidance. The comments and suggestions of Cynthia Beath, Anandhi Bharadwaj,

Kathleen Eisenhardt, Wynne Chin, Blake Ives, Bill Kettinger, V. Sambamurthy, Burt Swanson, and N.

Venkatraman were particularly valuable. The dissertation was substantially benefited from presentations

at Indiana University, New York University, University of British Columbia, University of Houston,

UCLA, University of California at Riverside, University of South Carolina, among others. I would also

like to thank the organizers and participants of the 2002 Product Development and Management

Association (PDMA) and 2003 Roundtable Management (RTM) Collaborative Development (CoDev)

Conferences for their support and participation in the dissertations two empirical studies. Last but not

least, I would like to thank Angelika Dimoka for her encouragement and assistance during all stages of

this dissertation study.

prod uced with permission of the copyright owner. Further reproduction prohibited without permission.

7/17/2019 2004 Pavlou b

4/192

ii i

TABLE OF CONTENTS

ACKNOWLEDGMENTS ii

List of Tables vi

List of Figures vii

ABSTRACT viii

CHAPTER 1: RESEARCH MOTIVATION 1

1. Overview of Conceptual Foundations 2

1.1 Dynamic Capabilities 2

1.2 Resource Reconfigurability and Competitive Advantage 4

1.3 IT Competence and Dynamic Capabilities 5

1.4 Environmental Turbulence 6

2. Research Context 7

2.1 New Product Development 7

2.2 New Product Development Work Units 8

3. Interorganizational and Intra-organizational Relationships 9

4. Dissertation Contribution 10

4.1 Theoretical Contribution 104.2 Empirical Contribution 12

4.3 Managerial Contribution 13

5. Dissertation Overview 13

CHAPTER 2: RESOURCE RECONFIGURABILITY 14

1. Overview of Resource Reconfigurability 14

2. Literature Review 152.1 The Resource-Based View 15

2.2 The Knowledge-based view 16

2.3 Dynamic Capabilities 17

3. Resource Reconfigurability 22

3.1 Resource Reconfigurability Defined 22

3.2 Theoretical Domain of Resource Reconfigurability 243.3 Resource Reconfigurability: A Higher-Order Construct 34

3.4 Relationship Among Lower-Order Capabilities 39

3.5 Resource Reconfigurability as a Formative Structure 44

4. Dynamic Capabilities in New Product Development 45

4.1 The New Product Development Context 45

4.3 Resource Reconfigurability in New Product Development 465. Interorganizational Dynamic Capabilities 48

5.1 Relational View 485.2 Interorganizational Dynamic Capabilities 50

5.3 Interorganizational NPD 52

5.4 Summary 53

CHAPTER 3: DEVELOPMENT OF RESEARCH MODEL 54

1. Overview of the Research Model 542. Building a Competitive Advantage 55

2.1 Competitive Advantage in New Product Development 55

2.2 Trade-Off in New Product Development 56

3. Resource Reconfigurability and Competitive Advantage 57

3.1 Resource Reconfigurability and Core Rigidities 58

3.2 Competive Potential of Resource Reconfigurability 59

4. Resource Reconfigurability and Strategy-Environment Alignment 60

4.1 Strategy-Environment Alignment 61

p rod uced with permission o f the copyright owner. Further reproduction prohibited without permission.

7/17/2019 2004 Pavlou b

5/192

iv

4.2 Strategy- Environment Alignment in NPD 61

4.3 Strategy- Environment Alignment and Competitive Advantage 68

4.4 Resource Reconfigurability and Strategy-environment Alignment 705. IT-Enabled Dynamic Capabilities 71

5.1 IT Competence 72

5.2 IT Competence in NPD 75

5.3 The Nature of IT Competence in NPD 79

5.4 IT Competence in NPD as a Formative Second-Order Factor 81

5.5 IT Competence and Resource Reconfigurability 82

5.6 Mediating Role of Resource Reconfigurability 87

6. Environmental Turbulence 876.1 Environmental Turbulence and Resource Reconfigurability 88

6.2 Environmental Turbulence on Resource Reconfigurability-Competitive Advantage Relationship 89

6.3 Environmental Turbulence on IT Competence-Resource Reconfigurability Relationship 907. Control Variables 92

7.1 Cross-Functional Integration 92

7.2 Functional Diversity 93

7.3 NPD Experience 93

7.4 NPD Knowledge 947.5 Innovation Type 94

7.6 Intra- Vs Inter-Organizational Work Units 95

7.7 Virtuality 95

7.8 Collaborative Development 96

CHAPTER 4: RESEARCH METHODOLOGY 971. The Context for Theory Testing 97

2. Field Interviews 97

3. Measurement Development 99

3.1 Measurement Instrument 99

3.2 Pilot Tests 114

4. Survey Administration 116

4.1 Key Respondents 1164.2 Sampling Frame 116

4.3 Data Collection 117

4.4 Response Characteristics 119

CHAPTER 5: DATA ANALYSIS AND RESULTS 121

1. Respondent Characteristics 1221.1 Demographics 122

1.2 Descriptive Statistics 123

1.3 Aggregate Data from Studies 1&2 123

2. Measurement Validation 123

2.1 Reliability 123

2.2 Discriminant and Convergent Validity 125

3. Second-Order Structures 1273.1 Resou rce Reconfigura bility as a Second-Ord er Structure 129

3.2 IT Competence as a Second-Order Structure 130

3.3 Environmental Turbulence as a Second-Order Structure 132

4. Computation of Strategy-Environment Alignment 132

5. The Structural Model 134

5.1 Mediating Role of Dynamic Capabilities 136

5.2 Dynamic Capabilities in Different Environments 138


7/17/2019 2004 Pavlou b

6/192

V

CHAPTER 6: DISCUSSION 140

1. Key Findings and Insights 140

2. Theoretical Implications 142

2.1 Implications for Information Systems Research 142

2.2 Implications for Strategic Management 145

2.3 Implications for New Product Development 149

4. Implications for Practice 150

5. Limitations and Suggestions for Future Work 151

6. Conclusion 155

REFERENCES 156


7/17/2019 2004 Pavlou b

7/192

vi

LIST OF TABLES

Table 1. Definitions of Principal Constructs 91

Table 2. Correlation Matrix among Objective and Subjective Performance Measures 106

Table 3. Steps and Procedures taken for Calculating Environment-Strategy Alignment 108

Table 4. Measurement Items of Principal Constructs 111

Table 5. Respondents Demographic Characteristics 122

Table 6. Descriptive Statistics for Principal Constructs 124

Table 7. Composite Reliabilities for Multi-Item Principal Constructs 124

Table 8. PLS Confirmatory Factor Analysis for Discriminant and Convergent Validity 126

Table 9. Correlation Matrix and Average Variance Extracted for Multi-item Constructs 127

Table 10. Test for Mediation for Resource Reconfigurability 130

Table 11. Test for Mediation for IT Competence 131

Table 12. Cluster Analysis Results and Cluster Validation 133

Table 13. Control Variables on Primary Dependent Variables 135

pro duc ed with perm ission o f the copyright owner. Further reproduction prohibited without permiss ion.

7/17/2019 2004 Pavlou b

8/192

vi i

LIST OF FIGURES

Figure 1. The Nature of Resource Reconfigurability 14

Figure 2: Proposed Research Model 54

Figure 3. Environment Strategy Alignment in NPD 62

Figure 4. IT Competence in New Product Development 76

Figure 5. The Formative Nature of Resource Reconfigurability 130

Figure 6. The Formative Nature of IT Competence 131

Figure 7. PLS Results of Structural Model (n=l 80) 134

Figure 8. PLS Results for Studies I and II (Independent Analyses) 136

Figure 9. Test of the Mediating Role of Resource Reconfigurability 137

Figure 10. Model Comparison for High Vs Low Turbulence Environments 138

Figure 11. Competing Theoretical Views 144


7/17/2019 2004 Pavlou b

9/192

ABSTRACT

This study describes the process by which IT forms the basis for competitive advantage in

todays turbulent environments. Following the dynamic capabilities view, competitive advantage results

from reconfiguring existing resources to shape new functional competencies that align with the

environment. I define the core principle of dynamic capabilities into a multi-dimensional construct

termed resource reconfigurability,conceptualized as a formative second-order structure, formed by four

capabilities - coordination competence, absorptive capacity, collective mind, and market orientation.

Resource reconfigurability is proposed to influence competitive advantage, applied into a new product

development (NPD) context. The proposed role of resource reconfigurability on competitive advantage is

mediated by the alignment of functional NPD competencies with the environment (termed strategy-

environment alignment), and it is moderated by environmental turbulence.

IT competence is posited as an antecedent of resource reconfigurability. IT competence in NPD

is conceptualized as a second-order formative structure, formed by the effective use of (a) project and

resource management systems, (b) knowledge management systems, and (c) cooperative work systems.

Environmental turbulence influences resource reconfigurability, while moderating the relationship

between IT competence and resource reconfigurability.

Data from 180 NPD managers support the proposed structural model, validating the proposed

indirect role of IT on competitive advantage through the mediating effects of resource reconfigurability

and strategy-environment alignment. The results also support the proposed second-order formative

structures of resource reconfigurability and IT competence, while supporting the proposed direct and

moderating roles of environmental turbulence. Most interestingly, the results suggest that IT-enabled

resource reconfigurability is valuable in both high and low turbulent environments.

This study contributes to the strategic role of IT in rapidly changing environments, delineating

the process by which IT influences competitive advantage through resource reconfigurability and

strategy-environment alignment. I discuss the studys implications for Information Systems research,

strategic management and the dynamic capabilities view, and the study of NPD, stressing the need for

reconceptualizing the role of IT as an enabler of dynamic processes.


7/17/2019 2004 Pavlou b

10/192

1

CHAPTER 1: RESEARCH MOTIVATION

Rapid technological developments, frequent changes in customer preferences, new product

introductions with short product cycles, and hyper-competition have increased the degree of change or

clockspeed of the business environment (Mendelson, 2000; Mendelson & Pillai, 1998; Sampler, 2000;

Segars & Dean, 2000; Segars & Grover, 1999; Wind & Mahajan, 1997). Changing environments destroy

the value of existing competencies (Leonard-Barton, 1992; Tushman & Anderson, 1986), dismpting

existing means o f competition (D'Aveni, 1994; Sambamurthy, 2000). In todays turbulent environments,

organizations need to diversify, adapt, and even reinvent themselves to match evolving market and

technological conditions to survive and thrive (Eisenhardt & Brown, 1999; Madhok & Tallman, 1998).

An important means of differentiating in turbulent environments is innovative moves, agility,

and strategic flexibility (Barney, 1991; Sambamurthy, Bharadwaj, & Grover, 2003). Therefore, a basic

premise o f this study is that a competitive advantage arises from the ability to continuously improve,

innovate, and reconfigure existing resources to develop valuable functional competencies that match

changing environmental needs (Eisenhardt & Tabrizi, 1995; Feeny & Willcocks, 1998; Hamel &

Prahalad, 1994). This ability has been formally described in the dynamic capabilities perspective (Teece,

Pisano, & Shuen, 1997). Broadly defined, dynamic capabilities are the strategic processes by which

organizations manipulate resources into new configurations of functional competencies in turbulent

environments (Galunic & Eisenhardt, 2001). This paper defines the core principle of dynamic capabilities

into a multi-dimensional construct termed resource reconfigurability. I describe, operationalize and test

its proposed higher-order nature and underlying dimensions, and hypothesize its impact on competitive

advantage. I then study the extent to which the value potential of resource reconfigurability on

competitive advantage is moderated by environmental turbulence.

Despite the importance of dynamic capabilities in rapidly changing environments, we know little

whether, how, and why IT helps manage change and facilitate resource reconfiguration, especially in

turbulent environments. Thus, the second fundamental question in this study is the role of IT as the basis

for competitive advantage in turbulent environments (Chatteijee, Richardson, & Zmud, 2001;

Sambamurthy et al., 2003).

prod uced with permission o f the copyright owner. Further reproduction prohibited without permission.

7/17/2019 2004 Pavlou b

11/192

2

An emerging literature on the strategic view of IT suggests that the role of IT has evolved from

traditional support of day-to-day operations towards a strategic and transformation role (Bharadwaj,

2000; Sambamurthy, 2000; Sampler, 2000; Santhanam & Hartono, 2003; Segars & Dean, 2000;

Venkatraman & Henderson, 1999). Practitioners also tout that IT could become the driving force behind

strategic competitive advantage in turbulent environments (D'Aveni, 1994). In the Information Systems

(IS) literature, IT-enabled responsiveness and agility have been viewed as sources of competitive

advantage (Lengnick-Hall & Wolff, 1999; Sambamurthy, 2000; Sambamurthy et al., 2003; Stalk & Hout,

1990). Information economics also emphasize IT-enabled dynamic strategies to leverage new market

opportunities (Shapiro & Varian, 1999). This study proposes IT competence as a multi-dimensional

construct that indirectly affects competitive advantage by enhancing resource reconfigurability. I define

and operationalize IT competence and its core dimensions, and test its impact on dynamic capabilities and

its indirect effect on competitive advantage. I also study whether the impact of IT competence is

moderated by the degree of environmental turbulence. In sum, this study examines the nomological

network by which IT influences differential performance outcomes in rapidly changing environments.

1. Overview of Conceptual Foundations

1.1 Dynamic Capabilities

The dynamic capabilities approach endeavors to identify sources of value creation in rapidly

changing environments (Eisenhardt & Martin, 2000; Teece et al., 1997). This approach draws from

Schumpeterian competition (Schumpeter, 1934, 1942), where competitive advantage is based on creative

destruction of existing functional competencies and creation of new ones that better match the emerging

environment. First, it is important to differentiate dynamic capabilities from functional or static

competencies. Functional competencies perform basic operational activities, such as logistics, marketing

campaigns, and manufacturing processes (Amit & Schoemaker, 1993; Madhok & Tallman, 1998;

Prahalad & Hamel, 1990). Dynamic capabilities, on the other hand, capture the creative capacity to renew

ineffective functional competencies for dynamic improvement of existing resources in response to

environmental changes (Collis, 1994). Dynamic capabilities thus govern the organizations ability to


7/17/2019 2004 Pavlou b

12/192

3

learn, adapt, change, and renew over time (Teece & Pisano, 1994). This is consistent with Henderson and

Cockbum (1994) who distinguish between component competence (managing day-to-day operations)

and architectural competence (developing new competencies). An example of a dynamic capability is in

new product development (NPD) where organizations must adapt to economic conditions and switch

gears rapidly, from rapid product development to efficient practices (Prahalad & Hamel, 1990). Another

NPD example is to recognize technological breakthroughs or changes in customer preferences and

quickly reconfigure resources to satisfy the new demand with new technologies before the competition. It

is not possible to enumerate all types of dynamic capabilities, such as strategic decision-making,

acquisition strategy, and alliance formation (Eisenhardt and Martin 2000). This study focuses on the

challenge of reconfiguring existing resources to build new NPD competencies that better match

environmental contingencies in order to introduce competitive, cost-effective products.

While the existence of dynamic capabilities has been documented at an abstract level using

qualitative case studies, to the best of my knowledge, no study has attempted to theoretically specify,

operationalize, and empirically measure the core principle of dynamic capabilities. Following Eisenhardt

and Martin (2000), dynamic capabilities are embedded in organizational processes necessitating an

empirical organizational lens, rather than an economic or formal modeling one (p. 1106). By taking an

empirical quantitative lens, this study identified a set of specific dynamic capabilities, and operationalized

the underlying factors and item measures that constitute the measurement model of the resource

reconfigurability concept. Resource reconfigurability is described as the complex higher-order dynamic

capability to identify and pursue new opportunities, change rapidly and continuously, and transform

existing resources into new functional competencies to match environmental contingencies.

Drawing from an extensive literature review and field interviews, four interrelated factors were

identified, which cumulatively form the proposed second-order resource reconfigurability construct. First,

to enable coordination of existing resources, coordination competence is described as the dynamic

process of managing knowledge resources to achieve synchronization, resource allocation, and task

assignment (Crowston, 1997; Malone & Crowston, 1994). Second, to enable expansion and improvement

of existing knowledge resources, absorptive capacity (Cohen & Levinthal, 1990; Zahra & George,

pro duc ed with perm ission o f the copyright own er. Further reproduction prohibited without permiss ion.

7/17/2019 2004 Pavlou b

13/192

2002a) is described as the dynamic learning process of acquiring, assimilating, transforming, and

exploiting knowledge resources. Third, since effective reconfiguration occurs in a collective fashion

(Brown and Eisenhardt 1997; Orlikowski 2002), collective mind is conceptualized as the dynamic

ability to heedfully contribute to the group outcome, represent the collective input, and interrelate

activities to adapt to situational demands and rapidly-evolving conditions (Weick & Roberts, 1993).

Finally, given the need to comprehend the environment, market orientation is proposed as the dynamic

ability to discover new opportunities in the environment and be oriented to market conditions (Brown &

Eisenhardt, 1997; Kirzner, 1973; Kohli & Jaworski, 1990; Weick, 1995). These four distinct, yet related,

mutually reinforcing capabilities are conceptualized as best practices in reconfiguring resources to adapt

to rapidly changing environments. In sum, the higher-order resource reconfigurability construct involves

identifying market opportunities (market orientation), learning (absorptive capacity), coordinating diverse

skills (coordination competence), and collectively integrating multiple streams of knowledge (collective

mind). These dynamic capabilities are consistent with the factors proposed to manage hyper-competitive

environments (Prahalad & Hamel, 1990; Sambamurthy, Bharadwaj, & Grover, 2002; Sambamurthy et al.,

2003; Segars & Dean, 2000; Teece et al., 1997). While this set is not exhaustive, I maintain that these

four capabilities are representative in forming the resource reconfigurability concept.

1.2 Resource Reconfigurability and Competitive Advantage

Resource reconfigurability is difficult to substitute and imitate because of its complexity that

creates causal ambiguity (Lippman & Rumelt, 1982). Given its complexity and the evolutionary way it

develops, resource reconfigurability is difficult to describe, explain, transfer, or replicate. Following

Barney (1991), these attributes make it a potential source of competitive advantage. This is consistent

with Henderson and his colleagues who show that dynamic capabilities can be important sources of

enduring competitive advantage (Henderson & Clark, 1990; Henderson & Cockbum, 1994).

This study focuses on an economic reasoning toward optimizing the technical fit between the

environment and functional competencies toward a competitive advantage. Following Schumpeterian

innovation (Schumpeter, 1934, 1942), resource reconfigurability is proposed to result in a competitive


7/17/2019 2004 Pavlou b

14/192

5

advantage by creating better matches between functional competencies and evolving environmental

contingencies. Failure to align functional competencies with external needs may transform valuable

proficiencies into rigidities (Leonard-Barton, 1992). Resource reconfigurability is expected to shape,

deepen, and configure resources to increase their alignment with changing product-market areas (Teece et

al., 1997), thus influencing competitive advantage (Doty, Glick, & Huber, 1993; Venkatraman, 1989).

1.3 IT Competence and Dynamic Capabilities

Drawing upon the resource-based view (Lippman & Rumelt, 1982; Penrose, 1959; Peteraf,

1993), the literature has long advocated tight linkages between IT and strategy (Bakos & Treacy, 1986;

Grant, 1991; Mata, Fuerst, & Barney, 1995; Powell & Dent-Micallef, 1997; Sabherwal & Chan, 2001). IT

is at the forefront of strategy formulation, preceding or driving business initiatives by creating new

opportunities and value propositions and enhancing organizational agility (Sambamurthy et al. 2003). In

fact, IT can enable organizations to do things they could not do before and thus develop superior new

abilities (Cash & Konsynski, 1985; Ching, Holsapple, & Whinston, 1996; Clemons & Row, 1992; Day,

1994; Dewett & Jones, 2001; Porter & Millar, 1985).

A particular emphasis is paid on the role of IT in enhancing strategic flexibility in rapidly

changing environments (Sambamurthy, 2000; Sambamurthy et al., 2002, 2003; Sampler, 2000;

Venkatraman & Henderson, 1998; Wheeler, 2002; Zahra & George, 2002b), coupled by managerial

intuition (DAveni, 1994; Goldman, Nagel, & Preiss, 1995). For example, (Sambamurthy et al., 2003)

argue that IT serves as the enabling platform on which agility is built. Drawing upon this view, this study

examines the role of IT on dynamic capabilities.

Despite the immense work in the IS discipline, the IT artifact is still not well-defined or

described (Orlikowski & Iacono, 2001). In order to better understand the role of IT and its impact on

dynamic capabilities, this study proposes the concept of IT competence, which is broadly described as

the ability to acquire, deploy, and leverage IT functionality in combination or co presence with other

resources to shape and support business processes (Bharadwaj, 2000; Sambamurthy & Zmud, 2000). It is

prod uced with permission of the copyright owner. Further reproduction prohibited without permission.

7/17/2019 2004 Pavlou b

15/192

6

important to note that IT competence is different than IT investments because competencecaptures the

effective utilization of investments in IT functionality, not merely IT expenditures.

While the potential benefits of IT may be intuitive, the exact process by which IT competence

results in differential performance outcomes is still not well understood. Even if there is evidence that IT

leads to higher performance (Bharadwaj, 2000; Bharadwaj, Bharadwaj, & Konsynski, 1999), this study

aims to delineate the exact process by which organizations can leverage IT to support resource

reconfigurability, build effective new functional competencies, achieve strategy-environment alignment,

and generate a competitive advantages in turbulent environments.

There are at least four theoretical perspectives that explain the impact of IT competence on

dynamic capabilities. First, resource reconfigurability is essentially an information processing routine

(Galbraith, 1977), creating the opportunity for IT competence to enhance the actors ability to process

information (Mendelson, 2000). In other words, IT competence extends the limits of bounded rationality

(Bakos & Treacy, 1986), and reduces its negative effects on decision making. Second, (Sambamurthy et

al., 2003) draw upon digital economics to suggest that IT competence creates digital options that help

intertwine IT with organizational processes to leverage digital economics (Shapiro & Varian, 1999).

Third, the ability to reconfigure resources is enhanced if resources are modular (Galunic & Eisenhardt,

2001). IT competence increases resource modularization, thus resource reconfigurability. Finally, the

proposed resource reconfigurability is essentially a knowledge management process, and it is likely to be

significantly supported by IT. The knowledge-based view suggests that knowledge driven capabilities can

enhance through efficiency, scope, and flexibility (Grant, 1995, 1996b). There is much evidence to

suggest that IT competence can enhance all three attributes. In sum, the knowledge sharing and

information processing capabilities of IT enable rapid information flows and resource reconfiguration and

facilitate organizations to successfully keep up with rapidly changing environments.

1.4 Environmental Turbulence

Dynamic capabilities are particularly valuable in high-velocity environments where firms need

to continuously adapt to rapidly changing conditions (Brown & Eisenhardt, 1997). Environmental


7/17/2019 2004 Pavlou b

16/192

turbulence reduces the value potential of existing competencies and competitive positions (Sambamurthy,

2000; Tushman & Anderson, 1986). Therefore, turbulent environments cause organizations to engage in

frequent resource reconfigurations to replace rigid configurations of functional competencies that no

longer match the new environments. In sum, Ipropose a positive relationship between environmental

turbulence and resource reconfigurability. In this study, environmental turbulence is proposed as a higher-

order formative construct formed by frequent technological breakthroughs and changes in customer

demand and competition.

Environmental turbulence also intensifies the competitive landscape and increases the intensity

of business processes (Mendelson, 2000), escalating the importance on knowledge resources (Hitt, Keats,

& DeMarie, 1998). Thus, the impact of resource reconfigurability on competitive advantage is contingent

on environmental turbulence. Higher turbulence is likely to facilitate the positive impact o f resource

reconfigurability on competitive advantage. Using the same logic, environmental turbulence reinforces

the positive impact of IT competence on resource reconfigurability.

2. Research Context

NPD is the context in which the proposed model of IT-enabled dynamic capabilities is applied.

2.1 New Product Development

NPD has long been touted as a domain that organizations can develop a strategic advantage

(Leonard-Barton, 1992; Verona, 1999; Wheelwright & Clark, 1992). The NPD is a prime example of a

knowledge-intensive, problem-solving process where disparate knowledge resources (e.g., technical and

marketing) need to be coordinated, expanded, and leveraged to quickly build cost-effective products. In

NPD, environmental turbulence (changing market needs and technological breakthroughs) calls for

continuously different new products to match changing customer needs and increased technical

sophistication. Since existing resources need to be recombined to maintain efficiency, yet achieve high

product quality and innovation, dynamic capabilities are much relevant to NPD (Eisenhardt & Martin,

2000; Marsh & Stock, 2002). Achieving process efficiency (development cost and time to market) and


7/17/2019 2004 Pavlou b

17/192

product effectiveness (quality and innovation) represents a trade-off (Sobrero & Roberts, 2001); thus the

simultaneous achievement of both factors is proposed as a measure of competitive advantage in NPD.

The NPD process is also becoming an important area for IS research on its own right. The NPD

process is an information-intensive process that is likely to be facilitated by IT. Despite the existence of

sophisticated IT tools (e.g., project and resource management, knowledge management, and cooperative

work systems) for NPD (Rangaswamy & Lilien, 1997), we know little about whether, how, and why

these systems can be translated into superior new products. Most work in NPD has focused on non-IT

aspects, such as project staffing and structure, external influences, and cross-functional teams; thus, the

nature and role o f IT is relatively under-researched (Marsh & Stock, 2002). Examining how IT influences

dynamic capabilities to achieve NPD success is a promising area for IS research (Nambisan, 2003).

2.2 New Product Development Work Units

The unit of analysis in this study is the NPD work unit, which operates at the project level and

undertakes strategic group-level NPD processes. With the advent of sophisticated IT, work units are

becoming the prim ary vehicle through which productive activity is orchestrated (Moss-Kanter, 1994;

Sambamurthy & Zmud, 2000). In fact, the process level is where all business processes - dynamic

capabilities, functional competencies, and IT competence - are embedded and operate. A process-level

view has also been touted as the most appropriate level for analyzing IT effects (Barua, Kriebel, &

Mukhopadhyay, 1995; El Sawy, 2001; Mooney, Gurbaxani, & Kraemer, 1995). The unit of analysis of in

NPD processes is often the work unit since the focus of much NPD research is the projec t team (Brown

and Eisenhardt 1995). While most research on NPD or dynamic capabilities have focused on firm-level

characteristics, this study draws upon Leonard-Barton (1992) who proposed a focus on enlarging the

boundaries of middle range theory and placing NPD groups under a magnifying glass to examine their

strategic potential (p. 122). In sum, NPD work units may contain several related divisions and product

dimensions, and may be formed by several departments or organizations (Galunic & Eisenhardt, 2001).


7/17/2019 2004 Pavlou b

18/192

3. Interorganizational and Intra-org anizational Relationsh ips

Similar to firm centric NPD work units, interorganizational NPD partnerships also need to

reconfigure their knowledge resources in response to changing environmental conditions (Stuart, 1998).

While dynamic capabilities have been viewed as firm-centric processes, this study integrates the inter

organizational literature with the dynamic capabilities perspective, under the aegis of the relational view

(Dyer & Singh, 1998) to argue that dynamic capabilities should likewise hold both in both intra- and also

in inter-organizational NPD processes.

From an IT perspective, recent advances in Internet-based IT enable geographically dispersed

work units to collaboratively conduct work, thus blurring traditional firm boundaries. In fact, greater use

of IT favors dispersed groups (DeSanctis & Monge, 1999; Jarvenpaa & Leidner, 1998; Maznevski &

Chudoba, 2000; Zmud, 2000). The primary example is virtual teamsthat accumulate and integrate

knowledge from dispersed locations, irrespective of firm boundaries (Saunders, 2000). The role of IT on

interfirm relationships is increasingly gaining attention (Bensaou, 1997; Liberatore & Stylianou, 1995;

Rayport & Sviokla, 1995), even in traditional intra-organizational areas, such as NPD (Sobrero &

Roberts, 2001). In other words, todays sophisticated IT makes it equally easy to exchange information

and collaborate, despite geographical boundaries (at least as far as IT is concerned).

In terms of non-IT distinctions, there is a growing recognition that interfirm relations offer

significant opportunities for strategic advantages. Organizations are in fact adopting a cooperative logic

and move toward strategic alliances (Bensaou, 1997; Dyer, 1997; Moss-Kanter, 1994). There is also

increased evidence for the value of combining complementary resources that reside outside traditional

firm boundaries (D'Adderio, 2001; Dyer & Singh, 1998). This is particularly hue in highly turbulent

environments where organizations urgently need new knowledge resources, which often reside outside

their firm boundaries (Henderson & Cockbum, 1994). While the resource-based view focuses on firm-

specific capabilities, the relational view focuses on interorganizational relationships as the unit o f analysis

(Dyer& Singh, 1998), examining how firms develop joint capabilities for collaborative advantage

(D'Adderio, 2001; Dyer, 2000; Jap, 2001). Many authors argued that competition occurs among networks

of firms (Dyer, 2000; Dyer & Singh, 1998), supply chain versus supply chain (Segars & Dean, 2000).


7/17/2019 2004 Pavlou b

19/192

10

The theoretical extension of dynamic capabilities to an interorganizational level of analysis

directly draws from the relational view (Dyer & Singh, 1998), which posits the relationship as the unit o f

analysis and interfirm processes as the focal activities. This is consistent with (De Boer, Van de Bosch, &

Volberda, 1999) who explain that capabilities can be both of an intra- or interfirm in nature, and (Bakos

& Treacy, 1986) and who argue that the unit of analysis might consist of two or more organizations. The

practical utility o f studying inter-organizational capabilities is supported by managerial empiricism (Grant

& Baden-Fuller, 1995; Konicki, 2002). Also, the literature on interfirm relationships is challenging the

traditional centrality of the organization as the main focus o f research (Koza & Lewin, 1998).

4. Dissertation Contribution

This dissertation aims to make contributions to theory, empirical research, and practice, as

described below:

4.1 Theoretical Contribution

The dynamic capabilities perspective is a fruitful area for combining IS and strategic

management theory since IT can enable a competitive advantage by supporting strategic processes (Zahra

& George, 2002b). This dissertation study theorizes IT as an enabler of strategic flexibility, laying the

groundwork for redefining the role of IT in contemporary organizations that operate in turbulent

environments. Whereas IT has been regarded as a strategic necessity (Clemons, Reddi, & Row, 1993;

Clemons & Row, 1992; Clemons, 1991) or an economic imperative (Benjamin, Rockart, Scott Morton,

& Wyman, 1984), I propose a theory-driven perspective on understanding the role of IT as a platform for

building dynamic capabil ities. This complements existing research on the effects of IT that focused

primarily on supporting operational processes, by stressing the role of IT on dynamic processes.

Similar to the resource-based view, the dynamic capabilities view has also been criticized due to

an alleged tautological relationship with competitive advantage (Eisenhardt & Martin, 2000). To

overcome this issue, a specific mediating variable between resource reconfigurability and competitive

advantage is herein proposed. The proposed strategy-environment alignment mediator captures the

extent to which functional competencies form a favorable configuration with environmental variables. By


7/17/2019 2004 Pavlou b

20/192

showing this mediating effect, this study empirically validates that dynamic capabilities impact

competitive advantage by creating favorable resource configurations, overcoming tautological criticism.

Resource reconfigurability is posited as a key mediating dynamic capability that enables NPD

work units to reconfigure and leverage their existing resources into new functional competencies that

better match turbulent environments. By proposing a set o f mediating dynamic capabilities and strategy-

environment alignment, this study argues that IT does not have a direct impact on competitive advantage,

but rather an indirect one through both dynamic and also through aligned functional processes. This

finding partially accounts for the infamous IT productivity paradox since there may be multiple

intermediate factors mediating the direct role of IT on performance. The proposed focus should be on

leveraging IT to build dynamic capabilities and align functional competencies with the environment, as

opposed to expecting a direct relationship by ignoring these crucial intermediate factors.

By cobbling together several critical factors (e.g., IT competence, dynamic capabilities,

functional competencies) in a coherent structural model, this study delineates the process by which IT

influences performance by enabling key organizational processes. It also provides empirical support to

Grants (1995) theoretical propositions for different types o f organizational resources, capabilities, and

competencies. This study thus adds granularity to the nomological network and delineates the process by

which IT leads to competitive advantage.

While the proposed model readily applies to rapidly changing environments, the results suggest

that the proposed resource reconfigurability is a key success factor, even in less rapidly changing

situations. This is explained by the fact that effectively reconfiguring resources can create superior

services and earn higher rents (Penrose, 1959), even i f adequate configurations of functional

competencies may exist. In other words, even i f stable environments, there are potentially valuable

opportunities for yet improved resource reconfigurations that may result in even higher performance.

Therefore, the proposed model may be viewed as a generalizable representation of how dynamic

capabilities result in competitive advantages, irrespective of the degree of environmental turbulence.

This study also extends the dynamic capabilities view to an inter-organizational level of analysis

by specifying the NPD work unit (both intra- and inter-organizational) as the unit o f analysis. This


7/17/2019 2004 Pavlou b

21/192

12

suggests that inter-organizational relationships can also develop their own dynamic processes to guide

their evolution and transformation over time. While the literature focused on firm-centric dynamic

capabilities (Teece et al., 1997), this study makes a modest argument that inter-organizational

relationships can also reconfigure their resources and transform themselves in response to changing

environments. This finding has implications for the viability of long-term inter-firm partnerships. This

study thus contributes to the relational view (Dyer & Singh, 1998) in the sense that dynamic capabilities

extend beyond traditional firm boundaries.

This study examines strategic process level phenomena, such as the ability o f NPD work units to

build a competitive advantage. While strategy has been viewed as a top management decision-making,

this study calls for examining the strategic implications of group level phenomena, such as effectively

and efficiently managing knowledge resources. After all, Galbraith (1977) argued that perhaps the only

source of sustainable competitive advantage is efficient and effective resource management.

Finally, this study aims to describe the role of IT-enabled dynamic capabilities in a NPD context,

a strategic, yet under-researched area in the IS literature (Nambisan, 2003). It aims to entice future

research on understanding the role of IT and its potential outcomes in NPD. Whereas NPD processes are

becoming heavily supported by NPD-specific IT tools , the IS li terature has done very little to inform

theory and practice as to the potential benefits from effectively using IT in NPD processes.

4.2 Empirical Contribution

The extant literature on dynamic capabilities has focused primarily on purely theoretical or

qualitative, case-study methodology. To the best o f my knowledge, a comprehensive framework that

conceptualizes, operationalizes, and measures dynamic capabilities has not yet been developed, nor has

been empirically examined. The measurement o f resource reconfigurability construct and its underlying

dimensions in the NPD context is perhaps the first attempt to empirically measure dynamic capabilities.

This approach can be used as a blueprint for measuring dynamic capabilities in other contexts. Following

Nambisan (2003), this study also operationalizes and measures a specific set o f IT competencies

specifically for a NPD context, thus providing empirical support to the IT artifact in an NPD context.

pro duc ed with permissio n of the copyright owne r. Further reproduction prohibited without permiss ion.

7/17/2019 2004 Pavlou b

22/192

13

4.3 Managerial Contribution

From a managerial perspective, this study aims to describe specific and identifiable factors that

affect success and performance outcomes in NPD, including interorganizational NPD processes. Since

this study aims to prescribe variables that can be readily influenced by managerial practices, the findings

of this study could provide useful recommendations for building a competitive advantage. The proposed

model that delineates the role of IT toward a competitive advantage provides a useful guide to managerial

thinking in terms of where to focus their attention. More important, it aims to prescribe how IT

functionality can be effectively utilized to support dynamic processes, particularly in an NPD context.

This study suggests that there is a need for a fundamental change in managerial thinking about the

enabling role of IT, not simply on operational processes, but on transformation processes and strategic

flexibility (Henderson & Venkatraman, 1993).

5. Dissertation Overview

This dissertation study is divided into six chapters. The second chapter describes the conceptual

underpinnings of resource reconfigurability and its underlying dimensions. The third chapter describes

the conceptual model and proposes a set of testable hypotheses that link resource reconfigurability with

competitive advantage and IT competence, moderated by environmental turbulence. The fourth chapter

describes the research methodology of two empirical studies, measure operationalization, and pilot

studies. The fifth chapter shows the results of the two empirical studies and tests the research hypotheses.

The last chapter discusses the studys findings and insights, its implications for theory and practice, and

its limitations and suggestions for future research.

pro du ced with perm ission o f the copyright owner. Further reproduction prohibited without permissio n.

7/17/2019 2004 Pavlou b

23/192

14

CHAPTER 2: RESOURCE RECONFIGURABILITY

1. Overview of Resource Reconfigurability

Dynamic capabilities characterize the ability to address changing environments by reconfiguring

existing internal and external resources into new functional competencies (Teece et al., 1997). This study

draws upon the Information Systems (IS), strategic management, and NPD literatures to propose the

construct of resource reconfigurability,which captures the core principle of dynamic capabilities.

Resource reconfigurability is a multi-dimensional set of dynamic capabilities that is proposed to influence

competitive advantage. The underlying dimensions o f resource reconfigurability are shown in Figure 1.

Figure 1. The N ature of Reso urce Reconfigurability

Competitive

AdvantageResource

Reconfigurability

Coordination

Competence

Absorptive

Capacity

Collective

Mind

Market

Orientation

DYNAMIC CAPABILITIES

The conceptualization of resource reconfigurability primarily draws upon the dynamic

capabilities view (Teece & Pisano, 1994; Teece et al., 1997), and it also informed by the resource-based

view (Penrose, 1959; Rumelt, 1984), the knowledge-base view (Grant, 1996b; Kogut & Zander, 1992;

Leonard-Barton, 1992; Nelson & Winter, 1982). These views offer useful insights regarding the nature of

dynamic capabilities (Kale, Dyer, & Singh, 2002). The application, operationalization, and test of the

resource reconfigurability construct takes place in a new product development (NPD) context. Finally,

resource reconfigurability is proposed to apply both to intra- and inter-organizational NPD work units,

drawing upon the relational view (Dyer & Singh, 1998).


7/17/2019 2004 Pavlou b

24/192

15

2. Literature Review

The basic theories reviewed in this preparatory section are (1) the resource-based view, (2) the

knowledge-based view, and (3) the dynamic capabilities view.

2.1 The Resource-Based View

Organizational resources and capabilities have received great interest multiple disciplines, such

as the strategic management (Grant, 1991; Madhok & Tallman, 1998; Makadok, 2001; Priem & Butler,

2001), IS (Bharadwaj, 2000; Kettinger, Grover, Suha, & Segars, 1994; Mata et al., 1995; Powell & Dent-

Micallef, 1997), and marketing literatures (Day, 1994; Jap, 2001; Vorhies & Harker, 2000). The resource-

based view posits firm-specific resources as the determinants of competitive advantage (Penrose, 1959;

Rumelt, 1984). Capabilities and competencies are complex bundles o f resources (Amit & Schoemaker,

1993; Grant, 1996a) that are deeply embedded in organizational processes to help undertake business

activities (Day, 1994; Prahalad & Hamel, 1990; Zollo, 1998). While both capabilities and competencies

are essentially complex bundles o f resources, I reserve the term capabilities for dynamicprocesses, and

the term competencies for functional or operational activities.

According to the resource-based view, organizations must accumulate synergistic combinations

of resources to produce competencies that are valuable, scarce, heterogeneous, imperfectly mobile, and

inimitable in order to build a competitive advantage (Barney, 1991; Lippman & Rumelt, 1982; Peteraf,

1993). Ample evidence links competencies to competitive advantage (Kale & Singh, 1999; Kusunoki,

Nonaka, & Nagata, 1998; Madhok & Tallman, 1998; Moorman & Slotegraaf, 1999).

It is important to clearly distinguish between resources and competencies. Competencies, routed

in organizational processes (Prahalad & Hamel, 1990), generally refer to a firms capacity to undertake

business activities by bringing together bundles of resources (Day, 1994; Grant, 1995; McGrath, 2001;

Winter, 2000). Competencies also differ from resources as they cannot be easily identified, described, or

traded (Hamel & Prahalad, 1991). In fact, Day (1994) argues that competencies and capabilities are so

deeply embedded in organizational processes that even the management finds it difficult to identify,

describe, and apply them to other contexts. Miller and Shamsie (1996) distinguish between resources and


7/17/2019 2004 Pavlou b

25/192

16

capabilities as discrete versus systemic resources; Black and Boal (1994) refer to resources and

capabilities as traits and configurations, respectively.

2.2 The Knowledge-based view

The notion of the firm as a bundle of knowledge resources has recently attracted considerable

attention. Following the resource-based view, knowledge has been widely touted as a primary strategic

resource for organizations (Grant, 1996a; Grant & Baden-Fuller, 1995; Kogut & Zander, 1992). The

knowledge-based view argues that the organizations primary function (and reason for existence) is to

leverage knowledge into productive outcomes (Kogut & Zander, 1996; Nahapiet & Ghoshal, 1998;

Nonaka, 1994; Zander & Kogut, 1995a). The basic idea behind the knowledge-based view is that

knowledge resources, skills, and expertise are the basis for competitive advantage. The evolutionary

economics perspective (Nelson & Winter, 1982) and the knowledge-based theory (Grant, 1996b) have

also stressed the importance of knowledge resources as the basis for differential performance. Many

authors even claimed that knowledge could become the primary source of sustainable competitive

advantage in todays knowledge-intensive environments (Glazer, 1999; Grover & Davenport, 2001).

In general, the knowledge-based view understands resources and capabilities as multi-layered

knowledge sets (Leonard-Barton, 1992). Grant (1995) argues that there is a hierarchy of organizational

capabilities from local knowledge resources to functional and cross-functional capabilities. Kusunoki et

al. (1998) view knowledge resources as local capabilities or distinctive knowledge units, described as

human resources, patents, and know-how. Functional competencies are generated through an ongoing

process of absorbing information, converting it into knowledge, and utilizing knowledge to effectively

undertake functional activities. According to Alavi (2000), such knowledge is created when individuals

work together in tightly-knit groups, known as communities o f practice (Brown & Duguid, 1998).

Increased representation of individuals and functions creates a diversity of knowledge resources, which

can create enormous value if properly managed (Blankenburg Holm, Eriksson, & Johnson, 1999; Helper

& MacDuffie, 2001; Moss-Kanter, 1994; Zajac & Olsen, 1993). A fundamental activity of cross

p rod uced with permission of the copyright owner. Further reproduction prohibited without permission.

7/17/2019 2004 Pavlou b

26/192

17

functional groups, such as NPD work units is to integrate functional knowledge into collective knowledge

capabilities of greater value (Okhuysen & Eisenhardt, 2002).

2.2.1 What is Knowledge?

Knowledge is the stock of intellectual assets accumulated through experience, learning, and

ongoing practices (Sambamurthy, 2000). Knowledge broadly encompasses facts, data, symbols, files,

documents, discussions, workflows, tasks, reports, and whiteboard sessions, human expertise, and

scientific understanding (Becerra-Femandez & Sabherwal, 2001).

In order to fully understand what is knowledge, it is important to first distinguish between

knowledge and information by proposing two distinct categories - (a) information or explicit, codifiable

knowledge and (b) know-how or tacit, sticky knowledge (Alavi & Leidner, 2001; Grant, 1996a; Kogut &

Zander, 1992; Nonaka, 1991). Information or codifiable knowledge can be easily exchanged, shared,

stored, and retrieved without much loss. On the other hand, knowledge is the information that has been

processed in the minds o f individuals through deliberation, learning, and thought (Alavi, 2000). Thus,

tacit knowledge and know-how are complex, sticky, and difficult to codify, transfer, use, and imitate

(Nelson & Winter, 1982). From a conceptual standpoint, compared to codifiable knowledge, tacit

knowledge is more likely to result in competitive advantage.

Despite this distinction, it is important to clarify that these two categories are not dichotomous,

but they are mutually-dependent and reinforcing facets of knowledge (Polanyi, 1975). As Tsoukas (1996)

suggested, tacit and explicit knowledge are inseparable and mutually constituted. Nonaka and Takeuchi

(1995) further proposed that knowledge is created through interactions among different combinations of

tacit and explicit knowledge.

2.3 Dynamic Capabilities

Rapidly changing environments force organizations to regularly change their mix of resources

(Penrose, 1959) since they require ongoing modification to adapt to new environments (Madhok &

Tallman, 1998). Dynamic capabilities are the strategic processes by which organizations combine,


7/17/2019 2004 Pavlou b

27/192

18

integrate, expand, and reconfigure their existing resources to address rapidly changing environments

(Teece & Pisano, 1994; Teece et al., 1997). Broadly described, dynamic capabilities are the processes by

which managers manipulate resources into new productive competencies (Galunic & Eisenhardt, 2001).

2.3.1 Resource Picking Vs Dynamic Capabilities

There are at least two distinct mechanisms by which firms build a strategic advantage - (a)

resource picking and (b) competence building (Makadok, 2001). First, based upon the resource-based

view, resource pickingsuggests that organizations can select and acquire resources that will gain a

greater value than expected by the market, or when used in combination with other complementary

resources (Barney, 1991). On the other hand, competence buildingrefers to the ability to integrate, build,

and reconfigure existing resources to build new functional competencies in conditions of rapid change

(Grant, 1995; Teece et al., 1997). Competence building or dynamic capabi lity isa distinct process that

describes how to deploy or exploit existing resources, as opposed to selecting or combining

resources (Hamel & Prahalad, 1994). In Schumpetarian theory (Schumpeter, 1934, 1942) where

innovation is the source of value creation, there is emphasis on the creation of novel combination of

resources through creative destruction of existing resources. Henderson and Clark (1990) also argue

that innovation is linking together existing resources in new ways. In e-business, value creation often

results from new innovative configurations of knowledge resources (Amit & Zott, 2001).

Dynamic capabilities have emerged in response to the inadequacy of the resource-based view to

account for how and why certain firms have a competitive advantage in rapidly changing environments

(without picking new resources). Nonetheless, the dynamic capabilities view is still consistent with the

resource-based view. It actually extends the resource-based view to address rapidly changing

environments by reconfiguring existing resources. In fact, the resource-based view admits that existing

resources enable value-creating strategies. Dynamic capabilities enhance resource deployment through

collecting, building, and transforming existing resources to create new competencies (Helfat, 1997). In

sum, resource picking defines whether knowledge resources can be obtained and integrated; competence

building defines how knowledge resources are leveraged to address new opportunities.


7/17/2019 2004 Pavlou b

28/192

19

2.3.2 Dynamic Capabilities Vs Functional Competencies

It is also important to differentiate between dynamic capabilities and functional competencies.

Functional competencies or proficiencies are those processes that perform basic operational activities,

such as logistics, marketing campaigns, and manufacturing processes (Amit & Schoemaker, 1993;

Madhok & Tallman, 1998; Prahalad & Hamel, 1990). Functional competencies are defined as purposive

combinations of resources that enable accomplishing a given task.

Dynamic capabilities, on the other hand, is the creative capacity for improvement and renewal of

functional competencies in response to environmental changes (Collis, 1994). Dynamic capabilities are

essentially the subset of organizational processes that are directed toward enabling change and evolution

of functional competencies. King and Tucci (2002) view dynamic capabilities as transformational

processes (p. 172), also distinguishing them from static or functional competencies. This is consistent

with Henderson and Cockbum (1994) who discriminate between component competence (managing

day-to-day operations) and architectural competence (building new competencies).

2.3.3 Related Work on Dynamic Capabilities

The spirit of dynamic capabilities has been described with different terms. They have been

termed combinative capabilities (Kogut & Zander, 1992), architectural competence (Henderson &

Cockbum, 1994), integrative capabilities (Lawrence & Lorsch, 1967), organizational architecture

(Nelson & Winter, 1982), invisible assets (Itami, 1987), or broadly capabilities (Amit & Schoemaker,

1993). Van den Bosch, Volberda, and De Boer (1999) and Kogut and Zander (1992) used the term

combinative capabilities to describe the processes by which firms synthesize and extend knowledge

resources to generate new applications from those resources. Grant (1996) used the term integration

while Henderson and Clark (1990) used the term configuration. Dynamic capabilities have also been

described as key capabilities (Grant, 1996b), or meta-capabilities (Henderson & Cockbum, 1994). A

related term, co evolution describes how competencies are shaped to match evolving environments

(Helfat & Raubitschek, 2000).


7/17/2019 2004 Pavlou b

29/192

20

Dynamic capabilities are specific set of processes within the broad domain of strategic flexibility

(Volberda, 1996). While strategic flexibility describes a variety o f managerial capabilities to increase the

organizations controllability (p. 36), dynamic capabilities are specific to resource reconfiguration.

2.3.4 Nature of Dynamic Capabilities

Changing conditions drive organizations to reinvent their existing competencies and develop

new ones (Fowler, King, Marsh, & Victor, 2000; Marsh & Stock, 2002). Dynamic capabilities are

essential for shifting and altering existing resources to accommodate changing environmental conditions.

Following Teece et al. (1997) and Galunic and Eisenhardt (2001), dynamic capabilities are defined as the

ability to integrate, build, and reconfigure existing resources to renew competencies that adapt to rapidly

changing environments. In turn, these new competencies will become the resource pool on which yet

newer functional competencies will develop to help match new environmental changes (Iansiti & Clark,

1994; Kogut & Zander, 1992). In brief, dynamic capabilities recurrently bring forward existing

knowledge resources to create new configurations of functional competencies.

Perhaps the most interesting notion of dynamic capabilities is the term dynamic, which refers

to the creative capacity to renew functional competencies. Dynamic capabilities design and construct

new, more valuable competencies to enhance the productivity of existing resources (Makadok, 2001).

Dynamic capabilities are essentially the processes by which managers alter their resource base by

recombining resources. In other words, dynamic capabilities are the drivers behind the creation,

evolution, and recombination of existing resources into new sources of value.

Dynamic capabilities exhibit common features that are associated with effective processes, or

simply best practices in managing change (Eisenhardt & Martin, 2000). While dynamic capabilities may

exhibit significant commonalities across firms, they are still idiosyncratic, specific, and distinct in terms

of how they operate. This is because the development of new competencies essentially starts from

different starting points (Eisenhardt & Martin, 2000). This inhomogeneity is one o f the reasons dynamic

capabilities can become the basis of competitive advantage. Finally, value potential of dynamic

capabilities is also a matter of degree (Winter, 2000).

p roduc ed with permission of the copyright owner. Further reproduction prohibited without perm ission.

7/17/2019 2004 Pavlou b

30/192

21

2.3.5 Dynamic Capabilities and Knowledge-Based View

While dynamic capabilities can draw upon and reconfigure virtually any organizational resource,

it is important to stress the role of knowledge as a key resource (Glazer, 1991). Knowledge is crucial in

todays organizations that operate based on knowledge-intensive processes. Competition has become

increasingly knowledge-based, and organizations strive to develop knowledge-intensive competencies

faster than the competition (Lane & Lubatkin, 1998). In fact, knowledge is often regarded as the only

source of sustainable competitive advantage (Alavi, 2000). Nonetheless, even if the necessary knowledge,

expertise, and skills are present, the true ability is to access and integrate the vast range of knowledge

resources to continuously support productive activity as the environment changes. The importance of

reconfiguring existing knowledge into new set of knowledge has been widely touted (De Boer et al.,

1999). In fact, integrating knowledge, skills, and expertise from multiple sources into valuable processes

is the cornerstone of dynamic capabilities (Eisenhardt & Martin, 2000).

Two critical issues arise from the knowledge-based view - knowledge utilization and

knowledge creation (Alavi, 2000). Dynamic capabilities address both issues by absorbing knowledge,

transforming it into superior knowledge representations, and utilizing it to effectively to drive

organizational processes. They first deal with collecting, coordinating, and integrating knowledge-based

resources to match market needs. Second, they also deal with the development, transformation, and

reconfiguration of existing knowledge. Dynamic capabilities describe how organizations create new

combinations of resources to create value, implying an iterative loop that allows exploitation o f new

opportunities (Helfat & Raubitschek, 2000). Dynamic capabilities are essentially knowledge management

processes that deal with the coordination, assimilation, creation, and exploitation of knowledge. Moran

and Ghoshal (1996) also argue that exchanging and combining existing knowledge resources can create

new knowledge-based competencies. NPD examples are the creation of new products by knowledge

brokering from previous designs (Hargadon & Sutton, 1997). In sum, drawing from a knowledge-based

view perspective, knowledge is the key strategic resource that dynamic capabilities recurrently

reconfigure into new sets of knowledge-intensive competencies (D'Adderio, 2001).


7/17/2019 2004 Pavlou b

31/192

22

2.3.6 Path Dependent Nature of Dynamic Capabilities

At any given time, functional competencies partly reflect prior investments in resource

allocation. Dynamic capabilities emerge from path-dependent histories (Teece et al., 1997) since the role

of dynamic capabilities lies in integrating existingresources (Helfat & Raubitschek, 2000). Therefore, the

development of new competencies is constrained by past processes and previous experience (Zahra &

George, 2002a). After all, organizations tend to search for opportunities in areas where they have had past

successes, essentially constraining their knowledge search. In other words, where a firm can go is a

function of its current position (Schumpeter, 1934). Even i f dynamic capabilities define the evolutionary

path of organizations (Nelson & Winter, 1982), they still follow a path dependent history since existing

resources are the basis for future ones (Kale et al., 2002).

3. Resource Reconfigurability

Because o f their tacit and dispersed knowledge, dynamic capabilities are generally difficult to

describe (Day, 1994). Therefore, they have been predominantly studied ex-post, usually referring to them

as an empty box measure of improved performance (D'Adderio, 2001). They have also been referred to

as hidden or invisible processes, completely unstructured or organic abstract processes. In fact,

Andrews (1987) pointed out much of what is intuitive in this process is yet to be identified. (p. 46).

Therefore, there is an urgent need to overcome this lack of specificity and capture the black box of

dynamic capabilities. This study proposes a set of specific, identifiable, and empirically measurable set of

capabilities that together capture the nature of dynamic capabilities. Resource reconfigurability'is thus

formally proposed as a multi-dimensional construct to capture the core principles of dynamic capabilities.

3.1 Resource Reconfigurability Defined

Resource reconfigurability is defined as the ability to recombine existing internal and external

resources in innovative ways to renew functional competencies that match environmental contingencies.

First, the term resource reconfiguration or recombination of resources in innovative ways is most

pro duc ed with perm ission of the copyright own er. Further reproduction prohibited without permissio n.

7/17/2019 2004 Pavlou b

32/192

23

consistent with Galunic and Eisenhardt's (2001) notion of architectural innovation. It also corresponds

to creating new architectural knowledge (De Boer et al., 1999), described as the combination of

different types of knowledge into new configurations for generating effective product market

combinations (p. 380). Second, to match environmental contingencies denotes the ability to quickly

match the renewed functional competencies with changing environmental conditions. Finally, while

mergers and acquisitions have also been proposed as means to reconfigure external resources (Karim &

Mitchell, 2000), the proposed resource reconfigurability focuses solely on existing internal and external

resources. In sum, resource reconfigurability is essentially a dynamic adaptation or transformation

process that involves the advancement o f existing resources to align with environmental contingencies.

While resource reconfigurability is proposed at a general level to reflect the ability to

reconfigure virtually all types o f resources, it is important to mention that different types o f resources

may have different degrees of malleabilityor amenability to change. Leonard-Barton (1992) argues that

as resources become less tangible, less visible, and less explicitly codified, they will be easier to

reconfigure and change (p. 121). For example, intangible knowledge resources may have the highest

degree of reconfigurability or malleability, and they could easily used to build new functional

competencies. On the contrary, tangible resources, such as manufacturing plants and equipment may

exhibit great difficulty in being reconfigured.

Finally, resource reconfigurability is a collective capability and does not reside in any single

individual (Brown & Eisenhardt, 1997). Even if some individuals may influence this dynamic capability

(Verona, 1999), it is by definition collective (Orlikowski, 2002). This is consistent with Weick and

Roberts (1993) who view the integration of disparate inputs as the magical transformation that creates

higher-order collective competencies that no individual can single-handedly produce.

3.1.1 Resource Reconfigurability and Related Concepts

Resource reconfigurability relates to the concept of organizational IQ (Mendelson, 2000;

Mendelson & Pillai, 1998), which was shown to influence performance outcomes, especially in fast

moving environments. Whereas organizational IQ describes the firms information processing capacity to

pro du ced with perm ission o f the copyright own er. Further reproduction prohibited without permiss ion.

7/17/2019 2004 Pavlou b

33/192

24

handle information, resource reconfigurability captures the capacity to transform existing resources into

new and improved competencies to achieve competitive advantage in response to changing environments.

Therefore, resource reconfigurability is distinct construct that focuses on a specific capability, not a

general capacity to process information.

Resource reconfigurability also relates to the concept of improvement in competencies

proposed by Venkatraman and Ramanujam (1987) and expanded by Segars and Grover (1998). These

authors describe this concept as the ability to improve functional competencies over time in order to

support organizational objectives. According to the authors, this includes planning and learning processes

that result in improved competencies, such as anticipating relevant events and issues within the

competitive environment, and adapting to unexpected changes.

Resource reconfigurability finally relates to the concept of co-evolution where webs of

collaborations from different areas are recombined to generate new synergistic combinations (Eisenhardt

& Galunic, 2000). "Patchingis a related dynamic routine that aims to realign the match-up of functional

competencies to changing market opportunities (Eisenhardt & Brown, 1999). Finally, reconfigurability is

similar to related diversification as knowledge is acquired, augmented, and reconfigured to match

market needs (Helfat & Raubitschek, 2000).

3.2 Theoretical Domain of Resource Reconfigurability

Higher-level capabilities do not reflect any certain domain of knowledge or skill, but they

reflect the ability to leam new domains (Danneels, 2000) (p. 1112). Dynamic capabilities are the multi

dimensional, higher-order processes that undertake organizational transformation (Collis, 1994; Kogut &

Zander, 1996; Pisano, 1996; Sambamurthy et al., 2003; Segars & Dean, 2000) (Teece et al., 1997;

Wheeler, 2002). Drawing upon this logic, resource reconfigurability is herein viewed as a complex,

higher-order combination of simpler, or lower-order routines that are foundational to the overall dynamic

capability. This view is consistent with Mendelson (2000) and Wheeler (2002) who describe a set of

interrelated capabilities into an aggregate set. Hence, a multi-dimensional model with multiple indicators

is likely to better capture the essence of resource reconfigurability.

p rod uced with permission of the copyright owner. Further reproduction prohibited without permission.

7/17/2019 2004 Pavlou b

34/192

25

Following Churchill (1979), Segars and Grover (1998), and Segars and Dean (2000), I

undertook an extensive literature review in conjunction with personal interviews to provide a sound

foundation for the theoretical domain of the resource reconfigurability construct. These reviews aimed at

identifying inter-related, lower-order factors with a transformational potential that contribute to the ability

to effectively reconfigure resources. My goal was to draw upon existing constructs from the literature, as

opposed to coming up with brand new terms, even if some reconceptualization was required to better

capture their adaptation potential and relationship to resource reconfigurability.

This procedure yielded a set of four factors, termed (a) coordination competence, (b) absorptive

capacity, (c) collective mind,and (d) market orientation.It is important to clarify that the proposed

variables may not exhaust the domain of resource reconfigurability; yet, they are merely posited as a

representative set of factors. Given the complexity of the proposed construct of resource reconfigurability

and its four underlying dimensions, there is a high degree of abstraction because of the tacitness of its

knowledge component. Following Okhuysen and Eisenhardt (2002), the usefulness of the dynamic

capabilities view relies on sharply defined constructs to describe their boundaries and relationships and

yield precise measurement. Therefore, it is important to be specific on such knowledge-related concepts

and avoid relying on loose definitions. The following section attempts to clearly distinguish, define, and

place all these factors under a magnifying glass to describe their nature, inter-relationships, and

relationship to resource reconfigurability.

3.2.1 Coordination Competence

Organizations often do not know what they know or have (Day, 1994), or where their knowledge

resources reside since they may exist across functional, departmental, or geographical levels. For

example, Hinds and Mortensen (2002) report that the greatest coordination problem in R&D teams was

differences in knowledge held by team members and incomplete or inaccurate knowledge about the

team s activities. These common problems result in resources not being fully utilized (Davis, 1984).

However, for these resources to become useful, they must be effectively coordinated. Knowledge may

reside across functional areas; hence, it must be collected to become useful. In knowledge-intensive


7/17/2019 2004 Pavlou b

35/192

26

environments, coordinating knowledge and expertise becomes prominent (Faraj & Sproull, 2000). In fact,

coordination has a prominent role both in the knowledge-based view (Levina, 1999) and also in the

dynamic capabilities perspective (Teece et al., 1997).

3.2.1.1 What is Coordination?

Coordination has been described as means for integrating knowledge (Dyer, 1997) by linking

different groups to accomplish a collective set of tasks (Van de Ven, Delbecq, & Koenig, 1976).

Mintzberg (1979) describes coordination as the management of dispersed knowledge resources. The

fundamental role of coordination has been widely documented (Adler, 1995; D'Adderio, 2001; Hoegl &

Gemuenden, 2001; Nidumolu, 1996; Sobek II, Liker, & Ward, 1998).

Following March and Simon (1958), there are two types of coordination: (a) by programming,

and (b) by feedback.These two types of coordination correspond respectively to the centralized and

decentralized control of interdependence (Sikora & Shaw, 1998), and organic and mechanistic

coordination strategies (Andres & Zmud, 2002). Coordination by programming typically involves

planning and routines, such as rules, codes, procedures, directives, and group routines (Grant, 1996a,

1996b; Nelson & Winter, 1982). Coordination by feedback requires intense information flow, rich

communication and collaboration, group decision making, socialization, and mutual adjustments (De

Boer et al., 1999; Grant, 1996b; Thompson, 1967).

Coordination mechanisms also depend on the type (e.g., tacit or explicit) of knowledge that must

be coordinated. Explicit knowledge can be coordinated by programming (Argyres, 1999); tacit

knowledge requires feedback (Sanchez & Mahoney, 1996). It is beyond the scope of this study to test

which coordination type is superior. In addition, while the importance of selecting proper coordination

mechanisms is recognized (Malone et al., 1999), Clark and Fujimoto (1991) indicated that there is no

single formula for achieving effective coordination. Coordination patterns are dynamic based on the

firms needs (Grant, 1991). It is thus beyond the purpose of this study to identify the most appropriate

coordination mechanism, which has been described elsewhere (Malone et al., 1999).

p roduc ed with perm ission o f the copyright owner. Further reproduction prohibited without permission.

7/17/2019 2004 Pavlou b

36/192

27

Brown and Eisenhardt (1997) argue that neither coordination by programming or by feedback is

superior since successful groups balance both. This is consistent with Okhuysen and Eisenhardt (2002)

who argue that too little structure makes coordination difficult, while too much structure makes it hard to

move (p. 383). In this study, coordination refers to the notion o f workflow coordination (Tan & Elarker,

1999). Finally, it is important to differentiate between contractual and workflow (procedural)

coordination (Sobrero & Roberts, 2001). Contractual coordination refers to the exchange of rights among

parties, while workflow coordination deals with the structure o f information and knowledge flows. This

study focuses on workflow or procedural coordination.

Coordination theory provides a theoretical basis for studying coordination (Malone & Crowston,

1994). According to the theory, coordination routines include gathering and processing information,

linking requirements with tasks, coordinating tasks, allocating resources, and managing dependencies

(Crowston, 1997; Malone & Crowston, 1994). The theory suggests that dependencies must first be

identified, and then alternative coordination mechanisms should be chosen to effectively manage them.

This is consistent with Faraj and Sproull (2000) who argue that effective coordination assumes

recognizing the need for knowledge and bringing it to bear. Following Crowston and Kammerer (1998),

there are three types of dependencies: (1) task-task dependencies (usability and transfer constraints), (2)

task-resource dependencies, and (3) shared resource dependencies.

3.2.1.2 Dimensions of Coordination Competence

Drawing upon coordination theory (Malone & Crowston, 1994), coordination competence is

described as the capacity to effectively and efficiently manage dependencies. Following Crowston and

Kammerer (1998), I propose three dimensions of coordination competence - (a) task synchronization (the

ability to coordinate task-task dependencies), (b) resource allocation (the ability to coordinate resource-

resource dependencies), and (c) task assignment (the ability to coordinate task-resource dependencies).

First, task synchronizationis the ability to specify and execute roles with minimal redundancy, referring

to the extent to which group members function according to the groups requirements (Mohr & Spekman,

1994). Second, resource allocationdeals with achieving the best allocation of resources, such as dealing

pro du ced with perm ission of the copyright own er. Further reproduction prohibited without permissio n.

7/17/2019 2004 Pavlou b

37/192

28

with accumulating and assigning scarce resources (Grant, 1995). Finally, task assignmentis the ability to

appoint suitable tasks to the right group members. These three abilities are combinative in nature and

build upon each other to produce an overall competence. Coordination competence is defined as the

ability to effectively synchronize tasks, allocate knowledge resources, and assign tasks.

3.2.13 Coordination Competence as a Dynamic Capability

The conceptualization of coordination competence as a dynamic capability is suggested by

several researchers. Day (1994) describes coordination as the ability to harmonize an array o f skills and

knowledge. The ability to coordinate knowledge has also been viewed as a key capability by De Boer et

al. (1999), and it has been referred to as the ability to combine skills and knowledge (Kogut & Zander,

1992; Zollo & Winter, 2002). In their seminal work on dynamic capabilities, Teece et al. (1997) argue

that the notion that competence/capability is embedded in distinct ways of coordinating and combining

helps to explain how and why seemingly minor technological changes can have devastating impacts on

incumbent firms abilities to compete in a market (p. 519).

3.2.2 Absorptive Capacity

Absorptive capacity is the ability to accumulate, integrate, and transform knowledge resources

(Grant, 1995; Kusunoki et al., 1998). The acquisition, accumulation, and expansion of knowledge are

important elements of virtually all organizations (Hamel, 1991). Knowledge-creation routines build new

thinking and create effective strategy and performance (Eisenhardt & Martin, 2000). According to

Gartner (www.gartner.com). the ability to capture and share knowledge, to reinvent, reuse, and innovate

with this knowledge is a key determinant of value.

3.2.2.1 W hat is Absorptive Capacity?

Absorptive capacity has been described as the ability to achieve organizational learning. In their

seminal work, Cohen and Levinthal (1990) described absorptive capacity as the firms ability to identify,

value, assimilate, and exploit knowledge from the environment. Absorptive capacity determines the

capacity to assess, appropriate, and integrate explicit and tacit knowledge (Kumar & Nti, 1998). Research

pro du ced with perm ission o f the copyright owner. Further reproduction prohibited without permissio n.
http://www.gartner.com/http://www.gartner.com/

7/17/2019 2004 Pavlou b

38/192

29

has also viewed absorptive capacity as the ability to use and modify both external (Koza & Lewin, 1998)

and internal knowledge (Cummings, 2001). In fact, both internal and external knowledge has been related

to group performance (Ancona & Caldwell, 1992; Eisenhardt & Tabrizi, 1995; Gran

2004 Pavlou b

Documents

Transcript of 2004 Pavlou b