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Understanding Absorptive Capacity from a Network Perspective

Article  in  Journal of Business Market Management · February 2009

DOI: 10.1007/s12087-008-0036-7

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Peters, Linda D., and Johnston, Wesley J.: (2009) “Network Formation, Collaboration, and
Collective Learning: An exploration of Absorptive Capacity from a Network Perspective”,
Journal of Business Market Management (invited for inclusion in the special issue from the
Relationship Marketing Summit, Buenos Aires), vol. 3 (1), pp 29-50.
doi: 10.1007/s12087-008-0036-7

Understanding Absorptive Capacity from a Network Perspective

Linda D Peters
Associate Professor of Marketing
Nottingham University Business School
Nottingham University
UK

Wesley J. Johnston
CBIM RoundTable Professor of Marketing
Center for Business and Industrial Marketing
J. Mack Robinson College of Business
Georgia State University
USA

The authors would like to thank the reviewer for their comments, insights, and helpful
suggestions. The resulting paper was greatly improved because of their guidance.
Understanding Absorptive Capacity from a Network Perspective

Abstract
The term absorptive capacity refers to the notion that firms may have differing capabilities to
innovate and to recognise the value of new knowledge, assimilate it, and apply it to creating
business value. Developing such capabilities often requires firms to become part of a value
network. We therefore apply the notion of absorptive capacity to the level of both the firm,
and the wider value network in that it is embedded. The purpose of this research is to
understand how absorptive capacity process may be moderated by contingent factors so that a
more complete picture of absorptive capacity development emerges from our research. We
identify from the literature on learning, innovation, and networks several theoretical
perspectives that may help researchers to understand how contingent factors may facilitate
and/or inhibit the development of absorptive capacity capabilities. We offer a set of
propositions that may guide research into learning and innovation in business networks, and
we discuss the managerial implications of these propositions.

Keywords: Learning, Networks, Absorptive Capacity

2
Peters, Linda D., and Johnston, Wesley J.: (2009) “Network Formation, Collaboration, and
Collective Learning: An exploration of Absorptive Capacity from a Network Perspective”,
Journal of Business Market Management (invited for inclusion in the special issue from the
Relationship Marketing Summit, Buenos Aires), vol. 3 (1), pp 29-50.
doi: 10.1007/s12087-008-0036-7

Introduction

The term absorptive capacity was coined by Cohen and Levinthal (1989; 1990) to capture the

notion that firms may have differing capabilities to innovate and to recognise the value of new

knowledge, assimilate it, and apply it to creating business value. Developing such capabilities

to enhance innovation often requires firms to become part of a value network. This

recognition is not new, and the emergence of networks as a research issue in business-to-

business marketing has been present for over 25 years (Johnston and Lewin, 1996). However,

new challenges exist in relation to our understanding of learning and knowledge management

in the context of such value networks. These challenges include the building of a repertoire of

knowledge within the network, the collective sharing and interpretation of such knowledge,

and the necessity to go beyond the consideration of information dissemination alone to

include the consideration of mutual exchanges and interdependencies among learners

(Haythornthwaite 2002). International network collaborations introduce additional

complexity to these interdependencies (Johnston, Lewin and Spekman, 1999). Such

interdependence between network members means that network interactions form the key to

developing resources that can be transformed into valuable network capabilities (Ford and

Hakansson 2006). These interdependencies exists not only in buying but also in selling

activities, as the exchange patterns between buying centres and selling centres in the sales

force management literature illustrate (Hutt, Johnston, and Ronchetto, 1985).

The activities of firms in such networks, particularly those activities related to the

development of inter-firm relationships and coordination among network members, raises

questions regarding network partner choice and realizable network and firm outcomes. This

1
is reflected in the concerns of Hunt and Lambe (2000:14), who ask “…under what

circumstances will firms developing relationships with such entities as suppliers, competitors,

employees and customers be likely to lead to enhanced financial performance?” We would

propose that the answers to such questions might be found, at least in part, in: (1) the nature

and purpose of the interactions that take place between network partners and (2) the

capabilities for learning and innovation that may result from such interactions. In this paper

we explore the concept of absorptive capacity and the contingent factors that may influence

its development. In particular, we identify key theoretical perspectives that may help explain

how these continent factors moderate the resulting absorptive capacity capabilities. The

purpose of this research is to understand how the five dimensions of absorptive capacity

(realising the value of new knowledge, knowledge acquisition, assimilation, transformation

and exploitation) may be moderated by the three main contingent factors (social integration

mechanisms, power relationships, and regimes of appropriability) identified by Todorova and

Durisin (2007) so that a more complete picture of absorptive capacity development emerges

from our research. We identify from the literature on learning, innovation, and networks

several theoretical perspectives that may help researchers to understand how contingent

factors may facilitate and/or inhibit the development of absorptive capacity capabilities. We

illustrate the focus of our research in Figure 1. While the current literature so far has

identified a number of specific contingent factors that moderate the whole absorptive capacity

process, little is yet understood regarding how this moderation operates.

Insert Figure 1 here

2
The expected contribution of this will be a set of propositions that can guide research into

learning and innovation in business networks. We focus our study, in particular, on the social

aspects of learning and innovation, and on the way in which factors such as network culture,

knowledge use, and the choice of network partners may influence the ability of the network to

acquire and utilise new knowledge and learn.

Ford and Hakansson (2006) highlight the challenges to traditional views of both business

structures and business processes that network and interaction perspectives bring, and note

that attempts to examine the characteristics and dimensions of interaction in an economic

setting has been limited. They assert that in the new economic logic of value creation only

two assets really matter: knowledge and relationships. Thirkell (1997) adds that companies

create value not only through making their offerings more intelligent, but by making their

customers and suppliers more intelligent as well. By viewing relationships in the context of

networks, firms will be better able to improve coordination mechanisms between network

partners and thus positively influence knowledge sharing (Peters and Fletcher 2002).

The Concept of Absorptive Capacity

In order to understand how coordination mechanisms between network partners may enhance

knowledge sharing and innovation, we draw upon the concept of absorptive capacity. As

stated previously, the term absorptive capacity captures the notion that firms may have

differing capabilities to innovate and to recognise the value of new knowledge, assimilate it,

and apply it to creating business value. Todorova and Durisin (2007) cite research that

confirms the existence of four empirically distinct dimensions of absorptive capacity:

knowledge acquisition, assimilation, transformation, and exploitation. In addition, they

3
recommend the reintroduction of a fifth dimension, found in Cohen and Levinthal’s original

work, that of “recognising the value” of new external knowledge. In this paper we argue that

these five dimensions of absorptive capacity capabilities are key drivers of value creation in

business networks, and we take up their suggestion that further research is needed in

understanding balance in the development of all four capabilities of knowledge absorption.

Zahra and George (2002) posited a two dimensional model of absorptive capacity, defining

knowledge acquisition and assimilation as potential absorptive capacity, and knowledge

transformation and exploitation as realized absorptive capacity. However, given the concerns

raised by Todorova and Durisin (2007) regarding the soundness of this two dimensional

conceptualisation of absorptive capacity capabilities and the empirical evidence provided by

Jansen, Van den Bosch and Volberda (2005) that supports a four dimension (rather than a two

dimension) conceptualisation, we have revisited the definitions of potential and realised

absorptive capacity posited by Zahra and George (2002). We have also considered the

reintroduction of a third type of absorptive capacity from earlier work in the field, that of

relative absorptive capacity (see Dyer and Singh 1998 and Lane and Lubatkin 1998).

Todorova and Durisin (2007) state that no new constructs (i.e. potential and realised) need to

be introduced to investigate either the efficiency of knowledge acquisition and use or the

balance of the four component capabilities (i.e. acquisition, assimilation, transformation, and

exploitation), and that a five dimension model is best representative of the concept of

absorptive capacity. We support this view and therefore define absorptive capacity

capabilities as a five dimensional construct (thus including the “recognising the value”

dimension as well). However, we do see a role for exploring the concepts of potential,

realised, and relative absorptive capacity as a means of understanding how these five

4
knowledge based capabilities might be facilitated and/or inhibited by certain contingent

factors. The specific contingent factors identified by Todorova and Durisin (2007) as

moderators in the development of absorptive capacity capabilities are: social integration

mechanisms; regimes of appropriability; and power relationships.

Social integration mechanisms help build connectedness and shared meanings. Todorova and

Durisin (2007:780) state “…the moderating influence of social integration is likely to affect

all components of absorptive capacity and to have either a positive or a negative effect,

depending on specific contingencies.” However, what are these specific contingencies? We

propose that by utilising network theory we may understand more clearly the specific ways in

which social integration mechanisms moderate absorptive capacity processes in networks.

Regimes of appropriability are “…the institutional and industry dynamics that affect the

firm’s ability to protect the advantages of (and benefits from) new products or processes.”

(Zahra and George, 2002:196) They determine the incentives to invest in absorptive capacity

and thus moderate the relationship between absorptive capacity and its antecedent knowledge

sources (Cohen and Levinthal, 1990) and the relationship between absorptive capacity and its

outcome of sustainable competitive advantage (Zahra and George, 2002). How does this

moderation happen? We propose that by utilising network theory we may understand more

clearly the specific ways in which regimes of appropriability moderate absorptive capacity

processes and their antecedents and consequential outcomes in networks.

Power relationships are said to interact with cognitive processes, leaning, and capabilities in

the organisation and so should be considered as a contingent factor (Todorova and Durisin,

2007). They maintain that power relationships help to explain why only some of the available

5
new knowledge is used by the organisation, and why some organisations are better able to

exploit external knowledge. Thus, power relationships (both inside an organisation, and

between organisations and external markets and stakeholders) may affect absorptive capacity

capabilities through their influence on resource allocation. How might their influence work?

We propose that by utilising network theory we may understand more clearly the specific

ways in which power relations moderate absorptive capacity processes in networks.

In Figure 2 we modify the refined model of Todorova and Durisin (2007) to include what we

term potential, realised, and relative absorptive capacity as aspects of network relationships

that may help to explain how contingent factors moderate the development of absorptive

capacity capabilities. Our discussion will focus on how they help to explain absorptive

capacity as a process of developing and enhancing capabilities, and how this process is

influenced by contingent factors. We will also focus on absorptive capacity as a function of

business networks, not simply organisations.

Insert Figure 2

While absorptive capacity is often theorised as a firm level construct, in this paper we apply

the notion of absorptive capacity to the level of both the firm, and the wider value network in

which it is embedded. Network theorists have identified a number of potential perspectives

that may be employed to understand network relationships and dynamics. Monge and

Contractor (2003) identify a number of these, including theories which focus upon the

motivation to collaborate such as those of self interest (e.g. Coleman’s social capital, Burt’s

structural holes, and Williamson’s transaction costs) and mutual interest (e.g. Samuelson’s

6
public good and Markus’s critical mass theories) where the primary motivation is to enhance

one’s own self interest rather than the interests of others. Motivation to collaborate is also at

the heart of exchange and dependency based theories (social exchange theory and resource

dependency theory) where the need to obtain information and material resources and the

ability to give such resources in return motivates collaboration (Monge and Contractor, 2003).

Motivation theories based upon self interest, mutual interest, exchange, and dependency are

certainly useful in understanding why collaborators engage to achieve desired outcomes (e.g.

to enhance self interest, to acquire scarce resources, etc). However, if firms collaborate in

order to learn, then the relations between network members become a primary focus.

Therefore, to support our investigation of how potential, realised, and relative absorptive

capacities may help to understand the moderating effects of contingent factors on the

development of absorptive capacity capabilities in value networks we focus upon network

theories that help explain the relations that exist in collaborative networks. To do this we

draw upon three relevant approaches found in network theory, namely Cognitive, Contagion,

and Homophily network theories (Monge and Contractor 2003). We apply these three

theoretical approaches to the three previously stated aspects of absorptive capacity processes

(potential, realised, and relative) and formulate propositions that may guide further research.

In addition, we highlight the managerial implications of these propositions.

Network Theories

Cognitive theoretical approaches seek to understand the structures of cognitions in

individuals. Cognitive theory applied to semantic networks focuses on the shared

interpretations that people have for message content, in particular network goals, slogans,

myths and stories. Thus, it relates directly to the building of shared meaning and consensus.

7
Because individuals tend to specialise in different knowledge domains, and focus on learning

information in their own areas of relative expertise and expect others to do the same, a

cognitive theory perspective also relates to the development of absorptive capacity in the

network. Cognitive consistency theory seeks to explain the mechanism by which individuals’

fulfil their aspirations for consistency in their cognitions. As an example, in personal

friendship networks it would argue that individuals are more satisfied when their friends are

friends with one another. This translates at the network level as the extent to which a drive

for consistency is manifest in network membership, attitudes, and relations. In a business

network, suppliers providing resources to both a firm and its competitors creates difficulties

for cognitive consistency, especially when the buyer-supplier relationship calls for a

proprietary relationship with the goal of creating a competitive advantage. Cognitive

similarities between firms should positively influence absorptive capacity because there is a

greater overlap of shared understanding.

Contagion theoretical approaches, in contrast to cognitive theories, assume that the contact

made between network members serves as a mechanism that exposes those members (at the

individual, group, firm and/or whole network levels) to information, attitudinal messages and

the behaviour of others. This exposure increases the likelihood of members developing

similar beliefs, assumptions and attitudes and thus may influence the shared meaning and

consensus in the network. Social information processing seeks to explain how, at the level of

the individual, variations in attitudes are based on differential exposure to social information.

Social learning seeks to explain the mimetic processes leading to contagion, whereby network

members (at all levels) imitate the practices of those in their relevant networks (Doerfel and

Fitzgerald 2004). Contagion can best be thought of in business networks as a firm having a

wide base of partner firms to provide industry knowledge and expertise in areas the firm may

8
not have experience. Because of interaction with network partners and their experience,

contagion helps firms develop specific knowledge without actual experience. Contagion may

speed learning among firms, but have negative effects on absorptive capacity because

similarity in thinking may limit the opportunity and capability for disparate thinking.

In addition to these cognitive and contagion theoretical perspectives, we examine the

implications of salient characteristics or traits of network participants upon network

interactions, and for this we utilise homophily theories (e.g. social comparison theory, and

social identity: Monge and Contractor 2003). Homophily theoretical approaches seek to

explain network construction as the selection of others who are similar. Social comparison

theory supports this by suggesting that relevant others are selected based on being similar in

salient respects. Social identity theory also proposes that these relevant others are those who

are seen as sharing the same social identity as the focal network member. Homophily

explains why large firms with well known reputations prefer to do business with other large

well known firms. Reputation is a salient aspect of network formation. Large, highly

reputable firms typically chose the best known accounting firms to conduct their audit

because of homophily forces. Homophily may also affect absorptive capacity in both positive

and negative ways. Firms are more likely to accept knowledge from firms that are similar to

them, but the total amount of knowledge in the network may therefore be limited because the

firms are highly similar to each other.

We now go on to apply these three network theoretical approaches to help define potential

absorptive capacity, realized absorptive capacity, and relative absorptive capacity. By

applying these network theoretical perspectives to understanding how contingent factors may

moderate absorptive capacity processes, we are able to better define and evaluate the key

9
features of these absorptive capacity processes and how they might operate within value

networks. In each case, we propose that a relationship exists between these aspects of

absorptive capacity development and the ability of the network to innovate and learn.

Potential Absorptive Capacity as Network Culture

To characterise potential absorptive capacity mediation as network culture coincides with

Zahra and George’s (2002:186) understanding of potential absorptive capacity as “a set of

organisational routines and processes”, thus helping to explain how social integration

mechanisms and power relationships in particular influence knowledge.

Cognitive Network Theory Applications

Absorptive capacity refers to a broad set of skills that are needed to deal with the tacit

component of transferred knowledge and the need to modify this transferred knowledge

(Zahra and George 2002). As cognitive theoretical approaches seek to understand the

structures of cognitions (in individuals and in networks) and the building of shared meaning

and consensus they may provide an appropriate theoretical bases for understanding how

absorptive capacity capabilities (knowledge recognition, acquisition, assimilation,

transformation, and exploitation) and contingent factors are related.

Todorova and Durisin (2007) argue that the ability to identify and absorb new external

knowledge can be hampered by the embedded knowledge, well established capabilities, and

traditional managerial cognitions of firms. Thus both social integration mechanisms and

regimes of appropriability may inhibit absorptive capacity capabilities (in particular

knowledge recognition and acquisition) because traditional ways of working and thinking are

10
firmly embedded in the network and thus blind participants to the opportunities present. This

ability may also be influenced by the allocation of internal resources, and thus power

relationships within an organisation (we discuss the influence of power relations between

organisations within the network later in this paper) will influence the exploitation of new

knowledge (Todorova and Durisin 2007). They argue that this ability to see and understand

the potential of new external knowledge is the first component of dynamic capability

development. This ability could be linked to the work of Harrington and Guimaraes (2005),

who point out that knowledge acquisition and assimilation requires a knowledge-sharing

culture. In part, network culture is a means through which network members orient

themselves to network interactions and activities. Network culture influences absorptive

capacity (knowledge transformation and exploitation in particular) in that the myths, sagas,

and stories developed through a common culture impact the network’s ability to implement

innovations and apply new learning (Harrington and Guimaraes 2005).

Contagion Network Theory Applications

As Harrington and Guimaraes (2005) point out, culture is reflective of both values and norms,

and therefore not only helps to determine the areas in which a network is able to learn easily

but also areas that might resist change or the communication channels through which learning

takes place. Lind and Zmud (1991) found that richer communication channels (such as face-

to-face communication) allowed convergence in mutual understanding and greater consensus.

Zahra and George (2002) posit that knowledge acquisition and assimilation provides firms

with the strategic flexibility and necessary freedom to adapt and evolve in high-velocity

environments. Thus, how regimes of appropriability affect the antecedents and consequences

of absorptive capacity may be partially understood by examining the norms and culture of the

institution and the industry.

11
Reagans and McEvily (2003:240) point out that researchers have inferred the association

between networks and knowledge transfer by observing the association between network

structure (or its surrogate, strength of network ties) and network performance rather than to

examine the effect of networks on knowledge transfer directly. In particular, they focus on

the role of cohesion (the extent to which a relationship is surrounded by strong third-party

connections) and range (the extent to which network connections span institutional,

organisational, or social boundaries) as facilitators of knowledge assimilation and transfer in

networks.

Aspects of network structure, such as cohesion and range, may be considered part of a

contagion theoretical perspective, in particular social information processing and social

influence theories (where attitudes and beliefs are similar to those of the others in the

network) and social learning (where the imitation of network members’ practices lead to

learning; Monge and Contractor 2003). Thus, contagion theory may help explain the impact

on knowledge transformation that occurs when exposure to new ways of working challenges

established practices and increases resistance to change in network relationships.

Contagion by structural equivalence refers to the social influence that occurs by virtue of

having similar ties as others in the network (Doerfel and Fitzgerald 2004). For example,

where individuals in a network hold similar levels of responsibility and competency (i.e.

where both are senior managers in their respective organisations), then contagion by structural

equivalence may enhance their ability to communicate with each other and to utilise social

influence mechanisms in solving problems or issues that arise. Their range of influence and

the positions they hold in the network by virtue of their connections to others at their level

12
may well enhance their ability to see the wider picture in relation to network activities and the

wider implications of network actions. Thus, power relationships in networks may influence

absorptive capacity development through the network structures that are developed and

maintained through network cultures.

An interesting analogy between the notion of contagion in networks and the spread of disease

in medical science is the diminishing effect that contagious elements may have over time. In

terms of disease, the development of immunity to the infection, and the tendency to physically

distance those who may be contagious (i.e. through isolation) from those who a healthy means

that over time the strength and spread of contagious disease may be diminished. This could

also be seen as a method by which appropriability regimes may be established. Where such

regimes in an industry are strong, firms may use legal methods such as trademarks and patents

to protect innovations and thus seek to be immune from competitive copies. Where such

regimes are weak, and new knowledge is not easily protected by methods such as patents,

firms will often resort to secrecy and isolation (Zahra and George, 2002).

In terms of networks and knowledge Soda, Usai and Zaheer (2004) note that the benefits of

structural holes (where different parts of the network are largely disconnected but bridged by

a few key individuals) as opposed to closure (where dense and mutually interconnected

network ties exist between most or all network members) as the network structure may also be

time dependent. They found that while the value of social capital in a dense network persisted

over time (and indeed may take time to become established), the benefit of a network full of

structural holes diminished over time. In the immediate period, structural holes may provide

access to rich sources of new information and arbitrage value. They may also be more

economical in that they require fewer resources to maintain redundant ties. However, over

13
time those benefits diminish and thus knowledge would be less contagious in such a network

as time passes.

On the other hand, Soda, Usai and Zaheer (2004) theorise that the benefits of network closure

may in fact be U shaped. High closure brings the benefits of a shared network culture,

common mental models, understanding and trust that may enhance network performance.

Low network closure may also enhance network performance, by allowing free expression of

ideas and encouraging entrepreneurial behaviour and innovation. The main influence here is

time. In the short term low network closure would mean that the exposure to network norms

and values would be limited and their possibly stifling influence on innovation less

contagious. In the long term, contagion would alter the network through developing norms

such as trust that would help to immunise the network against opportunistic behaviour and

facilitate knowledge exploitation.

Homophily Network Theory Applications

Homophily theoretical approaches focus upon the similarity or differences in salient traits and

the social identity of potential network partners. Thus, they provide an appropriate theoretical

base for understanding the relationship between absorptive capacity capabilities (knowledge

recognition, acquisition, assimilation, transformation, and exploitation) and contingent

factors. For example, Echols and Tsai (2005) noted that the structural embeddedness of a

network (the extent to which a firm is involved in a network of interconnected inter-firm

relationships) of a firm would influence the extent to which either product or process

uniqueness would translate into enhanced firm performance, and therefore relate to

knowledge transformation and exploitation. They state that when making decisions about

what to offer and how to operate, a firm must take into account the social context in which it’s

14
interactions with other partner firms takes place. Their research supported the view that when

network embeddedness was high, and thus a firm was engaged in a dense network among

other firms who were also tightly connected to each other, both product and process

distinctiveness had a greater positive effect upon firm performance. Thus for companies with

unique products - Echols and Tsai (2005) give the examples of Audi with their all-wheel-

drive coupe the TT and Johnson and Johnson’s ACUVUE UV-blocking daily disposable

contact lenses - and for companies with unique processes for operating the firm’s business

such as Sainsbury’s Groceries Online (that allows shoppers to specify which food products

are not substitutable if supplies are unavailable, and allows shoppers to use their previous

online orders as templates for their current shopping list) the density of their structural

embeddedness within their wider business networks will help explain the extent to which their

product and process distinctiveness enhances operational and financial performance. Thus the

moderation of regimes of appropriability on the consequences of absorptive capacity (i.e.

product and/or process uniqueness) may be partially understood by the network

embeddedness of the firms involved.

We summarise in table 1 the main actions and influences that can be characterised by

applying cognitive, contagion, and homophily network theories to help explain how network

culture as potential absorptive capacity may help us to understand absorptive capacity

processes.

Insert Table 1

In addition to aspects of network structure, we may well posit that the means through which

interactions take place in a network would be expected to influence the dissemination of

15
knowledge in that network. A key question may be: what are the interaction mechanisms and

processes in a network that influence the transfer of knowledge? Such interaction

mechanisms may be reflected in the network culture and the structural features of the

network, such as cohesion and range. In particular, consensus building activities in network

relationships and the potential absorptive capacity of the network may have a direct impact

upon the ability of the network to profit from knowledge sharing and learning.

Proposition 1: The network’s ability to develop, and to profit from, learning and

innovation will relate to its network culture, i.e. its potential absorptive capacity.

Managerial implications include recognising the importance of creating relationships focused

on improving collaboration between companies within the network, and viewing trust as an

important variable in the determination of what can be shared and how it will be shared within

networks. Therefore, firms need to understand how they can become “trustworthy” in the

eyes of others within the network. Networks comprised of firms with a shared vision will

experience a stronger positive influence on their absorptive capacity capabilities relating to

shared knowledge than other networks. An example of this network culture phenomenon is

found in Sun Microsystems and its Java software. In the mid 1990s, many people and firms

felt the Internet would become an important medium for commerce, communication and

entertainment. Java provided the common language among all the “believers” (Moore, 1996).

Realised Absorptive Capacity as Network Knowledge Use

Realised Absorptive Capacity refers to the ability of the network to make use of the

knowledge that has been absorbed (Lane and Lubatkin, 1998; Zahra and George, 2002;

16
Harrington and Guimaraes, 2005). Realised absorptive capacity highlights the capacity to

learn and solve problems.

Cognitive Network Theory Applications

Network collaborations will have to reach beyond the simple sharing of information (know-

what) and expertise (know-how). Even if collaborators share similar knowledge bases

(scientific, technical, or academic) and similar knowledge processing (or the know-how that

shaped those knowledge bases), there is an issue regarding the ability of the collaborators to

assimilate and commercially apply this information to create new knowledge. This is known

as the dominant logic of the firm. It will manifest itself as a common thread that runs through

the objectives of the firm and that manifests itself in preferences for projects of a given type,

size, risk level, and strategic choices that favour certain key success factors, stages in the

product life cycle, or product-market positions (Lane and Lubatkin 1998). Thus, the

dominant logics of network partners is one way in which realised absorptive capacity may

partially explain how contingent factors such as regimes of appropriability moderate dynamic

capability capacities, in particular knowledge recognition and acquisition. An example of this

is found in Beers Construction Company (Atlanta), now a division of Skanska, and its health

care projects. Beers Construction formed a key account relationship with HCA Columbia, the

largest builders of hospitals in the US. By focusing on HCA Columbia and its special needs,

Beers Construction was able to avoid cost inherent in developing bids and specialize in

project aspects of advantage to HCA Columbia. This gained and shared knowledge was not

lost from project to project because of the special relationship between Beers Construction

and HCA Columbia. Beers Construction then began to use this relationship model in other

areas of their business to gain and hold specific knowledge, and thus dominant logics of

17
network partners may also partially explain how contingent factors such as social integration

mechanisms moderate dynamic capability capacities.

Realised absorptive capacity may also help to explain the relationship between network

pictures and networking activities. Network pictures, according to Oberg, Henneberg and

Mouzas (2007) are how managerial sense-making and cognition affects managers and

companies in the way they ‘see’ their network environment and the options they perceive are

open to them. This could also be characterised as the dominant logic of the firm or industry.

Networking activities offer the options and activities through which managers and

organisations attempt to interact with and influence their environment. These activities are

the manifestation of the network picture and are what the network chooses to implement.

Examples could include sales-force visit schedules, budget allocations, sales incentive

systems, organisational restructuring related to key account management or the use of key

performance indicators (Oberg, Henneberg and Mouzas 2007).

Where network pictures change, cognitive representations of the network logic need to be

constantly checked against actual network outcomes. Oberg, Henneberg and Mouzas (2007)

identify this area as the management of social amalgamation processes in which overlapping

and conflicting individual network pictures are brought together through social activities.

Todorova and Durisin (2007) regard these as social integration mechanisms, and state that

these help build connectedness and shared meanings that in turn influence all five knowledge

processes. Thus, understanding the link between network pictures and network actions is one

way in which realised absorptive capacity may partially explain how contingent factors such

as social integration mechanisms and power relationships moderate dynamic capability

capacities. In particular, Todorova and Durisin (2007) suggest that further research is needed

18
to understand the link between internal power relationships (discussed in section on potential

absorptive capacity) and social integration mechanisms. Without such management, network

picture inertia may undermine the implementation of appropriate networking actions and

inhibit knowledge exploitation.

Contagion Network Theory Applications

Dominant logic is similar to Huff, Huff and Barr (2000) notion of strategic frames (i.e. the

accepted ways of defining key problems and tasks employed by the firm), and an important

benefit for firms of collaborative networks is that it may help to broaden the dominant logic of

the firm, thus enhancing knowledge transformation and exploitation. Zahra and George

(2002) propose that the diversity of exposure and the degree of overlap between the

knowledge bases of the external knowledge sources and the firm can enhance the firm’s

absorptive capacity.

Echols and Tsai (2005) related this differential advantage of the network to the strategic

aspirations of the firms involved. They found that when a firm’s network embeddedness was

high, this facilitated the positive effect that both product and process distinctiveness had upon

firm performance, but in different ways. Those firms pursuing a strategy of product

distinctness (as in the previous examples of Audi or Johnson & Johnson) found that high

network embeddedness enhanced performance by providing critical market and customer

related information that was more accurate and consistent because the redundancy in the

network structure provided multiple and repetitive sources of information, thus affecting

knowledge recognition and acquisition. On the other hand, those firms pursuing a strategy of

process distinctiveness (as in the previous example of Sainsbury’s Groceries Online) found

that high network embeddedness enhanced performance by providing safeguards that protect

19
their prized process knowledge from opportunism. They did this by allowing the firm to

share knowledge only with trusted network partners, who are also highly connected to each

other and who thus have the opportunity and motivation to develop greater trust than would

be likely in situations of low network embeddedness. In both of these cases knowledge

complexity and knowledge transfer processes are high, and thus according to Todorova and

Durisin (2007) strong (and dense) network ties and social integration would be beneficial for

knowledge recognition and acquisition processes.

Where knowledge processes are simple, such as environmental search processes, weak

network ties may be more appropriate and social integration may in fact diminish the

relationship between absorptive capacity and innovation. This may be why so many firms

choose to contract out such services to third party suppliers such as market research

companies. Thus, the embeddedness of network partners is one way in which realised

absorptive capacity may partially explain how contingent factors such as social integration

mechanisms moderate dynamic capability capacities.

Our previous discussion of the necessary degree of dominant logic overlap and the potential

for rigidity in network decision making is pertinent here, especially in relation to knowledge

assimilation. The management of social amalgamation or social integration processes could

be hindered by network dominant logics that are too homogeneous, as they would tend to

encourage rigidity and inertia. They may also be hindered by network dominant logics that

are too heterogeneous, as sense making may be difficult or impossible where the strategic

frames of the network partners are too diverse.

Homophily Network Theory Applications

20
Moving on from the notion of a firm level to a network level dominant logic, Moller and

Rahala (2007) propose that the effective management of different types of business networks

is dependent on their underlying value creation logic. They take the view that value activities

are essentially based on knowledge that is embedded in capabilities and manifested in

organisational routines, and so are relevant in understanding knowledge assimilation,

transformation and exploitation processes. They classify business networks into three main

categories, according to their level of determination. Determination is related to the

codification of knowledge, and how easily this knowledge can be accessed and shared

between the actors in the network. A high level of determination would be characterised by a

stable and well defined value system in which the value activities, network actors,

technologies, and business processes were all well known. Such networks are focused on the

development and management of current business, with a stable and high level of resource

and business process specification in their value production. An example would be firms

such as Dell or Nectar.

A low level of determination would be characterised by emerging business networks, in

which radical change and an emerging value system were key features. There would be a

mixture of old and new network actors present and radical changes in old value activities and

new value activities being created. The development of flat panel displays, Bluetooth

technologies, and many science based discoveries are examples of this kind of network.

In between these two extremes, Moller and Rahala (2007) identify business renewal networks,

in which incremental improvements to established value systems are the main priority. Such

networks are commonly found in industries such as construction or software solutions where

the value lies in applying established value systems to customer specific solutions.

21
These three business network typologies would have very different approaches to developing

knowledge use and learning. Moller and Rahala (2007) state that emerging business networks

would need to focus much more on tacit knowledge and the sense making of emerging

opportunities and the creation of knowledge through exploration. On the other hand, current

business networks would concentrate on the transference of existing explicit knowledge. This

is supported by the work of Todorova and Durisin (2007), who differentiate the activities of

knowledge assimilation and transformation. While new knowledge that fits well with existing

cognitive schemas may only need to be assimilated (as there is no radical change to the

existing cognitive structures), when new situations or ideas cannot realistically be altered to

fit with existing knowledge, then cognitive structures must be transformed to adapt to an idea

or situation. They see assimilation and transformation not as sequential but as alternative

processes. Thus current business networks may rely upon knowledge assimilation, while

emerging business networks may need to rely upon knowledge transformation. Thus, the

level of determination of the network is one way in which realised absorptive capacity may

partially explain how contingent factors such as regimes of appropriability, social integration

mechanisms, and power relationships moderate dynamic capability capacities.

Lane and Lubatkin (1998) maintain that developing an ability to create new knowledge will

relate to the degree to which the dominant logic of the member firms in the network

partnership overlaps, thus influencing knowledge recognition, acquisition, and assimilation in

particular. This dominant logic permits a firm to develop expertise in using information in

specific ways to cope with a well-defined set of organisational problems, but may also be a

source of rigidity and may limit opportunities for the firm. As the work of Moller and Rahala

(2007) suggests, this dominant logic may in fact be driven by the type of business network

22
membership a firm has. It is the changes in these network dominant logics that propel

emerging business nets to move towards the more stable and well defined value systems of

current business networks. However, the behaviour and management of strategic business

networks is little understood (Moller and Rahala 2007). Clearly, no business network would

be wholly reliant on either knowledge assimilation or knowledge transformation. However,

understanding the balance of these two alternative processes in a network situation may well

have implications for the management of knowledge use in such networks.

We summarise in table 2 the main actions and influences that can be characterised by

applying cognitive, contagion, and homophily network theories to the concept of realised

absorptive capacity.

Insert Table 2

In particular, homophily theories may help us understand how network interactions may affect

a firm’s dominant logic and therefore the extent of shared meaning and consensus in the

network. Similarity in key traits is the driving force behind network partner selection and

interaction according to homophily theory, and so similarity in the dominant logic of network

partners may be an important factor in network success. However, in order to broaden the

dominant logic of the firm some diversity may also be desirable.

Proposition 2: In network participant interactions there will be a tension between the

nature and extent of both similarity and diversity in the network member’s dominant

logics. This tension will affect the ability of the network to establish and benefit from

network knowledge use, i.e. realised absorptive capacity.

23
Managerial implications include recognising the importance of R&D consortiums and trade

associations in sharing key information within an industry, an area that has not been fully

explored. In addition, one of the greatest challenges to collaborative learning will come from

the potentially conflicting cultures in the network value chain. For example, in the

automotive industry OEMs have traditionally been based upon an economic model that has

looked to cut costs at every opportunity, a culture that may be at odds with developing

realised absorptive capacity in the network. Finally, differing stages of company maturity

amongst collaborators (both in terms of their organization and in terms of the processes they

adopt), national cultures, and size will influence organizational learning and realised

absorptive capacity in ways that are not yet understood.

Relative Absorptive Capacity as Network Partner Choice

In relation to forming network partnerships, both Dyer and Singh (1998) and Lane and

Lubatkin (1998) point out that the choice of partner with whom a learning alliance might be

profitably formed is an area in need of further research. They posit that the absorptive

capacity of the firm may be moderated by the appropriateness of the choice of learning

partner. This was termed “relative absorptive capacity” by Lane and Lubatkin and “partner-

specific absorptive capacity” by Dyer and Singh. Both sets of researchers state that the ability

of a firm to learn from another firm is jointly determined by the relative characteristics of the

two firms.

Cognitive Network Theory Applications

24
Both Zaheer and Bell (2005) and Ford and Hakansson (2006) recognise that network

participants employ their resources differently in interaction with different counterparts, and

that the value of their resources may be different depending on the particular relationship, thus

making network interactions subject to relativity. Here, we can see that resource allocation

differences that stem from network partner choice decisions is one way in which relative

absorptive capacity may partially explain how contingent factors such as regimes of

appropriability moderate absorptive capacity capabilities.

Putting network partner attributes into a knowledge management context, network partner

traits might include overlapping knowledge bases (Dyer and Singh 1998) or similarities in

‘know-what’ (Lane and Lubatkin 1998). These similarities in what network partners know

may help explain how network partner choice might help explain the influence that contingent

factors have in recognising the value of new knowledge and the acquisition of this knowledge.

Interaction routines are another network partner trait that may facilitate socio-technical

interactions and knowledge-processing systems (Dyer and Singh 1998), or ‘know-how’ (Lane

and Lubatkin 1998). Similarities in such interaction routines may help explain how network

partner choice might help us to understand how contingent factors operate in relation to the

assimilation of knowledge. Thirdly, dominant logics of the firms involved, or the ‘know-

why’ (Lane and Lubatkin 1998) is another network partner trait which may help researchers

to understand how contingent factors operate in transforming knowledge.

Contagion Network Theory Applications

However, we consider it important to expand the contingency approach employed by Lane

and Lubatkin (1998) in considering collaborative partner traits in partner choice to include the

nature and purpose of the interactions between the partnership firms as well. At the network

25
level, such interactions were explored by Vogel (2005), who identified two particular

dimensions of collective action in networks. Firstly, the energetic dimension is characterised

by the collective efforts made to pursue network activities. These collective efforts are

synergistic and are driven by the perception that joint goals and activities are relevant and

meaningful. This thus encourages the support of these shared goals within the network.

Secondly, the focusing dimension is characterised by a common purpose based on a shared

interpretation of opportunities in the network. It implies a long-term orientation, consciously

shared goals, that participants share a high priority for joint activities, and that the action is

disciplined and persistent in the face of hurdles or distractions. Together, these dimensions

help to explain why some networks have a greater willpower, (what Vogel termed volition) to

enact their goals. This, the level of volition between network partners is another way in

which relative absorptive capacity may partially explain how contingent factors moderate

absorptive capacity capabilities, in particular knowledge transformation.

At the level of the individual within networks, McFadyen and Cannella (2004) explored the

role of interpersonal relationship strength and number of relationships in building social

capital. They found that a quadratic relationship existed for both the number and strength of

interpersonal relationships with knowledge creation. While interpersonal relationships did

enhance knowledge creation up to a point, because of the resources involved in building and

maintaining such relationships as they increased in number returns on knowledge creation

diminished. Again, while strong interpersonal relationships were seen as beneficial in

knowledge creation, as the strength of these relationships increased through repeated

interactions the knowledge stock between the relationship partners became too similar and

thus inhibited further knowledge creation. It is conceivable that while this research focused

on the level of the individual, such dynamics might also been present at the network level as

26
well. Therefore we see that the number and strength of interpersonal interactions between

network partners may also help explain how contingent factors moderate absorptive capacity

capabilities, in particular knowledge recognition, acquisition and assimilation.

In their critique of the work of Zahra and George (2002), Todorova and Durisin (2007)

introduce the concept of efficiency in absorptive capacity. They recognise that contingency

factors such as social integration and power relationships will influence the organisational

routines that enable the absorptive capacity of a firm. Such relativity implies that efficiency

and effectiveness are not always enhanced by establishing relationships with all potential

stakeholders, and that building the ‘right’ type of relationship (taking into account situational

factors such as organisational design and culture, and the structure of the industry, company,

and marketplace) is a key concern (Reinartz et al. 2004).

Homophily Network Theory Applications

As mentioned earlier in this paper, Todorova and Durisin (2007) suggest that power

relationships will interact with cognitive processes, learning, and capabilities in the

organisation and will influence absorptive capacity through resource allocation decisions

within a firm. At the network level, external power relationships (with current customers and

current network partners such as suppliers, alliance partners and other stakeholders) may

hinder the correct valuing and exploitation of new knowledge. These external power

relationships are also the focus of the work of Bae and Gargiulo (2004), who noted that in

situations where network partner choice is governed by the non-substitutability of network

partners (for example, a car manufacturer who is sourcing new and innovative materials

technology from a network supplier), the firm may need to enter into highly embedded

network relationships to induce bilateral commitments from its partners. In a situation with

27
substitutable network partners (for example, a car manufacturer who is sourcing standard

vehicle parts, such as tyres), the firm may seek to hold a broker position that will advantage it

in relation to its partners and give it greater power within the network. Therefore, the

substitutability of network partners is one way in which relative absorptive capacity may

partially explain how contingent factors such as power relationships moderate absorptive

capacity capabilities, in particular knowledge exploitation.

Zaheer and Bell (2005) note that the many intrinsic organisational characteristics influence

the benefits of network partnerships, and that network structure (in terms of structural holes

and closure) alone will not explain network partner benefits and performance. In our previous

discussion of potential absorptive capacity we noted that time may be an important factor in

understanding the relative merits of different network structures on innovation. Here, Zaheer

and Bell (2005) also look at this relationship. They found that firm level characteristics (such

as innovativeness) were also an important factor. Where the innovativeness of the firm was

high, bridging structural holes brought greater performance benefits than being embedded in

closed network structures. Similarly, if the network partner firms were high in

innovativeness, this too enhanced the performance outcomes in network structures with

structural holes. Therefore, characteristics of network partners such as innovativeness is

another way in which relative absorptive capacity may partially explain how contingent

factors such as power relationships and social integration mechanisms moderate absorptive

capacity capabilities, in particular the recognition and acquisition of new knowledge.

Wilkinson, Young and Freytag (2005) used biological selection and relational balance

theories to examine such partner choices in what they termed “business mating” addressing

the question of how alike business partners can or must be to form a partnership. Relative

28
absorptive capacity will therefore be influenced by aspects of homophily theory, in particular

social comparison theory, that suggests that people feel discomfort when they compare

themselves to others who are different because they have a natural desire to affiliate with

those who exhibit traits similar to themselves. Wilkinson, Young and Freytag (2005) draw

upon research in social psychology, specifically Balance Theory, to extend this view to

include not only similarity but also complimentarity of traits. Balance theory states that

between partners a state of harmonious fit without stress is sought. This leads us to propose a

contingency approach to network partner selection. On the one hand, too much or too little

similarity in key traits would be considered an obstacle to effective learning. On the other

hand, some dissimilarity may be desirable as long as a balance is felt, as firms that are too

similar may have little to offer each other to transact business and may in fact end up as

competitors (Wilkinson, Young and Freytag 2005). Therefore they suggest that

complimentarity in network partner choice provides the diversity that enables collaborative

advantages and reciprocal value to be created. This may help explain the popularity of

construction industry network formation models such as Procure 21 (typical of the UK

National Health Service (NHS) contracting). Using this framework, network partners for a

construction project are chosen from a pool of firms that would have already prequalified for

NHS projects. Thus, the level of diversity in network partner choice is limited by the

requirement to be pre-approved for the scheme. However, the learning carried forward from

project to project by such firms also allows for a more harmonious fit between network

partners.

What traits might make business partners compatible? Geographical, social, and psychic

proximity (which include similar business objectives, attitudes, business philosophy,

education, experience and environments), competitive fitness (including internal resources

29
and skills) and business context are the main traits identified by Wilkinson, Young and

Freytag (2005). Thus in relation to network partner choice, compatibility would be seen as a

balance between similarity and complimentarity of key traits.

We summarise in table 3 the main actions and influences that can be characterised by

applying cognitive, contagion, and homophily network theories to the concept of relative

absorptive capacity.

Insert Table 3

How and why firms interact may influence what learning is shared, and how such learning is

utilised by the firms involved. On the one hand, it is advisable for partner firms to share

certain similarities (such as knowledge bases, organisational structures and reward systems,

and dominant logic according to Lane and Lubatkin 1998) in order to increase their relative

absorptive capacity. On the other hand, the type of interactions that are a feature of the

relationships will also influence the capability to acquire and assimilate knowledge and the

capacity to learn and solve problems, and thus affects the realised absorptive capacity of the

firms involved.

Proposition 3: Network participant selection is a contingency choice based upon the

relative similarities and differences between the network partners in what those

involved considered to be key traits. This contingency choice in network partner

selection will affect the development of absorptive capacity capabilities, i.e. the

relative absorptive capacity of the network.

30
Managerial implications include recognising that the trend in supply chain management has

been to lower the number of suppliers and have closer relationships with the remaining

suppliers. The implications for how this reduction in the number of suppliers affects the

learning processes within industry networks have not been fully explored. In addition, the

importance of customer premises employees (or “in-plants” as they are sometimes called) as a

vehicle for enhancing relative absorptive capacity has received little research attention, as has

the impact of quality assurance initiatives. Six sigma and the European ISO programs aim at

reducing variance and therefore they raise the level of homophily between network partners.

However, if all members of a network think and act in the same way, innovation is inhibited.

Manufacturing has benefited from quality initiatives, but are these initiative good for R & D

and buyer-seller collaboration?

Conclusion

Taken together cognitive, contagion, and homophily provide a new view of network

collaboration and knowledge management, yet one that is theoretically complete. They raise

a number of key questions in relation to network formation, collaboration and learning. For

example, a key question we may ask in relation to contagion theory is how it may help us to

understand the facilitation of learning for network members and how aspects of network

structure such as cohesion and range can best be managed? A key question we may ask in

relation to cognitive theory is how may it help us to understand the facilitation of learning for

network members and what cognitive variables most influence the creation of a shared

understanding and mutual orientation? Finally, a key question we may ask in relation to

homophily theory is how it may help us to understand the facilitation of learning and

31
innovation for network members and who should be considered a potential supplier, how

many suppliers are ideal, and what effect do these have on learning and innovation?

32
Peters, Linda D., and Johnston, Wesley J.: (2009) “Network Formation, Collaboration, and
Collective Learning: An exploration of Absorptive Capacity from a Network Perspective”,
Journal of Business Market Management (invited for inclusion in the special issue from the
Relationship Marketing Summit, Buenos Aires), vol. 3 (1), pp 29-50.
doi: 10.1007/s12087-008-0036-7

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36
 Contingent Factors of Absorptive Capacity
Development

How do these contingent factors moderate the

development of Absorptive Capacity Capabilities?

Antecedents Absorptive Consequences

of Capacity of Absorptive
Absorptive Processes Capacity
Capacity

Figure 1
Understanding the process of developing Absorptive Capacity Capabilities

37
Peters, Linda D., and Johnston, Wesley J.: (2009) “Network Formation, Collaboration, and Collective Learning: An exploration of Absorptive
Capacity from a Network Perspective”, Journal of Business Market Management (invited for inclusion in the special issue from the
Relationship Marketing Summit, Buenos Aires), vol. 3 (1), pp 29-50.
doi: 10.1007/s12087-008-0036-7

Regimes of
Appropriability

Assimilate Competitive
Knowledge
Advantage
Source Recognition
Acquire Exploit
of value
Prior •Flexibility
Knowledge
Transform •Innovation
•Performance
Dimensions of Absorptive Capacity Capabilities

Social Power
Integration
Relationships
Mechanisms
Figure 2 1
Three Aspects of Absorptive Capacity Development
Adapted from Todorova and Durisin (2007)
Peters, Linda D., and Johnston, Wesley J.: (2009) “Network Formation, Collaboration, and
Collective Learning: An exploration of Absorptive Capacity from a Network Perspective”,
Journal of Business Market Management (invited for inclusion in the special issue from the
Relationship Marketing Summit, Buenos Aires), vol. 3 (1), pp 29-50.
doi: 10.1007/s12087-008-0036-7

Table 1
Linking Network Theory to the Relationship between Potential Absorptive Capacity and
Knowledge

Absorptive Network Knowledge Knowledge Knowledge Knowledge

Capacity Theory Recognition and Assimilation Transformation Exploitation
Acquisition

Cognitive Ability to Development Development of Allocation of

recognise the of a a common internal
Potential value of new knowledge culture through resources and
knowledge sharing myths, sagas power
culture and stories relationships
within the
organisation

Contagion Exposure to Network Challenges to Time

new Structure: established dependent
information cohesion and practices and benefits of
sources range resistance to network
change structures

Homophily Similarity in Enhanced Effect of the Enhanced

salient ability to structural product and/or
characteristics develop embeddedness process
shared of the network uniqueness
meanings

2
 Table 2
Linking Network Theory to the Relationship between Realised Absorptive Capacity and
Knowledge

Absorptive Network Knowledge Knowledge Knowledge Knowledge

Capacity Theory Recognition and Assimilation Transformation Exploitation
Acquisition

Cognitive Effects of the Individual Effects of The

dominant logic cognitive complexity of relationship
Realised of the firm and aspects of knowledge and between
the value social knowledge network
creation logic amalgamation transfer pictures and
of the network and integration processes on network
processes the need for activities
social
integration

Contagion High vs. low Group Exposure to Imitation of

network processing new ways of network
embeddedness aspects of knowledge use partner
social practices
amalgamation
and integration
processes

Homophily Degree of Dependent on Dependent on Dependent on

overlap of the degree of the degree of the degree of
dominant logic determination determination determination
of partner firms of the network of the network of the network
in the network

3
 Table 3
Linking Network Theory to the Relationship between Relative Absorptive Capacity and
Knowledge

Absorptive Network Knowledge Knowledge Knowledge Knowledge

Capacity Theory Recognition and Assimilation Transformation Exploitation
Acquisition

Cognitive Overlapping Overlapping Overlapping Allocation of

knowledge bases interaction dominant resources and
Relative (know-what) routines logics (know- power
(know-how) why) relationships
between the
organisations
in the network

Contagion Effect of Effects of Level of Relativity in

external power strength and network efficiency and
relationship with number of volition effectiveness
current network relationships related to the
partners on in building choice of
valuation and social capital “right” types of
exploitation of partnerships
new knowledge

Homophily Network partner Network Social Network

characteristics structure comparison partner
(such as benefits and balance substitutability
innovativeness, (closed vs. theory in
geographical, open network
psychic and structures) partner choice
social proximity, effects
competitive
fitness, or
business
context)

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