Modeling Absorptive Capacity for Open Innovation in the Software Industry

Abstract

In today’s fast paced world, software companies face constant challenges to keep up with their competitors and meet the changing needs of their clients through innovation. While large software companies have significant resources for innovation, small and medium companies lack resources and must innovate more efficiently. These companies are also key to the innovation cycle, often making leading-edge discoveries that large companies cannot achieve. Without the resources to develop ideas internally, these companies must find innovation ideas from any source available. These small and medium software companies must be able to effectively find, internalize and exploit innovations. This is called Absorptive Capacity and defining how small and medium software companies can maximize innovation performance using absorptive capacity is the focus of our study. Absorptive capacity is made up of the following: 1. Finding the right innovation 2. Understanding and absorb the knowledge 3. Exploiting the innovation to drive success Thus, finding strategies to maximize absorptive capacity is the key to successful innovation for these firms. Our study will focus on finding the most effective absorptive capacity strategies for small and medium sized Canadian software firms. Based on the available literature, the key elements that define how firms can choose the most optimal strategies for absorptive capacity are: • Type of Innovation • Breadth of the Knowledge Search • Depth of Knowledge Search • Partnering strategy • Knowledge intake strategy • Knowledge sharing strategy In the study we interviewed 54 small and medium sized Canadian software firms that were engaged in External Open Innovation. The interview covered the areas above. The results showed key relationships between the variables that resulted in the following outcomes: • Firms Doing Radical Innovation Use External Solutions • Firms Doing Incremental Innovation Work in House • Centralized R&D Organizations Prefer Finding Solutions Not Knowledge • Custom Development Firms Source Innovations and Integrate • Product Based Firms Source and Share Ideas and Build in House These outcomes offer an opportunity to guide firms on how to best absorb knowledge as part of their innovation process. This will help these firms absorb knowledge and build innovations based on them, and successfully enhance their futures and their ability to compete.