J PROD INNOV MANAG 2008;25:313–330

r 2008 Product Development & Management Association

Major Innovation as a Dynamic Capability: A Systems Approach

Gina Colarelli O’Connor

Major innovation (MI), composed of both radical and really new innovation, is an
important mechanism for enabling the growth and renewal of an enterprise. Yet it is
poorly managed in most established firms, and success stories are rare. This con-
ceptual article draws on systems theory, recent advances in dynamic capabilities
theory, and the management of innovation literature to offer a framework for
building an MI dynamic capability. The framework is composed of seven elements
that together form a management system rather than a process-based approach to
nurturing radical innovation. These system elements are (1) an identifiable orga-
nization structure; (2) interface mechanisms with the mainstream organization,
some of which are tightly coupled and others of which are loose; (3) exploratory
processes; (4) requisite skills and talent development, given that entrepreneurial
talent is not present in most organizations; (5) governance and decision-making
mechanisms at the project, MI portfolio, and MI system levels; (6) appropriate
performance metrics; and (7) an appropriate culture and leadership context. It is
argued that dynamic capabilities for phenomena as complex as MI must be con-
sidered in a systems fashion rather than as operating routines and repeatable pro-
cesses as the literature currently suggests. A set of propositions is offered regarding
how each element should play out in this parallel management system. Finally, each
element’s role in the major innovation system is justified in terms of four criteria
required by systems theory: (1) The system is identifiable, and its elements are
interdependent; (2) the effect of the whole is greater than the sum of the parts; (3)
homeostasis is achieved through interaction and networking with the larger orga-
nization; and (4) there is a clear purpose in the larger system in which the MI
management system is embedded. Examples are given to demonstrate these criteria.
Systems theory offers a new way of thinking about dynamic capability development
and management.

Introduction 1993). One path to renewal is through organic, gen-

erative growth—that is, the development of new busi-

O
rganizational growth and renewal are fun-
damental to every firm’s long-term survival
(Jelinek and Schoonhoven, 1993; Morone,
Address correspondence to: Gina Colarelli O’Connor, Lally School
of Management and Technology, Rensselaer Polytechnic Institute, 110
8th Street, Troy, NY 12180-3590. Tel.: (518)276-6842. E-Mail:
oconng@rpi.edu.
 The author gratefully acknowledges helpful comments on earlier
drafts of this article from Andrew Corbett, Richard DeMartino,
Joanne Hyland, Heidi Neck, Narongsak Thongpapanl, Dan Robeson,
and three anonymous reviewers.
nesses based on technical competencies nurtured
within the organization. When the promise of an op-
portunity is large, when it relies on invention and in-
novation, and when the risk and uncertainty
associated with the opportunity are high (Hill and
Rothaermel, 2003), the literature refers to these or-
ganic growth initiatives as radical innovations (RIs)
(Leifer et al., 2000; Morone, 1993). Radical innova-
tions may bring wholly new benefits to the market,
and therefore to the firm. They may disrupt existing
314 J PROD INNOV MANAG
2008;25:313–330
industry dynamics (Christensen and Raynor, 2003)
and require a reconfiguration of value chains. Firms
that engage in radical innovation enjoy supranormal
returns (Sorescu, 2002; Sorescu, Chandy, and Prahbu
2003; Zahra, 1996, 1999), making RI an attractive
objective for established companies that view innova-
tion as a major source of competitive advantage.
Forces within established companies can impede
RI success (Sull, 1999). Organizations grow by gain-
ing efficiencies of scale and scope in core competency
areas that ultimately become core rigidities (Leonard-
Barton, 1992) or core incompetencies (Dougherty,
1995). Some scholars, in fact, proffer that large es-
tablished firms are incapable of meeting the demands
of current stakeholders while simultaneously planning
for future disruptive technologies (Christensen, 1997).
Case studies and other empirical evidence points to
the fact that new ventures groups or other incubator-
type models in large organizations do not last long
enough for their portfolios of innovations or the de-
velopment of new innovation competencies to have an
impact on the organization (Fast, 1979; Garvin, 2004;
O’Connor and Maslyn, 2002). Other scholars argue
that organizations can develop appropriate manage-
ment systems for RI but simply have not (Ahuja and
Lampert, 2001; Christensen and Raynor, 2003; Hill
and Rothaermel, 2003; Jelinek and Schoonhoven,
1993; Leifer et al., 2000; Morone, 1993).
Much of the RI literature highlights the critical role
of the single-minded, impassioned champion (Chakra-
barthi, 1974; Greene, Brush, and Hart, 1999; Howell
and Higgins, 1990; Kuratko, Montagno, and Hornsby,
1990; Maidique, 1980; Pinchot, 1985; Shane, 1994;
BIOGRAPHICAL SKETCH
Dr. Gina Colarelli O’Connor is associate professor of marketing in
the Lally School of Management and Technology at Rensselaer
Polytechnic Institute (RPI) and academic director of the Radical
Innovation Research Program. She has served as director of the
Lally School’s Master of Business Administration (MBA) and Mas-
ter of Science (MS) programs and as associate director of the Sev-
erino Center for Technology Entrepreneurship and currently serves
as director of the Executive MBA program at RPI. Dr. O’Connor’s
teaching and research interests lie at the intersection of corporate
entrepreneurship and radical innovation, marketing, and commer-
cialization of advanced technology. The majority of her research
efforts focus on how firms link advanced technology development to
market opportunities. She has published more than 30 articles in
refereed journals and books and is coauthor of Radical Innovation,
How Mature Companies Can Outsmart Upstarts (with Richard Leif-
er et al., Harvard Business School Press, 2000) and is lead author of
Grabbing Lightning: Building a Capability for Breakthrough Innova-
tion (Jossey-Bass, 2008).
G. C. O’CONNOR
Sharma, 2000). The central tenet of dynamic capabil-
ity theory, in contrast, is that firms can evolve processes
that enable them to develop, change, and rejuvenate
themselves. While persistent, skilled, visionary cham-
pions are critical to RI, organizations will never max-
imize their resources and advantages if they do not
move from relying on champions to a dynamic capa-
bility that includes them as one element of a system.
The purpose of this article is to leverage systems
theory and recent advances in dynamic capability the-
ory to increase our understanding of how firms can
evolve a capability for enabling major innovations.
The specific focus is identifying the elements of a
management system for sustained major innovation
that is not reliant simply on strong willed champions
but rather that leverages these and other knowledge
assets to fuel organizational renewal and health. A
major innovation (MI) capability, it is proposed, re-
quires the interaction of multiple elements of a man-
agement system that far exceed the complexity of
simple operating routines, which form the basis of
dynamic capability theory today. Seven specific ele-
ments of a management system are proposed that
could comprise an MI dynamic capability if viewed as
an integrated system: (1) an identifiable organization
structure; (2) interface mechanisms; (3) exploratory
processes; (4) requisite skills; (5) governance and de-
cision-making mechanisms; (6) appropriate perfor-
mance metrics; and (7) an appropriate culture and
leadership context. Each of these is elaborated
based on what both theory and observation suggest.
Their relationships are discussed in the context of
systems theory to identify these elements as necessary
and sufficient for building a sustainable innovation
capability.
Defining Radical and Major Innovation
RI has been defined previously as encompassing in-
novations that offer either new to the world perfor-
mance features or significant improvement (5–10
times) in known features or significant reductions
(e.g., 50%) in cost, such that new application do-
mains would open up (Leifer et al., 2000; O’Connor,
1998; O’Connor and Rice, 2001). Technology, either
newly discovered or in unique combinations, typically
enables the innovation and is recognized increasingly
as the basis of the competitive advantage (Garcia and
Calantone, 2002; Hill and Roethermel, 2003; Lynn,
Morone, and Paulson, 1996; Morone, 1993). Radical
MAJOR INNOVATION AS A DYNAMIC CAPABILITY
innovations transform existing markets or industries
or create new ones. RI is accompanied by high levels
of uncertainty because, to achieve these performance
leaps, firms must expand to incorporate or create
emergent customer markets or new technology com-
petencies. Each requires new knowledge or departure
from existing skills or familiar practices and relation-
ships (Christensen, 1997; Freeman and Soete, 1997;
Hill and Rothaermael, 2003; Levinthal and March,
1993). This triggers not only market and technical
uncertainties but also resource and organizational un-
certainties (O’Connor, Rice, and Leifer, 2003).
Garcia and Calantone (2002) criticized scholars for
muddying the definitional waters regarding innova-
tion. They called for a three-level typology of inno-
vation on the basis of micro- (firm) and macro-
(industry) levels of impact as well as technical and
market discontinuities rather than the simplistic rad-
ical–incremental dichotomy that is so often used.
They noted that, while radical innovations are ex-
tremely rare, their second category, really new inno-
vations, is more common and exhibits macrolevel
discontinuity on either the market or technical dimen-
sion and either market or technical or both types of
discontinuity at the microlevel. What is clear is that
both really new and radical innovations share a char-
acteristic that incremental innovation does not: high
levels of uncertainty on multiple dimensions. Both re-
quire the organization to move into unchartered ter-
ritory, where reliance on experience, current
knowledge assets, and loyal customers is not an ad-
vantage. Thus, the management challenges are of like
kind. Within really new and radical, the difference is
one of degree (i.e., uncertainties may be even more
extreme or exist on more dimensions for radical than
for really new), and so for purposes of this article they
are treated together and labeled as major innovation.
Between these two forms of major innovation and in-
cremental, the difference is one of kind. The point is
that managing for innovation in which uncertainty
levels are high requires approaches that differ from
those used to manage incremental innovation. (My
thanks to an anonymous reviewer for directing me to
consider this point.) But little theoretical work has
been published to suggest how companies can actually
be ambidextrous: excelling at current operations and
continuous improvement while positioning them-
selves for future growth. Systems theory can help es-
tablish the parameters necessary for a parallel
management system devoted to major innovation in
the context of a larger organization.
J PROD INNOV MANAG 315
2008;25:313–330
Systems Theory
A system is defined as ‘‘a complex of elements in mu-
tual interaction . . . Each individual part . . . depends
not only on conditions within itself, but also to a
greater or lesser extent on the conditions within the
whole, or within superordinate units of which it is a
part’’ (von Bertalanffy, 1960, pp. 11–12). Systems
thinking was pioneered by biologists in the early
20th century and enriched by other disciplines
(Capra, 1996). It evolved as a countertheory to the
mechanistic view that had prevailed since the Renais-
sance, driven by the scientific revolution and discov-
eries in physics (Isaac Newton), astronomy (Nicolaus
Copernicus and Galileo Galilei), and mathematics
(René DesCartes), which viewed the world as a per-
fect machine that could be understood completely by
analyzing its smallest components, each operating ac-
cording to deducible rules. The central tenet of sys-
tems theory, in contrast, is that the whole is greater
than the sum of its parts and that the behavior of the
whole thus cannot be understood from the properties
of its parts. A system’s properties are destroyed by
dissecting it into its elements. Just as the analysis
of the part is the focus of the mechanistic view and
Cartesian science, the analysis of the whole is the
focus of systems theory.
Systems are integrated. A system’s properties arise
from the interfaces of the parts (Capra, 1996; Kast and
Rosenzweig, 1972). A change in one element affects the
others. Systems thinking, therefore, concentrates not
on basic building blocks but on basic principles of or-
ganization. Systems can be closed or open. A closed
system exhibits clear boundaries and is subject to en-
tropy, moving toward disorganization or chaos until it
fails (Capra, 1996). The system exhibits autopoiesis
(Greek for ‘‘self-making’’), which means it seeks to re-
produce itself by constantly shifting its elements and
structures (Bausch, 2002) and orients itself to its envi-
ronment by single-loop learning. Homeostasis is the
self-regulatory mechanism that allows organisms to re-
main in dynamic balance, with their variables fluctu-
ating between certain tolerance limits
Open systems theory describes systems with semi-
permeable boundaries that escape entropy by feeding
on a continual flux of energy and matter to stay alive
(von Bertalanffy, 1968, 1972). This necessitates inter-
faces with the larger system in which it is embedded
and requires self-governance and learning through net-
works, interfaces, and feedback loops. Open systems
do not exhibit entropy but rather a movement toward
316 J PROD INNOV MANAG
2008;25:313–330
orderliness or a ‘‘flowing equilibrium’’ as they self-reg-
ulate in relationship to their environment (Capra,
1996; Felix, 2003; von Bertalanffy, 1968).
Finally, systems are nested, one within another, and
are linked as networks such that no single system
serves as a foundational building block for the rest
(Capra, 1996). Thus, systems are contextual, meaning
that the relationships among parts can only be un-
derstood in the context of one system relative to oth-
ers with which it is networked.
The application of systems theory to innovation
research and scholarship has been minimal to date but
appears to hold promise. Leveraging systems theory
can help define the relationships between the identi-
fied elements of an MI management system and the
relationship between the MI management system and
the larger organizational system. First, however, dy-
namic capabilities theory is reviewed to set the stage
for helping identify the appropriate system elements.
Dynamic Capabilities Theory
Dynamic capabilities theory arises from a resource-
based view (RBV) that sees the firm as owning stocks
of valuable technology or other firm-specific resources
(Teece, 1980). Firms are heterogeneous with respect to
resources, capabilities, and endowments. Further-
more, these endowments are ‘‘sticky,’’ or difficult to
modify (Amit and Schoemaker, 1993; Barney, 1991;
Mahoney and Pandian, 1992; Penrose, 1959; Werner-
felt, 1984). Because of this, an RBV claims that a
firm’s competitive advantage comes from strategies
that exploit existing firm-based assets.
Over time scholars recognized that a stock of assets
is not enough to maintain leadership or competitive
advantage during rapid or unpredictable change. Ca-
pabilities are the business processes needed to config-
ure assets in advantageous ways. The concept of
dynamic capabilities emphasizes the role of strategic
management in adapting, integrating, and reconfigur-
ing those assets to match the requirements of the
changing environment (Teece, Pisano, and Shuen,
1997).
Inconsistencies in the Theory and Application to
Major Innovation
Dynamic capabilities theory continues to evolve.
Scholars disagree not only on what the unit of anal-
G. C. O’CONNOR
ysis is but also about the mechanisms by which learn-
ing takes place to develop dynamic capabilities.
March and Simon (1958) described an organization-
al routine as a fixed response to a defined stimulus,
implying that, once embedded, no further learning is
necessary. Zollo and Winter (2002) called codifiable
processes, repeatability, and generalizability the
building blocks for developing a dynamic capability.
They defined the construct as ‘‘a learned and stable
pattern of collective activity through which the orga-
nization systematically generates and modifies its op-
erating routines in pursuit of improved effectiveness’’
(p. 340). According to this definition, dynamic capa-
bilities are process-improvement techniques that con-
stitute the firm’s way of modifying operating routines.
The generation of capabilities requires enough expe-
rience that tacit organizational knowledge become
stored in new patterns of activity, known in routines
(Teece et al., 1997). These routines help the firm in-
tegrate (Helfat and Raubitschek, 2000), reconfigure
(Hargadon and Sutton, 1997), or develop and release
new resources (Henderson and Cockburn, 1994).
Given that MI requires knowledge creation and
application in novel contexts, it is not clear how cod-
ifiable, repeatable processes can be useful mechanisms
for building MI dynamic capabilities (Cheng and Van
de Ven, 1996; Eisenhardt and Martin, 2000; McG-
rath, 2001). Theidea that routines might lead to dy-
namic capabilities contradicts claims that routines
breed inertia (Hannan and Freeman, 1984; King and
Tucci, 2002). Some scholars question whether large
established firms can ever achieve the flexibility in in-
tegrating knowledge that is required to create new
capabilities (Grant, 1996). Other scholars note, how-
ever, that routines that preserve ongoing change pro-
cesses can exist on a higher order (Argyris and Schon,
1978; Benner and Tushman, 2003; King and Tucci,
2002; Nelson and Winter, 1982; Winter, 2000). Just as
experience with operating routines preserves and en-
trenches those routines, experience with changing op-
erating routines necessitates modification routines
that can make similar changes in the future (Amb-
urgey, Kelly, and Barnett, 1993; King and Tucci,
2002). Firms can thus create routines that are variety
increasing rather than variety reducing.
Market velocity and uncertainty. Scholars argue
that the effectiveness of specific dynamic capabilities
depends on market dynamism (Dosi, Nelson, and
Winter, 2000; Eisenhardt and Martin, 2000). In fast-
paced markets firms cannot rely as much on existing
MAJOR INNOVATION AS A DYNAMIC CAPABILITY
knowledge as they can in moderately dynamic mar-
kets, wherein change may occur frequently but along
predictable linear paths. Moderately dynamic markets
have relatively stable industry structures; market
boundaries are clear, and the agents in the value chain
are known. Effective dynamic capabilities rely on ex-
isting knowledge or learning before doing (Pisano,
1994). Managers can use structured, analytical ap-
proaches and tacit knowledge in their decision mak-
ing. The key to competitive advantage is efficient,
well-codified, and well-understood processes coupled
with rapid execution. Routines can be specified to
create organizational memory about their execution
and to enhance predictability and diagnosis when an
error occurs.
High-velocity markets, in contrast, differ not just in
speed but also in character. But it is not the degree of
dynamism that drives differences in managing in these
two contexts, as Eisenhardt and Martin (2000) claim,
but the degree of uncertainty about links between ac-
tion and outcome. Market velocity creates uncertain-
ty, but so do other conditions. Whenever a firm is
involved in new-knowledge creation (e.g., through the
discovery and development of a novel technology) or
new-market creation (e.g., through the application of
technology to enable previously impossible benefits),
both of which happen in MI, uncertainty is extremely
high (O’Connor et al., in press).
Under conditions of high uncertainty, market
boundaries may become blurred as a firm recognizes
that a technology competency it has developed has
application possibilities in market spaces far afield
from those in which it currently operates. Business
models come into question as new value chains must
be created to exploit the novel technology (Eisenhardt
and Martin, 2000). All of this in turn stimulates or-
ganizational uncertainty as existing operating units
may not be appropriately fitted to the opportunity
that the fledgling business represents. One example is
Netactive, a Nortel Networks spin-out venture com-
pany that developed a technology that would enable
people to rent software on the Internet, long before
the Internet was an accepted commercial venue and
before Internet-based payment agents or distribution
agents for software existed. The business model Net-
active finally adopted changed many times due to the
absence of appropriate value chain partners in an im-
mature industry (O’Connor and Maslyn, 2002).
To create new markets in highly uncertain environ-
ments, the innovative firm often must forward or
backward integrate to fill parts of the value chain
J PROD INNOV MANAG 317
2008;25:313–330
that typical agents are unwilling to enter. The digital
light processor at Texas Instruments (TI), for exam-
ple, is based on a radically new digital micromirror
device, a computer chip with multitudes of tiny mir-
rors that enables major advances in projection tech-
nology. Yet TI could not entice projector makers to
incorporate it because of the high manufacturing un-
certainties they perceived and the market disruptions
in the cinema industry the new design would incur. TI
invested, therefore, in integrating forward and built
the power function, the electronics, the optics, and the
housing of a projector device so that projectors could
be assembled and shipped to create market demand.
Once that occurred, TI reverted to its original core
competency, that of chip manufacturer. But the initial
objective—to entice value chain agents to enter the
market—had been achieved.
These cases illustrate high uncertainty but not nec-
essarily high velocity. In fact, MIs can take years to
develop and commercialize (Morone, 1993) simply
because of existing technical, market, organizational,
and resource uncertainties (Leifer et al., 2000; O’Con-
nor et al., in press). But the characteristics that Ei-
senhardt and Martin (2000) detailed for effective
dynamic capabilities in high-velocity markets also ap-
ply in the broader context of high uncertainty.
Effective dynamic capabilities under conditions of
high uncertainty. Interestingly, these characteristics
are not all specified in terms of processes but rather
touch on a range of structural, cultural, skill-set, and
strategic elements. It is useful to consider them as el-
ements of a management system for MI.
The first observation from the theory is that, under
conditions of high uncertainty, as with high market
velocity, the end state is more central in managers’
minds than the means to getting there (Eisenhardt
and Martin, 2000). Achievement of the goal overrides
the process, since processes vary by situation.
Routines are simple, and investment in building
them is minimal (Eisenhardt and Sull, 2001). They
focus on specifying boundary conditions or priorities;
they are not rigid processes. People who can solve
problems become more important than any process. It
is known that a focus on ends over means enhances
creativity in work organizations (Amabile et al., 1996)
and that in knowledge creation and MI, creativity is at
a premium.
Second, in high-uncertainty environments, building
dynamic capabilities involves the creation of new,
situation-specific knowledge (Eisenhardt and Martin,
318 J PROD INNOV MANAG
2008;25:313–330
2000). Existing knowledge is not only likely irrelevant;
it can even also be harmful if it colors the interpreta-
tion of a discovery. Therefore, frequent experiential
actions that lead to quick learning compensate for
limited understanding (Eisenhardt and Martin, 2000;
McGrath, 2001). Iteration is critical as new informa-
tion and changing conditions are uncovered.
Such frequent iteration and active engagement with
internal and external constituents require real-time
information, cross-functional networking, and inten-
sive communication to help link the nonlinear learn-
ing experiences to one another and to the ultimate
objective. Real-time information builds intuition
about the marketplace and the problem in general;
cumulative experience counts over time (Eisenhardt,
1989).
Third, in high-uncertainty markets, dynamic capa-
bilities are characterized by ‘‘parallel consideration
and often partial implementation of multiple options’’
(Eisenhardt and Martin, 2000, p. 1112). This is man-
ifested in many ways. One is the use of rough proto-
typing (Lynn et al., 1996; O’Connor, 1998; Pisano,
1994; Veryzer, 1998), which provides rapid learning
by engaging the market experientially rather than an-
alytically. Others include exploring with multiple co-
development partners, multiple potential application
spaces, or multiple external and internal sources of
funding (Thongpapanl, 2005).
Fourth, dynamic capability theory implies that, un-
der conditions of high uncertainty, unique skill sets
are required (O’Connor and McDermott, 2004).
Courage is the first, since empirical evidence shows
that managers’ inability to cope with ambiguity and
risk slows their decision making (Dougherty, 1995;
Eisenhardt, 1989), thus requiring strong influence
skills on the part of the project leader. A certain
kind of intellect is also required. MI is a form of
deutero-learning that requires questioning implicit as-
sumptions and inquiry methods, triggering a funda-
mental rethinking of the problem (Argyris and Schon,
1978). MI learning includes searching for preferences
and alternate actions in addition to linking current
actions to past outcomes (Van de Ven and Polley,
1992), requiring use of both divergent and convergent
thinking. Deciding what to keep from the experience
set and what to discard is more crucial than deepening
capabilities based on small frequent variations
through related experiences (Gersick, 1994; McGrath,
2001). The implication is that individuals working in
this kind of environment must be capable of dealing
with complex information, able to articulate assump-
G. C. O’CONNOR
tions and call them into question, able to rely on in-
tuition, and able to reconceptualize problems
(Jacques and Cason, 1994). This complex set of capa-
bilities holds implications for staffing that are far
reaching. To evolve the competency, a system of ap-
prenticeship, information sharing, and coaching may
be necessary to build on cumulative experience and
wisdom (O’Connor and Guinan, 2003).
Finally, the literature notes that dynamic capabili-
ties in high-uncertainty markets tend to dissipate.
Since they cannot be routinized or codified, they are
easy to forget (Argote, 1999; Eisenhardt and Martin,
2000), so vigilance is required to sustain them (Prigo-
gine and Stengers, 1984). Sustaining activity can come
in the form of practice, experience, and clarity of pur-
pose. It takes so long to build the experience and net-
works required to be effective at MI that it is
torturous to note that many corporate entrepreneur-
ship or MI initiatives last a short time, only to be re-
started later (Fast, 1976). Firms expecting to
reinvigorate these capabilities after years of dorman-
cy run up against this ‘‘dissipative’’ character of MI
dynamic capabilities (Guehler, 2001).
While numerous case studies report successful com-
mercialization of individual MI projects (Leifer et al.,
2000; Morone, 1993), it is critical to understand how
firms can build MI capabilities systematically rather
than by exception. The unit of analysis in this article
is not the MI project but the firm. How can large
established enterprises successfully manage a portfo-
lio of high-risk, high-uncertainty projects? What
are the elements of a management system that enable
the initiation and development of a sustainable MI
capability?
MI Dynamic Capabilities: A Complete System
High-uncertainty environments do not lend them-
selves to operating routines or codifiable processes.
At the same time, firms whose competitive advantage
lies in the strategic use of technology and innovation
must have an MI capability. So rather than trying to
reduce an MI dynamic capability to a set of routines
or processes, it is conceptualized here as a set of seven
elements that theoretically appear necessary and suffi-
cient to comprise an MI management system. This
section elaborates on each element and builds a
framework for considering how firms can build a sus-
tainable MI dynamic capability.
MAJOR INNOVATION AS A DYNAMIC CAPABILITY
Element 1: A Clearly Identified Organizational
Structure
The first element is an identified team, group, depart-
ment, or other entity in the firm that is charged with
the responsibility for making MI happen. Systems
theory requires that any system or subsystem be iden-
tifiable based on a boundary (be it open or closed) and
a distinct function within the larger network of sys-
tems in which it operates (Capra, 1996). Jelinek and
Schoonhoven (1993), in fact, found that many inno-
vative firms in fact do have institutionalized groups
responsible for breakthrough innovation. They ar-
gued that major innovations cannot be expected in an
organic environment, where flexibility, consensus
building, and fluidity are the primary managerial
mechanisms for accomplishing objectives. Rather,
breakthrough innovation requires structure and clear
reporting relationships to ensure the opportunity for
both discipline and creativity.
The literature offers several reasons for establishing
an identified group to develop and sustain MI. Orga-
nizational capability building is not easy, especially
when the capability is foreign to the natural efficiency-
oriented processes of the company. Transformational
experiences (King and Tucci, 2002) are the building
blocks of MI, requiring improvisational processes
that will dissipate if not watched over (Eisenhardt
and Martin, 2000). A clear set of roles and responsi-
bilities is needed to sustain attention and resources to
transformational experience and MI. An identified
group can ensure this constant attention.
Second, experience accumulation is described as
the basic building block of any new dynamic capabil-
ity (Zollo and Winter, 2002). Before a phenomenon is
understood well enough to articulate and codify it, the
most likely mechanism for successful execution is for
a group of people to experience it repeatedly together.
A dedicated organization with accumulated common
experiences can compensate for the memory loss that
is likely when routines are simple and there is little
structure for managers to grasp (Argote, 1999; Eisen-
hardt and Martin, 2000).
Third, an identified organization, staffed with peo-
ple who are responsible for building and shepherding
the MI capability and are measured on its results, is
more apt to reflect on its progress and reconfigure its
practices to improve. Large established companies
offer the room to learn and to experiment that start-
ups cannot afford (Floyd and Woodridge, 1999; Kogut
and Zander, 1992). Since organizational elements often
J PROD INNOV MANAG 319
2008;25:313–330
display high levels of coherence, changing one element
requires changing others (Kast and Rosenzweig, 1972;
Teece et al., 1997). An identified entity allows the el-
ements of the system to display internal consistency
without affecting the mainstream organization.
Finally, a separate organization is needed to allow
competencies to develop without being stamped out
by reified rules (Dougherty, 1995; Leonard-Barton,
1992). Hill and Rothaermel (2003) argued and Rice,
Leifer, and O’Connor (2002) demonstrated that a
loosely coupled organizational unit should be estab-
lished to commercialize radical technology so that it
can evolve the business models and processes needed
to accelerate rapid growth without the pressures of
conforming to mainstream operating models. Much
of the dominance of incompetencies, Dougherty
(1995) argued, comes from organizational pressures
against loosely defined processes that defy codifica-
tion, pressures against hands-on practice, and pres-
sures against the linkage of technologies and markets.
Each of these practices, however, is exactly what is
needed in high-uncertainty technical and market en-
vironments (Lynn et al., 1996; O’Connor, 1998).
Some argue that groups dedicated to MI must be
physically and culturally separate (Benner and Tush-
man, 2003; Hill and Rothaermel, 2003; Kanter, 1985).
But while an organizational system whose elements are
internally consistent overall is critical to developing an
MI dynamic capability, there are positive aspects of
embedding the activity in the mainstream and attend-
ing vigorously to the interfaces (Heller, 1999). This is,
in fact, a requirement of any open system (Felix, 2003).
Corporate ventures have access to the assets and re-
sources of the organization (Greene et al., 1999; Pen-
rose, 1959; Wernerfelt, 1984), which theoretically gives
them a competitive advantage over start-ups. For ex-
ample, NetActive, the software-rental venture de-
scribed earlier, leveraged its parent company’s name,
Nortel Networks, to gain access to software game pro-
ducers they would never have attracted as a stand-
alone firm (O’Connor and Maslyn, 2002).
P1: An MI dynamic capability requires an identifiable
organizational group responsible for the firm’s major
innovation efforts.
Element 2: Internal and External Interface
Mechanisms
While the need for a dedicated infrastructure exists,
the extent to which it should be isolated from external
320 J PROD INNOV MANAG
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influences, either the mainstream organization or the
external environment, is not clear in the literature.
Incubators, or skunkworks, have been hotly debated
as the infrastructure of choice. Case studies show that
physical separation at the project level may work for a
time, but complete separation at the system level may
not be wise given that the purpose of an MI system is
to leverage and stretch current competencies while si-
multaneously building new ones. Thus, the interface
to the mainstream organization becomes critically im-
portant, and an identified group embedded within the
organization may help manage those interfaces (Hell-
er, 1999; Leifer et. al. 2000; Sharma, 2000).
Dynamic capability theory, while not explicit on
this issue, argues for the importance of the interplay
between old and new. Dougherty (1995) described the
need for interaction between rich core competencies
and core incompetencies to help firms improve their
capacity to change. Danneels (2002) demonstrated the
reciprocal interplay of product innovation with firm
competencies, showing that dynamic capabilities af-
fect innovation but that the journeys required by in-
novation initiatives also result in new dynamic
capabilities. But aside from the rationalistic approach
to developing operating routines through practice, ar-
ticulation, and codification (Teece et al., 1997; Zollo
and Winter, 2002), the literature does not yet address
the mechanisms by which new competencies become
embedded in the organization, particularly those driv-
en by transformational experiences that force the or-
ganization to change along a different vector (King
and Tucci, 2002). One important aspect of this is in-
terface mechanisms between the MI system and its
internal and external constituents.
External linkages. With respect to linkages to ex-
ternal resources, the literature is quite clear. MI can be
a knowledge creation opportunity for the firm. A
common feature across successful knowledge creation
processes is explicit linkage between the focal firm and
knowledge sources outside the firm through interac-
tions that include informal personal relationships, re-
lationships driven by promotion criteria (i.e., to
publish or attend conferences), and formal alliances
(Eisenhardt and Martin, 2000; Wolpert, 2002). Shane
(2000) demonstrated that entrepreneurs discover op-
portunities related to information they already pos-
sess, implying that enriching their networks, and thus
information stocks, leads to richer opportunity rec-
ognition. Cohen and Levinthal (1990) argued that the
ability to evaluate and utilize outside knowledge is
G. C. O’CONNOR
largely a function of the level of prior related knowl-
edge. Thus, variety enhancement is important
because, counter to the prevailing literature, entrepre-
neurs do not always choose between carefully con-
sidered alternate market opportunities for new tech-
nologies but rather choose the closest one (O’Connor,
1998; Shane, 2000). Frequent interactions with poten-
tial customers and external constituents can circum-
vent this problem (Dougherty, 1995). Firms are
beginning to build systems to enrich their external
networks for this express purpose. Corning, for ex-
ample, initiated an exploratory marketing function
within its central research group. Its objective is to
visit potential customers not yet served by the com-
pany to identify opportunities to apply Corning’s rich
technical competencies.
Internal linkages. Dynamic capability theory is less
developed regarding internal linkages and, specifical-
ly, how the results of transformational experiences
and the resulting new capabilities are assimilated into
the organization. The literature typically addresses
this in terms of whether a venture or, in this case, an
MI system should be loosely or tightly coupled to the
mainstream organization. Loosely coupled systems
may (1) provide a psychological haven for creativity
(Meyerson and Martin, 1987), (2) provide freedom
from senior-management scrutiny so system members
have more discretion to develop the opportunity with-
out process impediments (Dougherty and Heller,
1994), and (3) buffer the organization from innova-
tors’ failures (Weick, 1976). Benner and Tushman
(2003) argued that MI systems require tight coupling
among internal elements and loose coupling to the
mainstream. However, closer scrutiny shows that the
issue is not so simple; various aspects of the MI sys-
tem may be differentially coupled to the mainstream
for greatest effectiveness. Four aspects of the MI–
mainstream linkage are considered: (1) roles; (2) strat-
egy; (3) resources, networks, and administrative sys-
tems; and (4) learning processes.
First, the literature suggests that tight coupling is
required to ensure a clear understanding of the MI
system’s role in the organization (Capra, 1996; Roten-
berg and Saloner, 2000) and of how it differs from the
rest of the company’s innovation system, specifically
the NPD processes in operating units. For the MI
management system to maintain its purpose in the
larger corporate system, its role must be clearly and
widely communicated so that no threats are perceived
among other innovation groups; the rest of the orga-
MAJOR INNOVATION AS A DYNAMIC CAPABILITY
nization can leverage the MI system when opportu-
nities arise, and when the MI system requests resourc-
es from the mainstream, it is seen as a legitimate
organizational member. In one firm, after an MI sys-
tem was quietly initiated by senior leadership, its
members chose not to announce their existence be-
fore they had demonstrated commercial success on
several projects. They had great difficulty, however,
gaining access to key resources in the firm. Without
access or legitimacy, the MI projects they were over-
seeing could not flourish, management could not be
patient enough, and the cycle of failure ultimately re-
quired that the entire system be reformed. The reform
was managed with great fanfare, including a new se-
nior corporate leader for MI and the reassignment of
the initial group that had accumulated several years of
experience and learning.
P2a: An MI dynamic capability requires that the MI
system’s role in the larger organization be communi-
cated throughout the organization.
Second, systems theory suggests that the MI system
must exhibit tight coupling with the firm’s strategic
intent to ensure that the MI management system re-
mains relevant to the larger organization. If the pur-
pose of MI is organizational renewal, the link to the
firm’s vision for its future must be intimate and re-
ciprocal. In other words, the reason for building an
MI dynamic capability is to help the firm renew itself,
with the directions for renewal executed through the
MI system. Both theoretical and empirical evidence
suggest that the link between corporate entrepreneur-
ship (CE) activities and strategy formation processes
can determine the effects of CE on firm performance
(Baden-Fuller, 1995; Burgelman and Sayles, 1986;
Covin and Miles, 2003; Lovas and Ghoshal, 2000;
Meyer and Heppard, 2000; Thornhill and Amit,
2001). Furthermore, the influence works both ways
(Burgelman and Sayles, 1986; Covin and Miles, 2003;
Danneels, 2002; Markides, 1999). Opportunities pur-
sued by the MI system may cause the firm to broaden
or redirect its future course as it engages in and learns
about the new opportunity. Covin and Miles (2003)
found that communication between corporate entre-
preneurs and top managers increases the understand-
ing of corporate strategy among the former and
the understanding of market and technological op-
portunities among the latter. They viewed venturing
activities as an opportunity to begin strategic conver-
sations. Zahra, Nielsen, and Bogner (1999) described
J PROD INNOV MANAG 321
2008;25:313–330
how CE activities can identify and help articulate a
firm’s next competency domain. Tight coupling on
strategic intent can be ensured by regular communi-
cation among MI leadership and senior corporate
leadership. In many cases, for example, governance
boards that oversee the portfolio of MI opportunities
are composed of the company’s senior leadership.
P2b: An MI dynamic capability requires that the MI
system objectives be tightly and reciprocally coupled to
the firm’s strategic intent.
Systems theory suggests that systems have unique
properties and that, therefore, not all characteristics
of networked or embedded systems will be the same.
Some linkages will be more loosely connected than
others. CE and MI theories suggest that, while the
coupling with respect to resources, networks, and busi-
ness unit (BU) operating systems cannot be tight due
to the mainstream organization’s core rigidities
(Dougherty, 1995; Leonard-Barton, 1992), some links
may enhance the likelihood that new business oppor-
tunities transferred from the MI system will be ac-
cepted. Eventually, an MI will need to be embedded in
an operational unit and work within a business unit’s
systems. A project must at some point be added to the
BU’s portfolio planning and resource expenditure
plans, for example. Similarly, resources will be need-
ed during a project’s development that may already
reside in an operating unit if the opportunity is tightly
aligned with that unit. At Air Products and Shell
Chemicals, for example, the MI system directors
maintain a talent database: an inventory of people
throughout the company they may need to draw on
from time to time. Hill and Rothaermel (2003) argued
that incumbent firms are better prepared to respond
to an MI introduced into the firm’s industry when the
basic research function (discovery) is loosely coupled
with applied research functions directed by the BU.
Firms use idea-sharing fairs, technology conferences,
and innovation fairs to loosely network members of
the MI system and mainstream operations so that
mainstream employees are aware of MI activities.
P2c: An MI dynamic capability requires that the MI
system be loosely coupled with the mainstream organi-
zation in terms of access to resources, networks, and
BU systems.
Finally, the literature is fairly well developed regard-
ing the need for different product development pro-
322 J PROD INNOV MANAG
2008;25:313–330
cesses for high-uncertainty (MI) projects compared
with incremental new product projects. This calls for a
decoupling of processes, in that the processes and eval-
uative criteria that work for incremental innovation
are inappropriate for MI (Leifer et al., 2000; Morone
and O’Connor, 1992). One manifestation of the
decoupling of processes is the emergence of distinct
vocabularies for MI-appropriate processes: explorato-
ry marketing (vs. voice of the customer), emerging
business opportunities (vs. new product projects),
probe and learn (vs. market research), learning plans
(vs. project plans), new market creation (vs. product
launch), and general manager (vs. team leader).
P2d: An MI dynamic capability requires that the MI
system’s project management processes be decoupled
from those of the mainstream system.
Element 3: Exploratory Processes
Effective dynamic capabilities in high-uncertainty en-
vironments require new, situation-specific knowledge
(Eisenhardt and Martin, 2000), which accumulates as
project members engage in experiential activities to
learn quickly, to evaluate, and to redirect (Lynn et al.,
1996). In fact, for a while even that level of rationality
cannot be expected. Cheng and Van de Ven (1996)
found that during the initial phase of exploration,
project learning did not occur, in that actions and
outcomes were not connected in any patterned way.
Instead, teams were using another type of knowledge
acquisition: building a stock of knowledge about the
tasks to be learned. The definition of learning pre-
sumes that learners have a priori knowledge about (1)
alternative courses of action, (2) outcome preferences
or goals, and (3) the institutional rules, resources, and
settings in which the task is undertaken. In new situ-
ations this prerequisite knowledge must first be cre-
ated, through discovering possible actions, outcomes,
and the contexts in which they occur. If learners have
experience with only one course of action and one
outcome preference, there is little opportunity for
learning or creativity since the task is reduced to link-
ing the only known means with the only agreed-upon
end.
Other researchers note similar results. Brown and
Eisenhardt (1997) noted that highly structured pro-
cesses such as gating (prescribed for incremental in-
novation) may produce new products quickly but that
those products often do not meet market conditions
G. C. O’CONNOR
or offer long-run competitive advantage. Benner and
Tushman (2003) argued that process-oriented man-
agement stabilizes routines and increases efficiency in
the short run, triggering internal biases for certainty
and predictable results. A focus on process manage-
ment (i.e., codifiable routines) favors exploitative in-
novation over exploratory innovation.
In highly uncertain markets where MI is the objec-
tive, variety enhancement is favored over closure for
much of the project’s development cycle (McGrath,
2001). Knowledge and expertise come from experi-
ence with a wide variety of cues and stimuli. Gener-
ating multiple options and executing on each only to
the point of learning what is needed for the next step is
a more typical process. New knowledge occurs
through simultaneous outreach into the market, eval-
uation, and technology experimentation (O’Connor,
1998), since market and technical development are
intertwined in high-uncertainty environments (Mor-
one and O’Connor, 1992).
Clearly, the processes and tools needed to navigate
high-uncertainty market, technical, resource, and or-
ganizational spaces are different from those typically
used in large established firms. Explication of latent
assumptions, hypothesis generation, and testing re-
garding the four uncertainty dimensions (O’Connor et
al., in press) may be more appropriate approaches to
project management than the use of project manage-
ment tools that focus on reducing deviations from a
preordained and approved plan (McGrath and Mac-
Millan, 1995).
P3: An MI dynamic capability requires that learning-
oriented, exploratory processes be utilized for manag-
ing project progress.
Element 4: Requisite Skills
An organizational routine, as defined in the dynamic
capabilities literature, is a set of activities that are
routinized such that the need for choice is diminished:
A fixed response is provided for a defined stimulus
(March and Simon, 1958). Process is valued to such
an extent that individuals are considered
interchangeable. But no such routine exists when
the dynamic capability is based on transformational
experience, where the purpose is to move the organi-
zation into a renewal state and where new situation-
specific learning is required with each MI project
(Eisenhardt and Martin, 2000). Because risk, uncer-
MAJOR INNOVATION AS A DYNAMIC CAPABILITY
tainty, and novelty are so high, knowledge cannot be
proceduralized.
MI thus requires broadly skilled employees who
can be flexible as circumstances require (Kanter, 1985)
and as projects are pursued, redirected, dropped, or
tilted up. Rather than cross-functional teams, MI
teams are composed of highly multifunctional indi-
viduals (O’Connor and McDermott, 2004), who em-
body entrepreneurial characteristics. If not attended
to, they will not remain in a large established organi-
zational environment for long (Leifer et al., 2000).
The skills necessary for navigating highly uncertain
environments are not typically found in successful
managers in the large established firm, where career
success results from the efficient execution of known
routines and where operations are smooth, predict-
able, and implemented at the lowest possible cost. Ei-
senhardt (1989) found that an inability to cope with
uncertainty is a major reason managers are inhibited
in high-velocity markets. Yet it is just these managers
who are promoted and become decision makers over
MI initiatives, given that promotion occurs based on
success in the mainstream culture driven by a focus on
operational excellence.
Furthermore, when the organization is by defini-
tion moving into unfamiliar terrain, careers may be
threatened. While much of the literature has focused
on the threat to those in the host organization
(Chandy and Tellis, 1998), there is equal threat to
those who nurture the venture, since the transition
into the operating unit can be accompanied by jeal-
ousy and clumsy adaptation into the BU’s adminis-
trative systems (Chandy and Tellis, 1998; Sharma,
2000). O’Connor and McDermott (2004) documented
that over a six-year observation period key core team
members either quit or were fired in 10 of 12 MI pro-
jects they observed.
Because knowledge cannot be proceduralized in the
MI environment mentoring, coaching or apprentice-
ship may be the only ways to develop new capabilities.
Mentoring refers to the systematic development of the
skills and leadership abilities of less experienced mem-
bers of an organization (Scandura, 1992, 1998). Coach-
ing and mentoring can help manage career risk (Kram,
1985) as well as help share the accumulated wisdom
and experience of managing in a high-uncertainty en-
vironment (Lankau and Scandura, 2002). While many
authors have described the importance of such probe-
and-learn, experience-based learning approaches for
high-uncertainty environments (Cheng and Van de
Ven, 1996; Lynn et al., 1996; McGrath, 2001), learn-
J PROD INNOV MANAG 323
2008;25:313–330
ing how to conduct smart probes can be advanced
through the cumulative experience and wisdom affor-
ded by a coaching relationship.
One may see coaching as a substitute for accumu-
lating and articulating knowledge, the basic steps of
building new operating routines (Nelson and Winter,
1982). This is not the case. The pursuit of situation-
specific knowledge necessitated by high-uncertainty
environments does not allow such routines since every
experience is unique (Eisenhardt and Martin, 2000).
At one large industrial firm, a team of three senior
corporate leaders in strategy and technology together
spent 60 hours each month coaching 10 MI project
teams. When asked if this would become a more au-
tomatic process, the vice president of strategy noted,
‘‘Coaching teams cannot be handled by a process . . . .
It must be handled on a one-by-one basis.’’
Given this reality, the selection of coaches is crit-
ical. Given the mismatch of skills needed for upward
mobility in large established organizations and skills
needed in high-uncertainty environments, there is
room for improvement in coaching and talent devel-
opment for MI. Identifying and nurturing talent are
key to an MI dynamic capability system, given its ob-
jective to change the organization in fundamental
ways. It would appear that an understanding and
buildup of the requisite skills, which differ from those
required in the daily operations of an established firm,
is a necessary element of a sustainable MI manage-
ment system.
P4: An MI dynamic capability requires attention to the
identification and nurturing of appropriate skills and
talent.
Element 5: Appropriate Governance and Decision-
Making Mechanisms and Criteria
Systems are self-regulating, as shown in several ways.
First, a system exhibits autopoiesis; it seeks to repro-
duce itself by constantly shifting its elements so that it
continues to exist. Some systems learn through single-
loop feedback: A change enhances or inhibits the sys-
tem’s longevity, but the objectives toward which the
system is evolving are never questioned (Felix, 2003).
Double-loop learning is used to question the system’s
objectives. If they are out of alignment, changes are
initiated to enhance the system’s effectiveness. When
it differs from preset standards, the system attempts to
adapt as quickly as possible to the desired state.
324 J PROD INNOV MANAG
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Closed-loop systems thus always move toward equi-
librium (ibid.). Open systems seek homeostasis, a
shifting equilibrium that helps the system align with
its environment.
Some systems theorists, however, question whether
all systems have equilibrium as their objective. Von
Bertolanffy (1968) described the concept of flow equi-
librium, the idea that many complex systems are not
equilibrium seeking but rather seek disequilibrium.
The MI dynamic capability can be viewed as such a
disequilibrium-seeking entity within the larger com-
pany system. Flow-equilibrium management systems
are characterized by a constantly moving equilibrium.
A constant flow of negative and positive feedback di-
rects the system through a changing, unpredictable
environment. Systems theorists have shown that to
produce creative, innovative, continually changeable
behavior, systems must operate far from equilibrium
(Stacey, 1995). The governance model associated with
this changing system, then, is a necessary element of
an MI dynamic capability since it oversees the execu-
tion of breakthrough innovations and determines,
through positive and negative feedback, whether the
MI system is delivering on its mandate. There are
three levels of governance to consider: (1) the portfo-
lio of MI projects; (2) specific projects within the
portfolio; and (3) the MI system itself.
Element 5a: Governance over the portfolio. Firms
that do not build an entire management system for
major innovation but instead rely on champions and
their senior-management sponsors for any single pro-
ject’s success may be unaware of the set of MI projects
under development at any point in time. The literature
has recently focused on applying venture capital mod-
els to corporate entrepreneurship (Chesbrough, 2000;
Covin and Miles, 2003; Hamel, 1999), indicating
that considering the set of MI projects as a portfolio
is an important practice that is beginning to emerge.
Portfolios, however, are typically diversified to hedge
against risk. When the entire portfolio is composed of
high-risk projects, however, as in the case of MI, a new
dimension of protection must be used to guide portfo-
lio governance. Whether the portfolio is diversified
along technology platforms, new business platforms,
time-to-market estimates, or other considerations, the
MI portfolio manager is faced with the challenge of
considering an appropriate diversification strategy in
line with the new competency and business domains
the firm views as critical to its future health (O’Connor
et al., in press).
G. C. O’CONNOR
P5a: An MI dynamic capability requires a specific,
unique mechanism for considering and governing the
portfolio of MI ventures.
Element 5b: Governance over specific projects within
the portfolio. Two issues arise regarding project-level
governance. The first is evaluation processes for pro-
ject-level go/kill decisions. The second is the compo-
sition of the governing body.
Real-options theory can be used to guide invest-
ment decisions under uncertainty (Dixit and Pindyck,
1994; McGrath and MacMillan, 2000). With this
approach, researchers view investing in a technology
with a highly uncertain future as taking an option
that may or may not be exercised, depending on
how new information changes the option value of
that opportunity. The objective of each funding
milestone is to learn more, thereby reducing the
uncertainty about the value of an opportunity. This
approach aligns with the exploratory processes of
an MI dynamic capability previously described
(Eisenhardt and Tabrizi, 1995). Real-options meth-
ods reject simplistic financial analysis based on net
present value projections to evaluate investments in
nascent opportunities, focusing instead on keeping
options open.
Caution is in order, however, when applying
venture capital and real-options approaches to
internally managed MIs (Chesbrough, 2000). Behind
dynamic capabilities is the requirement to continually
renew through reflection and reevaluation. In a
large established firm, the memory of failed
experiments and expired options endures, and the
organization may choose to leverage the learning
from a seemingly expired option. Thus, unlike a
venture capitalist who samples many projects, the
MI system can build a capability to recombine
early experiences and to build them into larger op-
portunities.
In terms of the composition of the governing
body, the challenge arises that situation-specific
learning is required for each MI project by definition.
It is thus impossible for any single governance body
to have the depth of understanding needed to guide
each project. Therefore, individual projects may
need oversight from a unique governance board
whose members have expertise specific to the technol-
ogy or market in question and who can inform
the portfolio governance board of project-level
issues. The composition of these boards may need
to evolve as the requirements of the project change.
MAJOR INNOVATION AS A DYNAMIC CAPABILITY
P5b.1: An MI dynamic capability requires an options
mentality to project evaluation, with an allowance for
reconsideration of expired options.
P5b.2: An MI dynamic capability requires a mecha-
nism for governing or overseeing each project in the
portfolio composed of project-specific expertise.
Element 5c: Governance over the MI system. Re-
configuring people and processes over time is an im-
portant higher-order dynamic capability (King and
Tucci, 2002) and is a key aspect of the flow-equilib-
rium system that von Bertalanffy (1968) described. It
requires a model of reflection, reconfiguration, and
reinstitutionalization that can only occur if the expec-
tation of continued evolution exists and if MI system
members have the capabilities to manage higher-order
change. This ability to be a high-flex organization re-
quires organizational autonomy (Helfat and Rau-
bitschek, 2000; Teece et al., 1997), which is why a
separate organization structure is needed, as noted
earlier. In one very large U.S.-based organization, the
MI dynamic capability development is managed by
the corporate strategy office, whose high-level staff
members not only coach teams but also reconfigure
their processes. They benchmark externally and inter-
nally, evolve new tools, add new skills, and constantly
diagnose the system. At another large U.S.-based
firm, a recent merger placed enormous resource stress
on the MI system. Pressures to produce required that
the MI staff’s entire attention be devoted to ‘‘getting
just one project out the door.’’ They soon realized that
no one was attending to developing a rich portfolio of
opportunities or considering how to access appropri-
ate talent.
P5c: An MI dynamic capability requires a mechanism
for constant reflection and reconfiguration.
Element 6: Appropriate Metrics
To allow for differential processes and expectations
across innovation and operating systems, differential
budgeting systems and performance metrics must also
be established (Kanter et al., 1991; Rice et al., 2000;
Stringer, 2000). To the extent that the MI system
brings strategic renewal through transformational ex-
periences, senior management may provide slack be-
cause of the experimental nature of that role and may
hold MI to different constraints and rewards than
those to which operating units are held (Benner and
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2008;25:313–330
Tushman, 2003; Gavetti and Levinthal, 2000; Louis
and Sutton, 1989). Both activity- and performance-
based measures may be needed since commercial suc-
cess can be infrequent. Examples of appropriate
MI system metrics might include whether the MI
system accumulated new market connections, new
technical capabilities, and new partnerships or moved
the firm into a new strategic domain. In one large
firm, the MI system evaluates programs on how suc-
cessfully the market is informed of their initiatives,
whether by technical publications, conference presen-
tations, or direct interface with potential customer-
partners.
P6: An MI dynamic capability requires establishing
metrics that are appropriate for the high-risk, high-un-
certainty objectives of the MI management system.
Element 7: Cultural and Leadership Context
Systems are not autonomous; they are embedded in
larger systems (Capra, 1996). If the larger system is
malevolent, the system of focus cannot flourish. It
follows that MI systems must be integrated into the
mainstream by a senior team (Benner and Tushman,
2003). The ideal organizational culture and leadership
team values MI as a key component of their efforts,
acts as caretakers of the firm’s future health, and un-
derstands the risks inherent in MI (Rotenberg and
Soloner, 2000). This is shown through (1) investment
in strategic thinking and conversations about the fu-
ture health of the firm, (2) a vision of the firm’s com-
petency objectives, in terms of technology platforms
or market domains, that senior leadership would al-
low to be influenced by new learning, and (3) the in-
vestment in technology and human capital to build
and exploit those capabilities. Most often the reality is
different from the ideal, and MI dynamic capabilities
as a system are stunted when this last element does not
align with the other six. In addition, as macroenvi-
ronmental issues change, so do senior-management
priorities. For this reason, it is compelling to consider
a system-level capability so that it is more deeply
rooted than the current generation of senior-manage-
ment champions.
P7: An MI dynamic capability requires an organiza-
tional environment whose leadership and culture recog-
nize the importance of the MI system.
326 J PROD INNOV MANAG
2008;25:313–330
Discussion
Four requirements must be met to prove that these
seven elements comprise a system rather than a simple
list (von Bertalanffy, 1968). First, the system must be
identifiable and its elements interdependent, such that
a change in one affects the others. Second, the set of
elements must combine to yield a whole that is greater
than the sum of its parts. Third, to be a living, open
system, it must have a mechanism for interacting with
the larger environment that is self regulating and seeks
homeostasis. Finally, the MI system must play a
unique role in the larger system. It must be shown
that the seven elements listed herein fulfill these re-
quirements.
System Is Identifiable and Elements Are
Interdependent
It is proposed that, taken separately, these seven ele-
ments do not affect an organization’s MI capability.
Without alignment among them, the system is subop-
timal. Consider, for example, the exploratory pro-
cesses (Element 3) of an MI team. If the governance
mechanisms (Element 5) and metrics (Element 6) are
not oriented toward exploration, projects that exam-
ine a market that is too small by typical standards yet
offers valuable learning will be deemed failures. Nu-
merous examples highlight the importance of explor-
ing and investing in creating markets that appear too
small or do not yet exist (Lynn, Morone, and Paulson,
1996; Morone, 1993; O’Connor, 1998) and the need
for governance boards to understand and apply this
principle. Consider the issue of skills (Element 4).
Again, evidence abounds that some people work well
in high-uncertainty circumstances and high-risk, en-
trepreneurial environments that others find stressful.
If the stressed workers predominate, the MI system is
out of alignment. This affects the degree to which ex-
ploration can happen, to which strategic insight into
MI opportunities can be gained, and to which evalu-
ation methods can be applied.
Systems theory also requires that a system have
boundaries that identify it and distinguish it from
other systems. An identified organizational structure
(Element 1) is one way to achieve this. A vocabulary
that distinguishes major innovation from other forms
(evolutionary or incremental) is equally important to
delineate the necessity for separate management sys-
tems and to ensure that the MI management system’s
unique role is recognized.
G. C. O’CONNOR
The Whole Is Greater than the Sum of Its Parts
This article argues that the entire list of elements is
necessary and sufficient for providing an MI capabil-
ity in an organization and that, absent any one of
them, the system will not enable MI to occur except
by chance or through the strength of a few exceptional
individuals. If this is not true, the elements in the sys-
tem have not been correctly specified. The agenda for
future research will be to test this hypothesis.
Interaction and Networking with the Larger
Environment to Achieve Homeostasis
The internal and external interface mechanisms de-
scribed as critical to an MI management system (El-
ement 2) ensure that the MI subsystem operates as an
open system and achieves homeostasis within and in
connection to its larger system, the firm. The discus-
sion of various degrees of coupling allows scholars to
consider the nature of feedback loops and interfaces
with the larger system. The tight coupling to strategic
intent is identified specifically to ensure that the MI
management system maintains its strategic relevancy,
or its role within the larger system.
Purpose in the Larger System in which It Is
Embedded
The argument presented herein is that the MI system’s
purpose is innovation aimed at providing new plat-
forms for growth by leveraging novel technologies in
unique ways (Hill and Rothaermel, 2003). In a sense,
MI is insurance for the firm’s future. It is not argued
here that the entire organization should focus on MI.
Indeed, that would create too much risk. Most of the
organization must attend to mainstream operations
that serve current customers. But there must also be a
subsystem that attends to environmental turbulence
and readies the organization proactively (Foster and
Kaplan, 2001). Nor is it argued that a system should
only be loosely linked to the organization, since its
purpose would then be peripheral. Recently, several
companies became involved in developing and spin-
ning out MI ventures that were deemed strategically
not relevant, including Nortel Networks, Lucent, and
Intel. Today, none of these follow the spin-out model.
The company’s leadership must ensure that the MI
system’s purpose in the larger context is clear and that
the culture allows it to flourish (Element 7).
MAJOR INNOVATION AS A DYNAMIC CAPABILITY
Conclusions and Implications
The academic literature on MI has centered on its
definition and description. Scholars have a long way
to go to increase our understanding of how firms can
systematically embed an MI capability in their orga-
nizations, especially since large firms have been un-
successful at building and maintaining such systems.
One reason for this failure may be our incomplete
understanding of the MI dynamic capability as a
complex system of interdependent elements.
Dynamic capability theory is evolving to the point
at which it can help academics formulate models of
the processes and infrastructures needed to build a
lasting system. But more thinking is needed since MI
requires situation-specific knowledge that defies cod-
ifiable, automatic, stimulus–response processes. Ei-
senhardt and Martin’s (2000) contribution on high-
velocity markets helps push our thinking, but in this
article it is asserted that it is not the high-velocity
characteristic of markets that drive unique dynamic
capability requirements but rather high-uncertainty
domains. As we consider the challenges of major in-
novation and its associated high uncertainty, seven
elements emerge that, it is proposed, must be in place
for the dynamic capability to become effective. It is
argued that all these elements must be brought into
internal consistency and into alignment with the re-
quirements of operating in a highly uncertain envi-
ronment. Together, they make up a formidable
system.
The implications for scholarship of seeing complex
dynamic capabilities through the lens of systems the-
ory are vast. First, scholars can move beyond repeat-
able processes in identifying dynamic capabilities to
more complex activities. Initial writings focus on one
or a few processes as subjects of study for developing
dynamic capabilities theory (e.g., acquisition pro-
cesses, market learning activities, new product devel-
opment processes). Eisenhardt and Martin (2000)
contributed to the field by characterizing dynamic ca-
pabilities differently based on the volatility of the en-
vironment in which firms operate. But beyond this
environmental contingency is the complexity of the
process itself. Transformational processes (King and
Tucci, 2002) are complex and require situation-spe-
cific learning. The idea is not to routinize an operation
but to create experiences that defy routinization. This
does not mean organizations cannot become increas-
ingly efficient and effective at complex dynamic ca-
pabilities. Rather, it is argued that a systems approach
J PROD INNOV MANAG 327
2008;25:313–330
is necessary to build an organizational infrastructure
that is internally aligned to support such activity and
networked and coupled with the mainstream organi-
zation so it can experience the effects of rejuvenation.
This article outlines the elements of such a system
and shows how they interact to create a whole that is
greater than the sum of its parts. To test this model
empirically, the research methodology itself will have
to change. The study of organizational routines or
dynamic capabilities has tried to dissect the routine by
breaking the processes into distinct, analytical steps
(Grant, 1996; Helfat, 1997; Helfat and Raubitschek,
2000; Zollo and Winter, 2002). The assumption is that
routines can be best understood if each part is clarified
and its properties and characteristics described before
they are considered as a system. This mechanistic
Cartesian approach presumes we can learn about the
whole through summing its parts.
Systems theory, however, recognizes that some
phenomena are so complex and interconnected that
their elements cannot be fully understood when sep-
arated. It is the whole that must be examined and
whose properties must be explicated. Only afterward
can each element’s contribution be dissected and the
interrelationships considered as contributions to the
whole (Phillips, 1972). Thus, when studying particular
aspects of an MI dynamic capability (e.g., governance
boards), one must not isolate this aspect from the
study of the other elements. For example, a gover-
nance board can be studied solely as a governance
board. Its composition, location in the organization’s
hierarchy, decision-making processes, tenure, and po-
litical dynamics can all be compared with those same
characteristics of other governance boards. But its
contribution to the MI capabilities of a company can-
not be understood without observing it in relation to
the other parts of the MI system described in this ar-
ticle. In fact, systems theorists argue that a true un-
derstanding of the part (i.e., the governance board)
can only be gained by understanding the whole (i.e.
the MI capability) that encompasses the interrelation-
ships of all the elements and the relationship of the MI
system to the larger environment (Capra, 1996). While
it is impossible to fully understand the whole, it is by
identifying the parts and their interrelationships that a
deeper insight emerges.
A systems approach to building an MI capability
offers clear implications for practice as well. Leaders
interested in MI success, it is proposed, cannot expect
to build an MI capability on the basis of routines or
repeatable work processes; rather, transformational
328 J PROD INNOV MANAG
2008;25:313–330
routines that develop situation-specific knowledge
and are supported by a protective infrastructure are
needed. Recent interviews with companies concerned
with building MI capabilities indicate that this exact
approach is being considered and tried rather exten-
sively in the form of adapting Six Sigma concepts and
practices to the routinization of MI work processes.
Dynamic capabilities theory as extended by Eisen-
hardt and Martin (2000), King and Tucci (2002), and
the present article would predict that this program-
matization will fail dismally. Unless the elements of
an MI system are correctly identified, are managed
simultaneously, are oriented to achieving homeostasis
internally, and are aligned with the objectives of
the larger system (i.e., organizational renewal through
game-changing innovation), excellence in the execu-
tion of any single element cannot foreshadow MI
success.
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