Sample frameDay 258·Innovation · Absorption

Every useful idea in your field is already public. Most of them are unreadable from where you're standing.

Innovation.

Absorptive Capacity

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The question

Think of the last outside thing your business decided against — the technology, the method, the research somebody forwarded up the chain, the partner's proposal — and ask honestly whether you turned it down because you'd understood it and judged it wrong for you, or because nobody in the room held enough of the underlying subject to tell the difference. Both verdicts get minuted the same way, and only one of them is a decision.

The idea

Wesley Cohen, then at Carnegie Mellon, and Daniel Levinthal, then at the University of Pennsylvania, published Absorptive Capacity: A New Perspective on Learning and Innovation in Administrative Science Quarterly in March 1990. The claim runs in one sentence and it rearranges the whole subject: a firm's ability to recognise the value of new external information, assimilate it and apply it to commercial ends is largely a function of the level of prior related knowledge the firm already holds. Not its openness. Not its appetite. What it already knows about the thing arriving. That's a third gate, worth keeping apart from the two you have already been handed. Exploration and Exploitation was about where the effort goes. Open Innovation was about whether the boundary is open in both directions. This one assumes both — money on search, an entirely open door — and says a firm can still be unable to use what comes through. The economic half had appeared the year before in the Economic Journal, as Innovation and Learning: The Two Faces of R&D. Research spending buys an output, and it buys the capability to read everyone else's output, and only the first face ever gets reported. Their sharpest line is the irony sitting underneath all of it. A firm needs some absorptive capacity already in order to value the knowledge it's missing — which is why what you can't use so rarely looks worth having.

The framework

01
R&D buys two things, and only one of them gets reported.
The economics paper gives research two faces, and any business with people paid to go deep on something owns the same pair. One face produces your own results, the thing you can point at in a review. The other builds the capability to read, evaluate and use whatever everybody else produces: the papers, the patents, the rival's new machine, the offer from a partner nobody quite understood. Only the first has an output attached, so the budget gets judged on half its work — and the invisible half is what decides whether anything from outside ever gets in.
02
Prior related knowledge is the mechanism — and effort builds it, not exposure.
They grounded it in the psychology of memory. Learning is cumulative, and learning performance is greatest when what's arriving relates to what's already stored, which means the question isn't whether your people have heard of a field, it's whether they've done anything in it. Cohen and Levinthal are blunt that brief exposure won't do: intensity of effort is critical, and breadth of knowledge cannot be superficial to be effective. A newsletter subscription builds nothing at all. Somebody who spent two years working inside the adjacent discipline builds a great deal, and keeps drawing on it for years afterwards.
03
Lockout is bought years before it arrives.
Absorptive capacity accumulates, which makes it path-dependent: what you learned in a field makes the next thing out of that field cheaper to learn, so the stock you hold now was paid for years ago, and the stock you will need in five years is being bought — or not bought — this quarter. Cohen and Levinthal call the far end of that path lockout, and the paper explains why it is so quiet. Expertise sets a firm's ambitions from the opportunities it can see in the field. Without it, ambitions get set from the firm's own performance numbers instead.
04
Score the two halves separately.
Shaker Zahra and Gerard George, writing in the Academy of Management Review in 2002, cut the construct in two. Potential capacity is acquiring and assimilating what's outside. Realised capacity is transforming and exploiting it. A firm can be strong at the first and weak at the second, which is precisely what a busy scouting programme with nothing shipped out of it actually is. So count them apart, and note what Cohen and Levinthal said about the shortcut: consultants, new hires and acquisitions transfer this badly when the capacity has to integrate with everything else you already do.

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