Received March 30, 2012 / Accepted June 16, 2012 J. Technol. Manag. Innov.

2012,Volume 7, Issue 2

Innovation Capability: From Technology Development to

Transaction Capability

Paulo Antônio Zawislak1, André Cherubini Alves2, Jorge Tello-Gamarra3, Denise Barbieux4,
Fernanda Maciel Reichert5

Abstract

The firm’s role, besides producing goods and services, is to promote technological change and innovation. While academic
research on technological capabilities has led to a better understanding of the process of technical change itself, there
is no consensus on the ultimate definition of innovation capability. The purpose of this paper is to present a framework
for innovation capability. This is formed by four key capabilities (technology development, operations, management and
transaction) that enable firms to reach Schumpeterian profits. Given that the study is characterized as a theoretical paper,
methodologically is supported on an extensive literature review. Our main findings can be summed up in three aspects: (1)
every firm has all four capabilities; none of them are null; (2) to be innovative, at least one of the firm’s capabilities must
be predominant; (3) any firm, when established, is primarily technological or transactional, in a second stage, operational
or managerial.

Keywords: operations capability; management capability; technology development capability; transaction capability;
innovation capability.

Management School, Federal University of the State of Rio Grande do Sul (EA/UFRGS) Rua Washington Luiz, 855 Centro.
Porto Alegre - RS. Postal Code: 90.010-460. +55 51 33083536. (Corresponding authors).
E-mail: [email protected], [email protected], [email protected], [email protected], [email protected]

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 J. Technol. Manag. Innov. 2012,Volume 7, Issue 2

1. Introduction 2.The firm

Innovation as source of competitive advantage for the firm We part from two theoretically intense but often discon-
is a consolidated issue in the literature. This is typically nected research approaches of the firm. One presents the
achieved when firms possess or develop their technological firm as a collection of resources, knowledge, experience,
capabilities (Lall, 1992; Bell and Pavitt, 1995; Kim, 1999; Afuah, skills and routines (Penrose, 1959; Richardson, 1972; Nelson
2002; Reichert et al., 2011). However, one matter that re- and Winter, 1982; Chandler, 1992). The other deals with the
mains pending in this research area is: why not all firms that view of the firm as a nexus of treaties working under certain
invest on their technological capability are innovative? Or limits and according to certain governance structure (Coase,
why other firms that do not invest so much in that may have 1937; Demsetz, 1968; Williamson, 1985).
innovative performance? The answer to these questions can
be found in a meta-capability called innovation capability. For Langlois (2007), these views are complementary. Trans-
action cost theory proposes that there are some costs
The innovation capability as a new field of study is attract- because of the natural limitations of knowledge and infor-
ing interest from many scholars (e.g. Guan and Ma, 2003; mation, and capability theory insists that those limitations
Wang et al., 2008;Yam et al., 2011; Forsman, 2011). However, of knowledge and information are the key to understand
despite these important advances, there is still a lack of con- everything an organization does (Langlois and Foss, 1999).
sensus among academics. To help overcome the shortcom- Thus, the firm should be viewed as an agent of transaction
ings in innovation studies and particularly in the innovation following a governance structure, as well as an agent of pro-
capability concept, this paper aims to identify and analyze the duction that has specific knowledge and skills.
four building blocks of this capability: technology develop-
ment capability, operations capability, management capability, In a broad-sense, the firm is the technical-economic agent
and transaction capability. that produces goods and services and transacts in the mar-
ket by operating within a cost-minimizing organizational
The technology development capability of the firm leads to structure that should change over time by both internal and
technical change that allows for a successful innovation pro- external forces. To continue operating in a chosen environ-
cess. Once a new product has been thought out, the firm ment, the firm must produce some different solution, which
needs to produce it on a commercial scale. This is possible is recognized as such by the consumer.
with the operations capability, which materializes the prod-
uct created by the technology development capability. Be- This definition of the firm encompasses two important as-
sides, any firm aiming at obtaining Schumpeterian extraor- pects. First, the firm only exists because it is able to deliver
dinary profits needs transaction capabilities. Without them, value to the market. Second, it does so, through a technical
there would be a gap between promoting technical change structure called ‘organization’. There are many names to re-
and obtaining positive performance on the market. The re- fer to the firm such as, company, corporation, organization,
sponsible for integrating these three capabilities (technology enterprise, business and so on. We make a distinction be-
development, operations and transaction) is the manage- tween three major terms: firm, organization and enterprise.
ment capability. They coordinate the work done by other
capabilities. 2.1. Firm, organization and enterprise

This paper enlightens these different capabilities, their In the concrete world, the firm is commonly viewed as the
boundaries, types of activities and, specifically defines inno- business enterprise, in other words, the legal-institutional
vation capability. The innovation capability can be seen as entity allowed to produce and sell goods and services. The
an overall capability encompassing the ability to absorb, to enterprise can legally exist, but to be a firm, it has to “deliver
adapt and to transform a given technology into specific man- the most utility to ultimate consumers at the lowest cost”
agement, operations and transaction routines that can lead (Langlois, 2003, p. 355). To accomplish that task, the enter-
one firm to Schumpeterian profits, i.e., innovation. prise has to distinguish two interrelated systems: the tech-
nology of production and the organizational structure that
In section 2 we discuss the firm by combining transaction directs production. In a stricto sensu definition, the firm is
costs and resource-capability based view theories. Next, we the transaction-economic agent that carries out the produc-
explain the innovation capability and present a framework tion and sales of goods and services within the expectations
with the four capabilities and its interconnections with the of another agent, the consumer. Goods and services should
firm, organization and enterprise. In section 4 we make a dis- fulfill a market gap (demand).
cussion on the framework we developed. Finally, we present
our conclusions.

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 J. Technol. Manag. Innov. 2012,Volume 7, Issue 2

Since the firm is a repository of knowledge (Winter, 1991), Schumpeter’s (1942, p. 132) entrepreneur’s function is: “…to
it will transfer its goods and services to consumers to ful- reform or revolutionize the pattern of production by ex-
fill that gap. In an economic system, this is done through ploiting an invention or, more generally, an untried tech-
‘transaction’. The sine qua non condition for the enterprise nological possibility for producing a new commodity or pro-
to become a firm is to have a specific knowledge that can ducing an old one in a new way”. Schumpeter’s entrepreneur
be efficiently applied to bring valuable solutions (goods and is a sort of breaker of constraints. “His new combination is
services) with selling potential. based on novel premises, but not on any premises that he
might fancy: it is the imagined, deemed possible” (Loasby,
In that sense, firms should translate specific knowledge into 1999, p.63). In this sense, the entrepreneur goes further than
an efficient, well arranged set of organized and structured the coordinator: he changes the efficiency pattern.
procedures, decision rules, specific skills, and products to ful-
fill the knowledge gap in the market. In other words, the firm Therefore, the combination of Coase’s and Schumpeter’s
requires an ‘organization’ to transform the specific knowl- view upon the entrepreneur-coordinator function helps to
edge into selling products. The organization is the technical describe the nature of the firm as it actually is: an economic
structure responsible for the availability of resources (hu- agent that promotes technological change and innovation in
man, materials, energy, and equipment) according to a given order not only to reduce costs (efficiency), but to increase
technology (knowledge, methods and practices) for the revenues by making it more efficient than the market.
production and sale of goods and services with value. The
organization is an indirect but necessary consequence of any This is the same reasoning that Penrose (1959) uses in
firm. There is no firm without an organization. distinguishing the two functions. She characterizes the co-
ordination as a maintenance role performed by manage-
However, it is important to make a fine distinction: neither rial services focused on organizational continuity, while the
the enterprise nor the organization is the economic agent. entrepreneur is concerned with changes in knowledge, re-
The only economic agent is the firm. It is the firm that cre- sources and structures.
ates value and profit in the strict sense.
Lazonick (1991, 1992) differentiate these functions in terms
The firm can decide whether to turn new technological so- of adaptive and innovative strategy. Through the adaptive
lutions into new operations or to manage new transactions strategy, the entrepreneur-coordinator chooses to keep the
within its current technological state of knowledge. These value-creating capabilities inherited from the past by just
two types of decision are respectively the functions of the trying “to squeeze every last bit of potential profit out of
Schumpeterian entrepreneur (Schumpeter, 1942) and the their businesses by employing additional variable factors of
Coasean coordinator (Coase, 1937). production up to the point where marginal cost, just equals
revenue” (Lazonick, 1991, p.172). This strategy may be prof-
2.2.The entrepreneur and the coordinator itable in the short-run, but in the long run it will make the
firm vulnerable to the innovative strategies of competitors.
The question made by Coase (1937) ‘Why do firms exist?’ Therefore, the entrepreneur-coordinator should choose the
is only partially answered by transaction costs economics. innovative strategy in order to renew the value-creating po-
According to Coase (1937), the scope of the firm is deter- tential of his firm.
mined at the margin. It will expand the number of internal
activities until the costs of internalizing one more transac- If our assumption on the dependence between the firm and
tion just balances out the costs of an equivalent transaction the organization is true, no production or transaction of a
on the market. If the firm is the reason for the existence of specific knowledge will ever happens without the coupled
the organization and the organization is what ‘gives life’ to interpretation of the entrepreneur-coordinator. The entre-
the firm, by allowing it to do a better job than the market preneur-coordinator is, therefore, the very essence of the
in reducing transaction costs , some questions still remain innovative process and thus the existence of the enterprise.
such as: ‘Why the firm came into being in the first place?’ or He is able, at the same time, to perceive new ventures, to
‘How does it perpetuate itself over time?’. To answer these use new knowledge, to manage new combinations, to oper-
questions, one should promote a “meeting” between Coase ate new process, and to sell new products that are recog-
and Schumpeter. nized as more valuable than others by the market. More
valuable recognized ventures are: innovation.
Coase’s (1937) coordinator is not necessarily an agent of change,
but of efficiency. His role is to choose according to market ex- By combining those ideas surrounding the definitions of the
pectations the best generic mode to organize the production firm, the organization and the enterprise with the discus-
of any given product under the hierarchical structure of a firm. sion over the Coasean coordinator and the Schumpeterian

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 J. Technol. Manag. Innov. 2012,Volume 7, Issue 2

entrepreneur, we draw our capability based-model of the Lall (1992) stressed the power of technological capability
innovation capability. as the way firms absorb, process, create, change and gen-
erate feasible technical applications (new technology, new
3. Innovation Capability process, new products, new routines) within the knowledge
frontier. However, one missing link seems to be forgotten:
how seldom all this technological effort really turns into
To exist and to thrive, every firm must have some specific
positive performance and recognized economic outcome. In
capabilities. Different authors have initiated the studies on other words, if a firm has developed technological capability,
capabilities under different labels such as human resourc- it does not necessarily mean that it will consequently have
es (Penrose, 1959; Barney, 1991), distinctive competencies innovation capability1.
(Selznick 1957; Snow and Hrebiniak, 1980), specific skills
(Richardson, 1972), invisible assets (Itami and Roehl, 1987), There are many studies on innovation capability aiming at
repertoire of routines (Nelson and Winter, 1982), core developing the concept itself, as well as trying to identify the
competences (Prahalad and Hamel, 1990), absorptive capac- capabilities needed that allow the firm to innovate (Guan
ity (Cohen and Levintal, 1990), organizational capabilities and Ma, 2003; Wang et al., 2008; Zawislak, et al., 2009;Yam et
(Chandler, 1992; Dosi et al., 2000), technological capabilities al., 2011; Forsman, 2011; Alves et al, 2011). However other
(Lall, 1992), and marketing capability (Kotabe, et al., 2002). All contributions are still needed to consolidate this new area
of research.The innovation capability is understood as both
these labels refer to specific capabilities that the firm creates
the technological learning process from the firm translat-
and uses strategically in order to identify market gaps to be ed into the technology development and operations capa-
filled with new offerings of value. bilities, as well as the managerial and transactional routines
represented by the management and transaction capabilities.
These studies have been important to the understand- The integration between these four capabilities effectively
ing of the firm; however, there is no agreement on what promotes innovation which creates competitive advantages.
are the capabilities that ensure survival and superior per- Table 1 presents the innovation capability as a meta-capabil-
formance, nor a consensus on the ultimate definition of ity embedded in four different complementary capabilities.
innovation capability.

Capability Definition
The ability that any firm has to interpret the current state of the
Technology Development art, absorb and eventually transform a given technology to create
capability or change its operations capacity and any other capability aiming
at reaching higher levels of technical-economic efficiency.
The ability to perform the given productive capacity through the
Operations capability collection of daily routines that are embedded in knowledge, skills
and technical systems at a given time.
The ability to transform the technology development outcome into
Management capability coherent operations and transaction arrangements.

The ability to reduce its marketing, outsourcing, bargaining, logis-

Transaction capability tics, and delivering costs; in other words, transaction costs.

Table 1
Definition of Capabilities

1
The definition of innovation is quite confusing. One can keep the Schumpeterian point of view of successful business ventures that neces-
sarily gives to the entrepreneur extraordinary profits. Other can consider a more technical definition, such as those that advocate that any
novelty that is brought to the market should already be considered an innovation. In this paper, we follow a Schumpeterian tradition. This
means that an existing technological capability is not a sufficient condition to consider any firm to be innovative. In our assumption, to be
innovative the firm should understand and lay its strategies over the innovative capability.

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 J. Technol. Manag. Innov. 2012,Volume 7, Issue 2

3.1 Technology Development capability 3.2 Operations capability

Since the early 1980’s, technological capabilities have been “Every organization, no matter what sector, has an opera-
defined as both: “the ability or proficiency to make effective tions function (even if it is not called by this name) because
use of technological knowledge” (Westphal, Kim and Dahl- every organization produces some mix of goods and ser-
man, 1985, p.171) and as the capabilities needed to generate vices” (Slack and Lewis, 2008, p.1). Here we consider the
and manage technical change (Bell and Pavitt, 1995). Accord- ability to use technology as operations capability. Activities
ing to Dutrénit (2000) technological capabilities inheres not such as quality control, preventative maintenance, work flow
in the knowledge that a firm possesses, but in the way that and inventory control, mentioned by Lall (1992, p.167) as
this knowledge is used and in the proficiency of its use in part of the technological capabilities, actually fall under the
production, investment and innovation. “If a firm is unable operations capability category. Thus, it is what the firm re-
by itself to decide on its investment plans or selection of ally does given what it knows.
equipment processes, or to reach minimum levels of oper-
ating efficiency, quality control […] it is unlikely to be able Jacobides and Hitt (2005) state that capabilities are driven
to compete effectively in open markets” (Lall, 1992, p.168). by the firms’ knowledge of the production process. They say
However, “the technological capabilities needed to generate this knowledge “is developed by a path-dependent process
and manage technical change include skills, knowledge, and of complementary investment and learning by doing” (Jaco-
experiences that often (but not always) differ substantially bides and Hitt, 2005, p. 1212); as well as shaped by a series of
from these needed to operate existing technical systems contingencies which firms face in their operations. The au-
[…]” (Bell and Pavitt, 1995 p.78). thors suggest that even if the primary resources were sup-
plied homogeneously, different firms are likely to develop
In this sense we differentiate the technological capability different processes, and therefore, to present different pro-
necessary to make effective use of the technology as opera- ductive capabilities.
tions capability (refer to next section); and the technological
capability used to manage and generate technological change Beyond the mere production of goods and services, opera-
as the technology development capability. tions capability should be concerned with the alignment of
the production strategy with the firm’s competitive strat-
The technology development capability allows the firm egy and goals (Skinner, 1969). Operations capability involves
to choose and to use technology with strategic purposes the occupation of the firm’s production capacity aiming at
(Gomel and Sbragia, 2006; Rush et al., 2007), to create new the necessary productive output it should achieve in a given
methods, process and techniques (Afuah, 2002), and, mostly, period of time. The operations capability is a result of the
to offer new products (Zhou and Wu, 2010 p.557). The ba- selection of competitive priorities in order to take advan-
sic assumption is that technology development capability is tage of things like: low cost, quality, delivery time, respon-
a result from the learning process through which firms in- siveness, flexibility (Skinner, 1974; Hayes and Pisano, 1994),
ternalize new knowledge to produce technological change, degree of product or service standardization, size of prod-
consequently new process and products. It involves move- uct mix carried within the firm, volumes required (Ward, et
ments of the production function rather than along it (Lall, al. 1998; Hayes et al. 2005) as well as production lead-time
1992). This learning process can involve acquisition, imita- and the ability to concretely attend technological innovation
tion, adaptation, modification and/or the development of a required by the market (Hayes et al., 2005).
new set of knowledge and technical systems for internal use.
The result of this process should be potential goods and The firm should implement a production system which bet-
services with new technical patterns for the firm. Those are, ter adapts to its products, its capacity, and ultimately, to its
after all, the technological innovations. customers’ needs and satisfaction. What a firm aims in rela-
tion to its operations capability is to have the continuous
More important than simple technological change, the per- ability to reduce costs, to improve quality, to get more flex-
spective of providing innovative solutions to the market is ibility and to have responsiveness.
the major goal of the firm’s technology development capa-
bility. However, a capability to efficiently operate the tech- Both technology development and operations capabilities
nology in order to produce tradable goods and services is play important roles within the firm. The first is responsible
also needed. This is the operations capability. for creating new products, while the latter enables the man-
ufacturing these products on a commercial scale. However,
for that these capabilities to work in a synchronized manner,
every firm requires a capability to integrate and coordinate
them, that is, they need management capability.

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 J. Technol. Manag. Innov. 2012,Volume 7, Issue 2

3.3 Management capability With a mastered technology and settled managerial rou-
tines, any firm should, at once, put it to work.This implies on
The emergence of the big enterprises, in the beginning of the the capability to efficiently operate the technology in order
twentieth century, brought much interest around the roles to produce tradable goods and services. Transacting in the
and functions of managers (Fayol, 1949; Mintzberg, 1973; market requires that the firm has a set knowledge, abilities
Barnard, 1966). With the application of scientific knowledge and routines, that is, transaction capability.
into the production systems, vertical integration of whole
supply chains and the active ‘visible hand’ of management, 3.4 Transaction capability
firms were able to plan and co-ordinate transactions more
efficiently than if they were carried out through the ‘invisible Once a technological solution has been developed, every
hand’ of the market (Taylor, 1911; Schumpeter, 1942; Wil- firm should be able to do whatever it takes in order to fa-
liamson, 1985; Chandler, 1977). vor the transaction, in other words, to sell it. The sales are
facilitated through what we call transaction capability3. The
The main advantage of the formal managerial organization is transaction capability is everything that a firm actually does
the ability to integrate and combine productive capabilities to reduce its marketing, bargaining and delivering costs, in
of human and physical resources. It can contribute to the other words, to reduce transaction costs.
firm’s capability to achieve higher levels of resource utiliza-
tion and the ability to anticipate shortages (Lazonick, 1992). A growing literature indicates the existence of this capabil-
Overall, the management capability maintains a smooth ity (Argyres, 1996; Hodgson, 1998; Langlois and Foss, 1999;
flow of information and outputs to reach higher rates Williamson, 1999; Mayer and Argyres, 2004; Jacobides and
of efficiency2. Winter 2005; Mayer and Salomon 2006; Argyres and Mayer
2007, Argyres, 2011; Nogueira and Bataglia, 2012), but signifi-
“Managerial services, therefore, have economic value by vir- cant progress still needs to be done.
tue of organizing and controlling resources in systematic and
cohesive ways and are constitutive of firms” (Whitley, 1989). Mayer and Salomon (2006) have proposed the concept of
However, it does not follow the same pattern as operational governance capability, which is defined as the capabilities
routines (Stamp, 1981; Whitley, 1989). If capabilities can be that reduce the costs imposed by contractual risk. They also
explained by a set of routines embedded in applied knowl- argue that technological capability can improve firms’ ability
edge (technology), management capability requires a more to manage their transactions. Thus, a firm that can improve
generalist repertoire to take action through choice and de- its technology development capability has more chances
cision where technology fails to be perfectly routinized. In to improve its governance capabilities in comparison to its
order to cope with often unpredictable circumstances, man- competitors.
agement capability needs a wide range of skills to be applied
flexibly in problem solving (Langlois, 2003). Once a firm is able to produce something that is per-
ceived as valuable when compared to similar existing so-
Management capability not only reduces the costs imposed lutions of competitors, it should be able to transact it in
by uncertainty, but also is dynamic and evolving, ideally con- the market. Since every firm uses, manages and operates a
cerned with the maintenance of administrative structures given technology with the explicit goal of making economic
and the improvement of resource coordination and use, positive returns, it should have a specific capability to trade
combining continuity with innovation (Whitley, 1989). its products.

The management capability, however, will vary according to Like any other capability, it needs to be created, developed
the degree of asset specificity of the technology involved and and changed. In this process learning plays, once again, a key
the costs to organize the aforementioned arrangement. For role. In this sense, learning to contract (Mayer and Argyres,
each level of asset specificity, the firm should build its own 2004) develops the capability to design contracts (Argyres
management system and be capable to change it over time. and Mayers, 2007). Firms that align their terms of contracts,
Every firm has its limits (Coase, 1937; Penrose, 1959), and
the transaction attributes and the capabilities will have ex-
to overpass them, not only technology must be enhanced,
but managerial routines should be enlarged to deal with one perience in more successful contracts than those firms that
more operation and one more transaction. In doing that, the misaligned them (Argyres and Mayers, 2007). Alternatively, if
firm is surely innovating.
3
This concept was somehow used by Teece (1986, 2006) and Teece
2
Somehow, one can consider management as the former neoclassi- et al. (1994). However, they do not indicate characteristics, scope
cal definition of the firm: to ensure the best resource arrangement and the necessity of this capability in order to understand the na-
given the technology and its production function. ture of the firm.

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 J. Technol. Manag. Innov. 2012,Volume 7, Issue 2

the firm’s advantage can be achieved using the technology this applied ‘know-how’ corresponds to the firm’s specific
development capability (to create new products), opera- technology, the firm transacts technology. From this point
tions capability (to produce these products more efficiently) of view, both technology development and transaction capa-
and management capability (to maintain all areas of the firm bilities are the essence of the firm, aiming at finding a new
tuned and running), the development of its transaction capa- knowledge that can be applied in effective solutions to exist-
bility will then help to expand this advantage. Transactional ing and identified market gaps.
innovation is thus another innovative issue.
The problem is that the potential technological solution to
In order to better understand the firm’s successful perfor- be translated into an operational arrangement must be ef-
mance through innovation, we use a framework that aggre- ficiently managed to guarantee the delivery of the expected
gates all four complementary capabilities into one, the in- outcome. Management of technology is the major con-
novation capability. necting competence between technology development and
management capabilities. Technology development capabil-
3.5 The innovation capability framework ity provides ‘development’ as the result from the learning
process through which firms internalize new knowledge to
Innovation can emerge from any one of the complementary produce technological change and, consequently, new pro-
capabilities. If technological innovation is perhaps the most cesses and products. This process involves search routines
evident and charming type of innovation, not all firms are and the ability to change from one stage to another through
able to technologically innovate. For example, companies in the entrepreneur function which consists of creating and
commodity markets will mostly follow technical constraints, re-creating the operations once new knowledge is absorbed
such as production process and product mix. However, if and the imagined is deemed possible.
they are trading, it is because they surely present some
other advantage. It is our assumption that this advantage, The concrete applied technological solution (presented here
whenever it is not on technology development, is related in terms of a specific process and its resulting products) is
to management, operations or transaction capabilities, and brought to light by the operations capability. It uses already
it can be respectively translated into efficiency, productivity stabilized technology with established routines and proce-
or marketing gains. dures. Once the operation is in fact stable, other indirect
procedures, routines and decision rules which constitute the
Our framework presents the idea that every firm starts by organization, should be achieved by the combination of the
having a special knowledge advantage that supposedly can management with the operations capabilities. This is related
be translated into a technology that has value on market. If to the control effort which guarantees the operations.
the firm exists to transact what it ‘knows how’ to do, and

INNOVATION CAPABILITY
THE ENTERPRISE

THE FIRM
“Sells Technology”

Entrepreneurial Function
“Creates the operations” Logistics and Marketing

TECHNOLOGY
OPERATIONS MANAGEMENT TRANSACTION
DEVELOPMENT
Capability Capability Capability
Capability

Management of Co-ordination Function

Technology “guarantees the sale”
THE ORGANIZATION
“guarantees the operations”

TECHNOLOGY DRIVEN BUSINESS DRIVEN

CAPABILITIES CAPABILITIES

Figure 1

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 J. Technol. Manag. Innov. 2012,Volume 7, Issue 2

Although a technology must in fact be turned into opera- under a minimum operational structure can be a market
tions – since the entrepreneurial creation of a productive success if, for example, the geographic location is exclusive.
solution aims to do so in order to get products done – it is
the transaction capability that is responsible for connecting For example, the technology development capability is cru-
the firm to the market. In most of the times, this capability cial but not sufficient to ensure operations efficiency or
provides guidance through different commercial activities management integration of all areas of the company or even
(customer service, marketing, logistics) to where the tech- the transaction with suppliers and customers.Therefore, the
nological change must follow. technology development capability must be complemented
to some extent with other capabilities.
The coordination function is the link between the manage-
ment capability and transaction capability in which proce- Along the same lines, we also can identify that firms whose
dures, routines and decision rules aim at guaranteeing sales. operations capability is much more developed than their
In sum, the firm’s innovation capability is the ability to pro- competitors, seek to strengthen their other three capabili-
vide new valuable solutions validated by the market, wher- ties.This may explain why some firms that focus their efforts
ever it came from. Figure 1 summarizes the framework for on a single capability at the expense of others fail in the
innovation capability. market.

In order for a firm to obtain Schumpeterian extraordinary The origin of the firm can begin with the application of a
profits, the transaction capability must be integrated with technology-based knowledge to result in a prototype. How-
the others.The integration of these capabilities is what ‘gives ever, this does not guarantee its existence. Before that, the
life’ to the firm. Without the transaction capability, there prototype must be manufactured at the lowest possible cost,
would be a gap between promoting technical change and with the support of a managerial structure and eventually be
obtaining positive performance on the market. Although the transacted. Considering the arguments of the discussion, the
technology development capability of a firm is an important following proposition is made:
component for the innovation process, it is insufficient in
explaining how any firm turns internal technological inven- Proposition 1: Every firm has all four capabilities.
tion into market transaction and innovation.This framework None of them are null.
offers possible explanations not only to the firm’s existence
but for its origins and differences between firms across dif- Considering the different complementary capabilities of the
ferent economic sectors. firm, it is reasonable to try to identify which capability best
defines the success of a firm. This intriguing question has
4. Propositions led to the creation of a body of theory that argues that the
success of firms comes from the development and imple-
Every firm, in essence, develops, makes, manages and sells mentation of, essentially, a single capability; for example, the
technical solutions. This does not happen by accident. In- technology development capability (Lall, 1992; García-Muiña
stead, it is a deliberate act as it implies the existence of and Navas-López, 2007) or operations capability (Ward et
an entrepreneur-coordinator to identify a market gap (e.g. al., 1998). In this proposal, we believe that the superior per-
technological, marketing, locational, legal-institutional) to be formance of firms is a consequence of the predominance of
filled with a specific knowledge based product. Somehow, one of the capabilities, but which does not imply that the
every successful firm will have in its origins some specific firm does not have the others.
knowledge that has made the difference, even if it was only
once or for a short period. A firm is always created from the combination of the four
capabilities (technology development, operations, man-
Once identified the gap, the firm translates its knowledge agement and transaction). Yet to be an innovative firm, at
and skills into organized operations and transactions. The least one of them should be above the market average. The
firm exists through its capabilities that are put together to firm will be innovative in the presence of a ‘higher order
deliver utility to consumers. These are core activities that capability’.
represent the firm’s ‘know-how’ of developing, producing,
managing, and transacting new solutions. The innovative capability is thus, the result of some domi-
nant capability that is complemented with the other ones. In
The value delivered is a function of these four capabilities this context, the innovative firm may be of four types: tech-
combined. This does not imply necessarily formal capabili- nological, transactional, managerial or operational.
ties; informal structures of work can follow different levels
of capabilities. A simple idea, informally managed to work

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Technology-based firms are those in which technology de- Micro-electronics firms that are outsourced in China by
velopment capability is prevalent – but they always require Apple, for example, fit in the operations capability profile.
some degree of operations capability. Here we can exemplify In this example, the firm only exists because Apple’s tech-
with the case of technology incubators. These firms often nology development capability identifies on the operations
begin operating with support from some government insti- capability of the outsourced firm the possibility to produce
tution or university, but seek somehow to supply its transac- in a more efficient way than Apple itself. At the same time,
tion capability gap through this decision which, among other the outsourced firm will need some technology develop-
things, grants them access to the organizational structure ment capability every time Apple launches a new product
and transaction capability to sell its technological solution. that will need to be produced in series.The outsourced firm
The Sentinelle Medical Inc. and Visual Sonics are two tech- will need to design a prototype and adjust the process. Also,
nology-based firms that fit this profile. Initially, these com- to translate these adjustments into an efficient operation,
panies were born with spinoffs in the Sunnybrook Research it will need management capability. Finally, the simple fact
Institute (SRI, 2011) in Canada. Once incubated, companies that the companies negotiate with Apple, requires a mini-
have developed the other capabilities, including transaction mum of transaction capability. Moreover, there are
and management, making them able to work with greater firms that have turned from the prevalence of operations
autonomy. capability. These are processes oriented and have managed
to gain operational efficiency which guarantees them a com-
On the opposite side, a firm that has well developed transac- petitive advantage. Technological innovation can be present
tion capability, but with a technology development capability in these firms, but they are not recognized for being great
that has been relatively weaker, is Coca Cola. The company technological innovators. Also, they have transaction capabil-
is the result of applying technology development capability ity that allows them to transact faster and cheaper, but its
that led to the formula of Coca Cola syrup (Teece, 1986). production process in this differential with suppliers and the
Nowadays, the firm continues with its original formula and consumers.
uses the power of their brand to create new extensions
(Zhang and Sood, 2002), advertising campaigns, and regional These examples show that every firm will always have all
outsourced producers enabling it to continue being suc- four capabilities combined, but with different levels, which
cessful. No doubt Coca Cola is innovative, but its advantage brings us to the second proposition:
is in terms of its transaction capability. Nonetheless, Coca
Cola has its operations capability in order to produce the Proposition 2: To be innovative, at least one of the
minimum amount of its syrup that protects the secret of firm’s capabilities must be predominant.
the product. Currently, it also has some technology devel-
opment capability to develop alternatives to compete with It is important to note that this ‘dominance’ is not a static
other products (i.e. Coca-Cola light), and to do that, it needs subject, but the types of capabilities that are prominent in a
to reach a certain level of efficiency; therefore it must have given time can be another one in the future. This evolution
management capability. However, it is prevalent their trans- takes place mainly by the fact that first, firms are born as a
action capability. result of a minimum of specific technology development ca-
pability since it has identified a market gap that can be filled
For a company in a traditional and mature industry, such as only with the transaction capabilities.
the iron and steel sector – where prices are well defined by
the market, where most of the knowledge about the pro- However, firms realize they need to keep evolving to con-
cesses is already dominated and few new improvements are tinue developing their capabilities according to new market
to be developed – it is reasonable to think that the big se- demands. In this sense the third proposition is:
cret will be its management capability.The Brazilian company
Gerdau is an example of management oriented capability. Proposition 3:Any firm, when born, is primarily tech-
With its growth strategy mostly based in mergers and acqui- nological or transactional, in a second stage, opera-
sitions overseas, it had to learn and to change itself in order tional or managerial.
to manage its operations in the different countries and cul-
tures. This doesn’t mean the company does not have a mini- For example, firms that were innovative at the beginning due
mum of technology development capability to guarantee the to the predominance of their technology development ca-
quality of product according to the customer requirements. pability, as the market matures, may need to develop other
And it must also have a certain transaction capability to be capabilities. In this sense, we understand that there may be a
able to bargain in a worldwide market, dominated by players migration of capabilities. The firm continues with some pre-
such as Arcelor Mittal or Nippon Steel. dominant innovative ability, but it has to enlarge its produc-
tive, management or even transaction capabilities.

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 J. Technol. Manag. Innov. 2012,Volume 7, Issue 2

The second factor of evolution is due to the change trig- Acknowledgements

gered by the very firm that, regardless of market dynamics,
the company might decide to migrate its efforts to other ca- The present study was carried out with the financial sup-
pabilities. . For instance, firms that have developed a technol- port of the Brazilian Government research funding agen-
ogy development capability may decide to become predomi- cies Research Foundation the State of Rio Grande do Sul
nant in operations. This migration of capabilities whether by (FAPERGS) and the Brazilian National Council for Scientific
market demand or within the firm, is a recurring action in and Technological Development (CNPq).
every kind of market and like any strategic decision, is risky.
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