(Routledge Studies in Innovation, Organizations and Technology) Mitsuru Kodama - Management System For Strategic Innovation - Building Dynamic Capabilities View of The Firm-Routledge (2023)

Management System for Strategic
Innovation
Strategic innovation dynamically brings about strategic positioning through new

products, services and business models, and is a dynamic view of strategy that
enables a corporation to maintain its competitive advantage and establish sustainable
growth. For these reasons, corporations have to be innovators that can reinforce
their existing positions through incremental innovation, while at the same time
constantly renewing or destroying existing business through radical innovation. This
book presents a holistic theoretical model, The Strategic Innovation System, as a
system of capabilities for companies to achieve strategic innovation.
As a subsystem of the Strategic Innovation System, this book presents the concept
of the “Capabilities Building Map”, which has characteristics of four different
capabilities that correspond to the elements of speed of changes and uncertainty
in the environment faced by companies. It explores how companies can change
and even evolve their capabilities to achieve strategic innovation, using the latest
findings of the systems-view, the process-view, and dynamic capabilities-view. The
author evaluates management systems that achieve sustainable strategic innovation
by utilizing knowledge assets inside and outside of organizations, including those of
leaders, rather than simply relying on leaders with strong will.
This book will primarily appeal to academics, researchers, and graduate students
interested in innovation and technology management, digital transformation as well
as strategic management and strategy planning and a broader business audience.
Mitsuru Kodama is Professor of Innovation and Technology Management in the

College of Commerce and Graduate School of Business Administration at Nihon
University. He has published 17 books in English such as Managing IT for Innovation:
Dynamic Capabilities and Competitive Advantage (Routledge, 2021), Developing Holistic
Strategic Management in the Advanced ICT Era (Series on Technology Management Vol.
35) (World Scientific Europe, 2019), Sustainable Growth Through Strategic In novation
(2018), Developing Holistic Leadership (2017), Collaborative Innovation (Routledge, 2015),
Winning Through Boundaries Innovation (2014), Competing Through ICT Capability
(2012), Knowledge Integration Dynamics (World Scientific, 2011), Boundary Management
(2009), Project-Based Organization in the Knowledge-Based Society (Series on Technology
Management Vol. 12) (2007), and articles in several international scholarly journals. Prior
to joining University, he was working as a project leader at NTT and NTT DOCOMO
for around 20 years. He received R&D 100 Awards 2003 in R&D Magazine (US).
Routledge Studies in Innovation, Organizations and
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Management System for Strategic Innovation

Building Dynamic Capabilities View of the Firm
Mitsuru Kodama
For more information about this series, please visit: www.routledge.com/Routledge-Studies-in-

Innovation-Organizations-and-Technology/book-series/RIOT
Management System for
Strategic Innovation
Building Dynamic Capabilities
View of the Firm
Mitsuru Kodama
First published 2024
by Routledge
4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2024 Mitsuru Kodama
The right of Mitsuru Kodama to be identified as author of this work has
been asserted in accordance with sections 77 and 78 of the Copyright,
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All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered
trademarks, and are used only for identification and explanation without
intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
ISBN: 978-1-032-30430-4 (hbk)
ISBN: 978-1-032-30431-1 (pbk)
ISBN: 978-1-003-30505-7 (ebk)
DOI: 10.4324/9781003305057
Typeset in Bembo
by Apex CoVantage, LLC
Toward building a corporate strategy model that opens
up the future
Contents
List of figures viii

List of tables x
Preface and acknowledgments xi
1 The need for a new theoretical model and the research

approach of this book 1
2 Capabilities building through dynamic capabilities approach 13
3 Capabilities building through the innovation process approach 45
4 Capabilities building through the exploitation and

exploration approach 63
5 Strategic innovation system – a new theory from synthesis

of prior literature 79
6 The strategic innovation system – multi-case analyses in

high-tech companies 106
7 The asset orchestration process based on the boundaries-

based view (BBV) and the attention-based view (ABV) –
A longitudinal study of the mobile communications industry 149
8 Implications, conclusion, and future research issues 192
Index208
Figures
1.1 Research approach to building a new theory 8

1.2 The structure of the book 9
2.1 Dynamic capabilities (DC) and ordinary capabilities (OC) 14
2.2 Activities-based view of capabilities building 21
2.3 Contrasting the capabilities building map and capabilities lifecycle 21
2.4 “Business Activities Map” for corporate activities 23
2.5 Positioning various new product development (NPD) on the
business activities map 24
2.6 Capabilities building map – capabilities building through the
dynamic capabilities approach 27
2.7 The process of building capabilities in the capabilities lifecycle 37
3.1 Capabilities – management systems in NPD processes 48
3.2 The dynamic chain-linked model – recursive framework 50
3.3 Micro strategy formulation and implementation in project management 52
3.4 Components and processes of dynamic capabilities 55
3.5 Capabilities building map – capabilities building through the
innovation process approach 58
4.1 The valley of death and the Darwinian sea models 66
4.2 Exploration and exploitation dynamic combination processes 70
4.3 Leader teams, project and line networks in a corporation 73
4.4 Dynamic capabilities building through exploration and
exploitation processes 74
5.1 Capabilities building map – the dynamic and ordinary capabilities view 80
5.2 The strategic innovation system 86
5.3 The Helfat and Winter (2011) position in the capabilities building map 94
5.4 Cospecialization through convergence 97
5.5 The asset orchestration model (asset orchestration firm) 99
5.6 Value chains and capabilities in advanced IT environments 100
6.1 Capabilities building map (CM) and strategic innovation
capabilities (SIC) 108
6.2 Relationship between the capabilities building map and the
capabilities lifecycle 109
6.3 Organizational framework of Fujifilm R&D 112
Figures ix
6.4 Realization of “intellectual fusion and innovation” through the

formation of multi-layered SC 113
6.5 Zoom’s business ecosystem 128
6.6 The strategic innovation system 131
6.7 Position and characteristics of a triad system 140
6.8 Relationship of a Ba triad and a triad system 144
7.1 Strategy realization and interaction between dynamic capabilities
(DC) and ordinary capabilities (OC) 150
7.2 Asset orchestration by forming strategic communities between actors 155
7.3 The attention-based view and boundaries-based view in dynamic
capabilities (DC) 158
7.4 The i-mode Business Model by Asset Orchestration 170
7.5 Main activities in three main GBD business strategies 172
7.6 Capabilities lifecycles on the capabilities building map 175
7.7 The growing i-mode organizational power 179
7.8 MM division new service development systems 180
7.9 Asset orchestration – learning from the i-mode development 181
7.10 Capabilities abrasion and friction hindering capabilities congruence 183
8.1 A framework of holistic leadership from complex adaptive theory 197
8.2 Characteristics of organizational boundaries (knowledge boundaries) 200
8.3 Knowledge integration through uniting boundaries (graphic):
group interlock network 201
8.4 Positioning knowledge integration capabilities in dynamic capabilities 203
Tables
4.1 Paradoxical management of exploration and exploitation 69

Preface and acknowledgments
The book discusses strategic management and innovation activities in corporations

from the perspective of the dynamic capabilities of individuals, groups, and organi-
zations. This book is the result of substantive observations made over a long period
of time by me in the business workplace, and analysis of those observations. Over
21 years, I experienced the exciting business of mainly company-internal ventures
and the development of new products, services, and businesses in the rapidly chang-
ing ICT field. Through past business experience, I found that a driving force sup-
porting learning and innovation in companies are dynamic capabilities and that these
are dynamic elements that are constantly changing.
My interest in “Dynamic Capabilities (DC)” stemmed from my work experi-
ence as a project leader at NTT DoCoMo. DC is described in previous studies as
follows. “We define dynamic capabilities as the firm’s ability to integrate, build, and
reconfigure internal and external competences to address rapidly changing environ-
ments” (Teece et al., 1997, p. 516). At that time, my project team at NTT DoCoMo
followed exactly this process. After that, I detailed the contents of my own new ser-
vice development project from the perspective of knowledge creation (knowledge
integration) and the innovation process by DC and published this research result in
an academic journal.1
I found that these dynamic capabilities evolve by the orchestration (or integra-
tion) of the assets (knowledge) of people and groups, the leadership of top and mid-
dle management, and staff, and dynamic process to achieve real business. The asset
orchestration, leadership, and dynamic process dynamically formulate and imple-
ment strategy in corporate organizations. An important aspect of the evolution of
capabilities is the theoretical perspective on dynamic capabilities. At the micro level,
practitioners either consciously or unconsciously, and dynamically network assets
(knowledge) to bring about continuous strategic innovation and sustainable growth.
The purpose of this book is to extract micro-level theoretical frameworks
(dynamic capabilities, ordinary capabilities, capabilities building map, strategic
innovation capabilities, strategic innovation loop, strategic innovation system) for
companies to bring about new assets (knowledge) and strategic innovation with
a realistic view of organizational and strategic dynamic processes in industries that
are constantly changing through time such as the fast-moving high-tech field. As a
researcher of business person and in the field of business and management studies,
xii Preface and acknowledgments
the most important objective of this book is how to bridge theory and practice. For
this reason, I have immersed myself deeply in organizations and closely observed
and analyzed the thinking and actions of many practitioners including those in their
partnered corporations and their customers. Hence, I performed an in-depth quali-
tative study pursuing the research issues of how practitioners actually dynamically
set down and execute strategy both inside and outside of companies, and how they
restructure organizations to acquire and demonstrate new capabilities. Accordingly,
the research methodologies I employed are primarily in-depth case studies centered
on participant observation and ethnography.
In this long-term field research, I was giving much encouragement and valuable
insights into practitioners’ creation of the businesses of the future and achievement
of visions in exciting business environments through practical hands-on activities as
their way of life. However, there is also drama in business activity (macro and micro,
and in both cases of success and failure), and it’s the subjectivity and values as beliefs
and thoughts of practitioners that achieve strategy and acquire capabilities.
This book could not be completed without the thorough and strict interaction
that I have had with many practitioners. I would like to extend my gratitude to these
practitioners that are of a number too great to count. Concerning the publication of
this book, I wish to extend my appreciation to Ms. Alex Atkinson, Commissioning
Editor, and Ms. Manjusha Mishra, Editorial Assistant of Routledge, for all of their
support and efforts.
I am also deeply grateful for the valuable comments offered by the two reviewers
of the proposal for this book. Lastly, I would like to express my deep gratitude to
Nihon University’s College of Commerce, my workplace which has provided me
with the comforts of a day-to-day research environment.
Mitsuru Kodama
Note
1 Kodama, M. (2007). Innovation and knowledge creation through leadership-based strate-
gic community: Case study on high-tech company in Japan. Technovation, 27(3), 115–132.
Reference
Teece, D. J., Pisano, G. and Shuen, A. (1997). Dynamic capabilities and strategic manage-
ment. Strategic Management Journal, 18(7), 509–533.
1 The need for a new theoretical
model and the research
approach of this book
1.1 Aims and objectives of this book – strategy transformation

through strategic innovation
Needless to say, the continuous creation of new products, services, and even novel
business models is important for companies to gain and maintain a sustainable com-
petitive advantage and grow over the long term (e.g., Jelinek and Schoonhoven,
1990; Morone, 1993; Kodama, 2011, 2018). In particular, the creation and execu-
tion of new business models that transform existing rules and radically revamp con-
ventional products and services have triggered major strategy transformations in
traditional large corporations throughout history.
The chain of academic research of recent years on radical innovation (e.g., Leifer
et al., 2000), breakthrough innovation (e.g., Hargadon, 2003), discontinuous inno-
vation (e.g., Kaplan et al., 2003; Laurila, 2002), and disruptive innovation (Chris-
tensen and Raynor, 2003) illustrates the challenges and associated difficulties with
strategy transformation of companies to pioneer new markets or create new tech-
nologies, as well as many factors of success and failure.
Acquiring the organizational capabilities to quickly adapt to environmental
changes and drive new technological and business development (e.g., Brown and
Eisenhardt, 1997; Teece et al., 1997; Tushman and Anderson, 1986) is a top prior-
ity for companies. However, in the past, in several industries such as the PC mar-
ket (Mitchell, 1989), digital photography (Tripsas and Gavetti, 2000), disk drives
(Christensen and Bower, 1996), semiconductor lithography equipment (Henderson
and Clark, 1990), watches (Glasmeier, 1991), and the business transformation from
analog to digital technology (Kodama, 2018), cases were reported of large traditional
companies that could not cope well with changing environments, which had signifi-
cant impacts on their performance and survival.
This is closely related to the fact that companies rely heavily on routines that
utilize certain core path-dependent competencies (Nelson and Winter, 1982; Teece
et al., 1997). The more efficient business activities a company pursues to drive the
economic activity of increasing scale and scope, the more its existing core compe-
tencies fall into core rigidities or competency traps, meaning the company becomes
less able to respond quickly to major environmental changes (Levinthal, 1991, 1997;
Leonard-Barton, 1992; Levitt and March, 1988). Promoting efficiency in business
DOI: 10.4324/9781003305057-1
2 New theoretical model and research approach
activities inhibits diversity of operations and reduces behaviors that induce inde-
pendent creativity in employees (e.g., Weick, 1995).
The traditional large companies of the past found great competitiveness by utiliz-
ing their path-dependent capabilities to profit by gradually improving (incrementally
innovating) their existing products to release newer versions of them in existing mar-
kets. In contrast, radical or breakthrough innovations entail the paradigm shifts of
new markets and technologies and bring about big increases in product functional-
ity, radical transformation of existing markets, the creation of new markets and sub-
stantial cost reductions, and so forth (Leifer et al., 2000; O’Connor and Rice, 2001).
Thus, as new breakthrough innovation, radical innovation is different in char-
acter to incremental innovation by routine improving and upgrading through path
dependency. To achieve radical innovation, companies need new knowledge that
differs from their existing skills and know-how (e.g., Ettlie et al., 1984; Green et al.,
1995). This is because corporations engaging in radical innovation and even individ-
ual projects must face uncertainty and discontinuity in areas such as markets, technol-
ogies, organizations and resources, and although it may be possible for some projects
to overcome these hurdles, many lose momentum and fail (e.g., Leifer et al., 2000).
For companies to acquire the capabilities for radical innovation, they need dif-
ferent capabilities (the elements of strategy, organization, resources, technology,
process, and leadership) to the management (practices) developed in the past for
incremental innovation (e.g., Kodama, 2003, 2007a, 2007b; O’Reilly and Tushman,
2004; Vanhaverbeke and Peeters, 2005).
According to Markides (1997), strategic innovation is the dynamic creation of
creative strategic positioning through new products, services and business models.
Markides argues that this framework is a dynamic strategic view that establishes
a sustainable competitive advantage for a company. This means companies must
become innovators that do not stick to their existing position (existing business)
and are always disrupting it. Govindarajan and Trimble (2005) define strategic inno-
vation as the achievement of new business models (including new products and
services) that have innovativeness in their strategies. These strategic innovations are
qualitatively different from the incremental innovation mentioned earlier, as they
imply a transformation from an existing business to a new business or a business
innovation that has a significant impact on company performance.
However, realistically, it is important for companies to dynamically create origi-
nal strategic positioning through new products, services, and business models while
growing their existing business – balancing existing and new businesses is the essence
of strategic innovation. In other words, a strategic framework that simultaneously
covers and balances the two different business activities of exploitation (growth of
existing businesses) and exploration (exploration of new businesses) is a dynamic
view of strategy that establishes a sustainable competitive advantage for a company.
Such an innovation system is called a “strategic innovation system” in this book.
1.2 Combining incremental and radical innovation

Here in the 21st century, the changes to business circumstances surrounding com-
panies are becoming more pronounced. Business leaders and managers face a wide
New theoretical model and research approach 3
range of challenges such as increased globalization of business, rapid technologi-

cal innovation, ubiquitous networking throughout society, maturing markets, price
wars, and environmental problems. Obviously, in the long term, businesses must
continually produce new products, services, and business models to acquire and
sustain competitiveness to maintain their growth. However, the radical revamp of
conventional products and services and the creation of new business models that
change existing rules have triggered major transformations in corporate strategy. For
instance, Apple, a company that brought sweeping changes to music distribution and
smartphone businesses, created new value chains in the ICT industry with its iPod,
iTunes, iPhone, iPad, and Apple Watch products.
To swiftly respond to changing circumstances, companies have to continually
polish their existing core competencies to fortify their main businesses. Here, incre-
mental innovation is important to advance organizational capabilities through suc-
cessive and regular improvement and reform activities. In contrast, it is through
radical innovation that companies can acquire new and never-before-seen core
competencies through the convergence of differing knowledge needed to acquire
the organizational capability to drive the development of business for the creation of
new circumstances (markets).
In particular, radical innovation (e.g., Leifer et al., 2000) has led to theoretical
and practical guidance for companies to transform strategies to develop new markets
and create new technologies. These innovation strategies emphasize not only swift
response to circumstantial change but also the acquisition of organizational capabili-
ties to drive business development toward creating new circumstances (markets).
Of these two innovation processes – incremental (exploitation) and radical (explo-
ration) – the former is required to pursue efficiency in existing business (or main
business) knowledge in the company, while the latter is required to pursue the crea-
tion of knowledge to pioneer the businesses of the future. Nevertheless, corporations
must simultaneously manage both of these disparate innovation processes and build
them into the core of their corporate strategies (e.g., Kodama, 2003, 2004, 2018).
Viewed from the research stream of knowledge management (e.g., Nonaka et al.,
2014), there is a dynamic relationship between the creation and use of knowl-
edge. Knowledge is used to train technical know-how and personnel skills, thus
in turn, the accumulation of knowledge is the fuel for new knowledge creation.
Accordingly, businesses need to understand to what extent they need to balance
the creation and use of knowledge and proactively manage it. In this way, the ideas
of creativity and efficiency of knowledge are reflected in the concept of combining
exploration and exploitation (March, 1991) – creating knowledge to bring about
groundbreaking radical innovation, or using knowledge for incremental innovation
of existing core businesses to maintain competitiveness.
For this reason, business leaders and managers need fresh perspectives to pioneer
businesses for new markets while at the same time accumulating and advancing
core competences to reinforce their core businesses. Simultaneously executing and
combining these two substantially different innovation processes to pioneer new and
highly individualized strategic positions are a superior corporate strategy also asso-
ciated with the achievement of sustainable competitiveness (e.g., Markides, 1999;
Kodama, 2018).
This dynamic strategic view of strategic innovation balances the different modes
of the exploration process (new routines through new changes) and the exploita-
tion process (existing routines) to ensure the long-term growth of a company (e.g.,
March, 1996; Benner and Tushman, 2003; Tushman and O’Reilly, 1997). For this
reason, the research question of this book looks at the following:
Realistically, it is important for companies to dynamically create original stra-

tegic positioning through new products, services, and business models while
growing their existing business – balancing existing and new businesses is
the essence of strategic innovation. In other words, a strategic framework
that simultaneously covers and balances the two different business activities
of exploitation (growth of existing businesses) and exploration (exploration
of new businesses) is a dynamic view of strategy that establishes a sustainable
competitive advantage for a company. As mentioned, this book refers to such
an innovation system as a “strategic innovation system”.
To date, there has been little prior research on the strategic innovation system –
a comprehensive systems approach in which companies continuously and system-
atically create new businesses while maintaining the growth of existing businesses.
Teece (2018), who advocated “dynamic capabilities” (Teece, 2007, 2014), a major
research theme of strategy theory in recent years, asserts that both the capabilities
and systems frameworks require coordination between all elements of an organiza-
tion and should adopt a holistic view.
Systems theory is a framework designed to achieve a holistic approach to studying
phenomena in a variety of fields (Jackson, 1991, 2007, 2016). The systems approach
offers useful tips without getting caught up in details and losing sight of the whole.
At the heart of this framework is the notion that “the whole is more than the sum
of its parts”, which originated with Aristotle. While the holistic view is the most
obvious feature of systems theory, a systems approach requires understanding at both
levels and therefore does not neglect the study of individual elements. Thus, the
academic application of systems theory to innovation research and strategic studies
is extremely promising. Effective use of systems theory enables the identification of
elements of systems necessary for corporate capabilities building and the relation-
ships among them while enabling the building of theoretical models for companies
to achieve continuous strategic innovation.
Teece (2018) also argues that general systems theory (von Bertalanffy, 1960),
which is biologically oriented and emphasizes reactivity, is consistent with evolu-
tionary ideas about companies (Nelson and Winter, 1982) – strategic management
requires a framework that can recognize both evolution (path dependency) and
design (entrepreneurship), which is the framework of dynamic capabilities (Augier
and Teece, 2008). Therefore, research on such strategic innovation from the per-
spective of corporate and management systems will become increasingly important
in the future (e.g., O’Connor, 2008; Teece, 2018).
This dynamic view of strategic innovation balances the different modes of the
exploration process (new routines through new changes) and the exploitation process
(existing routines) to ensure the long-term growth of a company (e.g., March, 1996;
Benner and Tushman, 2003; Tushman and O’Reilly, 1997). This book asks: “What
is the theoretical model of the strategic innovation system, a corporate system that
simultaneously covers and balances the opposing corporate activities of exploitation
(growth of existing businesses) and exploration (development of new businesses)?”
and, from synthesis of a range of major prior literature, clarifies the capabilities
required by companies in dynamic innovation processes to achieve strategic innova-
tion (combined exploitation for incremental innovation and exploration for radical
innovation) in a sustainable way.
1.3 Research approach
To understand the capabilities required to achieve strategic innovation that ensures
the long-term growth of a company by balancing the different modes of the explo-
ration and exploitation processes, it is necessary to understand the building of organ-
izational capabilities required for each process in new product (or new business)
development. For example, realistically, in the new product development process,
projects face numerous problems and challenges, and project members need to
implement practical processes to overcome the “Valley of Death” (Branscomb et al.,
2001; Markham, 2002; Merrifield, 1995) and the “Darwinian Sea” (e.g., Dismukes,
2004), which are phenomena noted from practical experience. However, the practi-
cal processes experienced in projects are extremely complex (e.g., Kodama, 2002,
2005, 2007c), and the quality of capabilities required of individuals and organiza-
tions is also expected to vary.
Responding to the research question “what is a theoretical model of a corporate
system called a ‘strategic innovation system’ that simultaneously covers and recon-
ciles the two different corporate activities of exploitation (growth of existing busi-
nesses) and exploration (development of new businesses) (Okhuysen and Bonardi,
2011)?”, this book is an attempt to construct a new theoretical model combining
several different existing theoretical studies.
The capabilities of a company to achieve sustainable strategic innovation are con-
sidered to have two major dimensions. The first dimension is capability character-
istics that respond to changes in business environments (a perspective from a system
framework of capabilities), and the second dimension is the process of changing
capabilities in business activities over time (a perspective from the temporality and
process of capabilities).
The first reason these two dimensions are important is that for a company to
achieve strategic innovation, which means both growing existing businesses and
developing new businesses, it must build capabilities to respond to diverse changes
in the business environments it faces. Change in business environments refers to the
degree of uncertainty and the speed of change within and outside companies. The
second reason is that the concepts of temporality and process need to be considered
from the perspective of sustainable growth of corporate management when building
corporate capabilities. It is necessary to capture changes in the capability-building
process over time, for example, how a company’s (organization’s) capabilities change
in the transition from exploratory to exploitative activities (or from exploitative to

exploratory activities).
Organizing these two dimensions ((1) the characteristics of capabilities with
respect to changes in business environments, and (2) the temporality and process
of capabilities) by the classifications “covered (elements of capability)” and “rarefied
(elements of capability)”, the research streams of the different theories can then be
mapped as shown in Figure 1.1.
For example, in the “dynamic capabilities approach” system framework, (1) the
characteristics of capabilities with respect to changes in business environments are
covered, but (2) the temporality and process of capabilities are rare. In addition, in
the series of major research streams called the “innovation process approach” and
the “exploration and exploitation approach”, the context of (2) the temporality and
process of capabilities is covered, but the context of (1) the characteristics of capa-
bilities with respect to changes in business environments is rare.
The traditional resource-based view, which originated with Penrose (1959), has
been refined as neoclassical corporate theory (Wernerfelt, 1984; Barney, 1991).
Michael Porter’s positioning-based view (e.g., Porter, 1980), which emphasizes mar-
ket structure analysis, originates from industrial organization theory but has its roots
in the same neoclassical economic theory in that it sees the relationship between
firms and markets as an opposition. VRIN resources (Barney, 1991) by themselves
are, by definition, inherently valuable, but Teece (2014, p. 340) notes that VRIN
resources alone do not create long-term corporate value.
Furthermore, the resource framework places little emphasis on entrepreneurship
in response to environmental change, and on innovation and learning processes that
consider temporality (Teece, 2014, p. 341). Actually, as identified by Barney and
Clark (2007, p. 257), Teece (2014, p. 341) also says “resource-based theory takes the
existence of heterogeneous firm resources and capabilities as given and examines the
impact of the resources for the ability of firms to gain and sustain competitive advan-
tage”. In addition, virtually all of Porter’s (2008) “Five Forces” implicitly assume a
relatively predictable environment. In Porter’s approach, risks may be recognized,
but deep uncertainties (indeterminacy) are ignored (Teece and Leih, 2016, p. 7).
Critically missing from the resource-based and positioning-based view paradigms
is the theorization of innovation processes with a temporal nature that create new
equilibriums, and capabilities of people and organizations to discover, invent, and
commercialize business opportunities, markets, and technologies with the intention
of realizing innovation (Osono et al., 2006). In other words, these traditional theo-
ries lack analysis and consideration from the two aforementioned dimensions ((1)
the characteristics of capabilities with respect to changes in business environments,
and (2) the temporality and process of capabilities).
The process of building capabilities for sustainable strategic innovation in this
book satisfies both of the two theoretical dimensions: (1) the characteristics of capa-
bilities with respect to changes in business environments and (2) the temporality and
process of capabilities. In this regard, Okhuysen and Bonardi (2011) point out that it
is possible to use a combination of multiple ideas or a blend of theories to advance
new insights when building unknown new theoretical models. In other words, the
perspectives of multiple theoretical lenses bridge silos within and between disciplines
and enable new theoretical insights. Okhuysen and Bonardi (2011) note the advan-
tages and challenges of integrating two different theoretical lenses to build a theory.
They suggest that the potential for new theory building arises when the different
theoretical lenses are close areas of study and when there is compatibility between
the assumptions underlying the theoretical lenses being integrated.
By applying the findings of Okhuysen and Bonardi (2011), the research approach
in this book can be explained as follows: The degree of “proximity” is significant,
that is, the conceptual distance that exists between the phenomena of the two differ-
ent theoretical lenses of (1) the characteristics of capabilities with respect to changes
in business environments, and (2) the temporality and process of capabilities. The
areas of expertise of the two theoretical lenses are also close in terms of research, and
the compatibility and fit between the assumptions underlying these two theoretical
lenses is significant. In other words, changes in business environments, temporal-
ity, and processes are based on assumptions about strong influences that extend to
capabilities.
Based on the findings of Okhuysen and Bonardi (2011), the steps of theory build-
ing in this research approach are as follows: First, Google Scholar, Scopus, and Web
of Science databases were utilized and searched for literature related to capability
theory regarding the two dimensions of characteristics of capabilities and temporal-
ity or process of capabilities. Three prior research streams were found (the “dynamic
capabilities approach”, the “innovation process approach”, and the “exploration and
exploitation approach”) that refer in detail to capability building in relation to the
two dimensions, and the major studies among them were reviewed.
Then, as shown in Figure 1.1, these three research streams were integrated to
reveal new knowledge about the sustainable and dynamic capability-building process
in companies. This book derives the concept of the “Capabilities Building Map” as
a new theoretical model, and presents a theoretical model of the strategic innovation
capabilities and strategic innovation system necessary for companies to continuously
generate strategic innovation.
1.4 Structure of this book

This book is structured as follows (see Figure 1.2). First, the book discusses the need
for a new theoretical model and the book’s research approach toward theory build-
ing. Second, the book presents a new perspective for building this theoretical model
from the synthesis of major prior literature in three research areas (“dynamic capa-
bilities approach”, “innovation process approach”, and “exploration & exploitation
approach”) with a background of the system-view and/or process-view.
Third, under the new theoretical development item, the book presents the fol-
lowing theoretical model. First, as capabilities systems of companies, this book
presents the concept of the capabilities building map (four domains of capabili-
ties), which illustrates capabilities with four different characteristics that correspond
to the elements of speed and uncertainty in the environmental changes faced by
companies.
Figure 1.1 Research approach to building a new theory
Next, the book presents a model of holistic capability building called “strate-
gic innovation capabilities”, which are corporate system capabilities to achieve a
combination of both exploitation and exploration. The book presents the impor-
tance of these strategic innovation capabilities as they enable companies to achieve
the dynamic spiral of the two distinct types of capabilities on the time axis – the
dynamic and ordinary capabilities of the capabilities building map, which are skill-
fully combined to achieve exploitation for fast or slow incremental innovation and
exploration for radical innovation. In addition, the book discusses the importance
of building strategic innovation capabilities and the concept that encompasses the
four capabilities to realize the strategic innovation loop characteristic of the strategic
innovation system.
Fourth, the book provides readers with theoretical and empirical findings through
in-depth multi-case analysis of global high-tech companies that have built a strategic
innovation system and achieved sustainable strategic innovation. This book details
the dynamic innovation process such as strategy transformation of Xiaomi, HUA-
WEI, Fujifilm for new business development, new business model construction
in the semiconductor industry by Qualcomm, TSMC, business strategy by Zoom
Video Communications, and so on, and shows that construction of a strategic inno-
vation system is important for these high-tech companies.
Figure 1.2 The structure of the book
Fifth, as an application of new theoretical development, the book shows that stra-
tegic innovation is realized through the asset orchestration process, which is a core
function of dynamic capabilities. Through in-depth multi-case analysis of global high-
tech companies such as Apple, NTT DOCOMO, and Fujifilm, this book shows that
such organizational capabilities are the strategic innovation capabilities that realize the
dynamic integration processes between dynamic and ordinary capabilities. Finally,
this book describes theoretical and practical implications and future research issues.
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2 Capabilities building through
dynamic capabilities approach
2.1 Dynamic capabilities approach

Resource-based theory, which focuses on independent capabilities for compa-
nies and organizations (e.g., Penrose, 1959; Richardson, 1972; Wernerfelt, 1984;
Rumelt, 1984; Barney, 1991), has developed as a strategy theory framework from
the viewpoints of microeconomics and organizational economics. Resource-based
theory and Porter’s (1980) competition strategy theory enable a detailed analysis of
strategic positioning and the relationship between competitive excellence and the
internal resources already owned by companies in slowly changing environments
and industries. However, it is difficult to analyze how companies in rapidly chang-
ing high-tech industries within competitive environments, such as the IT and digital
sectors, create new competitive excellence.
Meanwhile, in recent years, refinements to the theory of dynamic capabilities
(hereinafter referred to as “DC”) (e.g., Teece et al., 1997; Teece, 2007, 2014) have
progressed so that the fundamental theory clarifies the mechanisms for sustainable
growth through corporate strategic innovation. Teece et al. (1997, p. 516) assert that
DC are defined as “a company’s ability to integrate, build, and reconfigure inter-
nal and external competences to address rapidly changing environments”. Thus,
they assert that dynamic capabilities reflect an organization’s ability to achieve new
and innovative forms of competitive advantage given path dependencies and market
positions (Leonard-Barton, 1992). In addition, Teece (2014, p. 332) suggests that
strong DC help enable an enterprise to profitably build and renew resources and
assets that lie both within and beyond its boundaries, reconfiguring them as needed
to innovate and respond to (or bring about) changes in the market and in the busi-
ness environment more generally.
As micro functions of DC, DC can usefully be broken down into three primary
clusters: (1) identification, development, co-development, and assessment of tech-
nological opportunities in relationship to customer needs (sensing); (2) mobilization
of resources to address needs and opportunities, and to capture value from doing
so (seizing); and (3) continued renewal (transforming). Engagement in continuous or
semicontinuous sensing, seizing, and transforming is essential if a company is to sus-
tain itself as customers, competitors, and technologies change (Teece, 2007, 2014)
(see Figure 2.1).
DOI: 10.4324/9781003305057-2
14 Capabilities building through DC approach
Figure 2.1 Dynamic capabilities (DC) and ordinary capabilities (OC)

Source: Created by the author, citing Teece (2007, 2014)
Another significant feature of DC is its strategic involvement and commitment

based on the basic guiding principle of “doing the right things” (Teece, 2014).
There are also “signature processes” (Bruch and Ghoshal, 2004) in large traditional
(leading) corporations that are difficult for other companies to copy. These signature
processes also lead to raising the quality of DC.
On the other hand, regarding the domain in which DC are applied, Teece et al.
(1997) claimed that dynamic capabilities are important for sustainable firm-level
competitive advantage, especially in high-velocity markets. In addition, strong
dynamic capabilities (strong DC) allow an enterprise and its top management to
develop hypotheses about the evolution of consumer preferences, business problems,
and technology, validate and fine-tune them, and then act on them by realigning
assets and activities to enable continuous innovation and change (Teece, 2014). In
this perspective, DC can be thought of as dynamic business processes that should be
demonstrated in business environments that are changing rapidly, and/or in business
environments that have high levels of uncertainty.
Teece (2007, 2014) clearly distinguishes these DC from “ordinary capabili-
ties” (hereinafter referred to as “OC”). Teece (2014, p. 330) states that “ordinary
capabilities have also been called static (Collis, 1994), zero-level (Winter, 2003),
first order (Danneels, 2002), and substantive (Zahra et al., 2006). The zero-, first-
and second typology is used by Easterby-Smith and Prieto (2008) and Schilke
(2014). The more common usage seems to be equating first-order with ordinary”.
Hence, these OC generally fall into three categories: administration, operations,
Capabilities building through DC approach 15
and governance (see Figure 2.1). Clarified as specific details of corporate activity, it
can be said that OC enable a firm to perform an activity on an ongoing basis using
more or less the same techniques on the same scale to support existing products
and services for the same customer base. Such a capability is ordinary in the sense
of maintaining the status quo (i.e., not out of the ordinary; Winter, 2003) (Helfat
and Winter, 2011).
Nevertheless, OC that pursue efficiency in terms of a company’s best practices
and “doing things right” are not to be underestimated – they are often fundamental
and can support competitive advantage for decade-long periods (Teece, 2014). In
other words, OC are valid in businesses in environments that are relatively stable and
gently changing with low levels of uncertainty but cannot ensure corporate sustain-
ability over the long term. However, in large traditional companies that operate
many businesses, to a greater or lesser degree, there will always be business domains
in which such OC must be demonstrated. Demonstrating OC in business in rela-
tively stable environments where environmental change is gradual and there are low
levels of uncertainty is crucial.
Accordingly, companies must apply ordinary capabilities (OC) and systematically
and analytically formulate and implement strategies under relatively stable or slow-
moving conditions with little business uncertainty. “Learning before doing” (Pisano,
1994), that is, formulating and implementing detailed strategy planning and policies,
is a key element of OC in market structures with clear corporate boundaries and also
grasps the players in value chains.
Based on the above discussion, the capabilities that a company should demonstrate
(capabilities that are required) differ depending on the environmental conditions
it faces. From this perspective, this book presents a theory of dynamic capabili-
ties building that takes into account the variable factors of capabilities exhibited by
companies (e.g., the speed of market changes, uncertainty of markets, the time axis
factors of corporate activities). Then, based on prior research, the book describes in
detail the capabilities building map, a core concept of this book.
2.2 The capabilities building map
2.2.1 Resource and capabilities
Resources are intangible or tangible assets and production inputs that can be semi-
permanently owned, controlled, and accessed by organizations. On the other hand,
capabilities are the abilities of a company (organization) to execute a series of coor-
dinated tasks using its own resources to achieve a certain result (Helfat and Peteraf,
2003). Put differently, Teece (2016) states that capabilities are a set of activities that
a company performs in a semi-routine manner and that enable it to achieve a series
of tasks so that even in adversity, such as a business crisis, the company develops,
produces, and provides products and services and generates revenue. Both resources
and capabilities may constantly evolve and change over time, in the environment
that companies face, and in the development and implementation of their intended
(or unintended) strategies. These ideas suggest the importance of understanding
resource-based theory in its entirety from a dynamic perspective.
To clarify future discussions, as mentioned in the previous section, this book

classifies capabilities with diverse characteristics as “ordinary (or operational)” and
“dynamic”, and discusses patterns and paths of capability evolution. Winter (2000)
calls operational capabilities (or ordinary capabilities) a high-level routine, or a set of
routines, integrated with the execution of input flows that provides organizational
management with a set of decision-making options to produce a specific type of
significant output. In this definition, routine means a pattern of repeated activities
(Nelson and Winter, 1982). In general, ordinary capabilities (or operational capabili-
ties) include the execution of various processes, for example, production activities
for a particular product or service using a set of routines that entail coordination and
execution of the various tasks required for the activity.
In contrast, Teece (2016) describes that ordinary capabilities relate to the perfor-
mance of management, operations, and governance-related functions needed to com-
plete a task, as shown in Figure 2.1, and points out the importance of getting things
right. In addition, Teece (2016) says dynamic capabilities are activities at a higher level
that are able to orient themselves to the development and production of products
and services for which demand is (or may soon be) high. Companies with dynamic
capabilities are not only able to integrate, build, and reconfigure internal and external
resources (or assets or knowledge) to cope with rapidly changing business environ-
ments but also able to shape rapidly changing business environments as well (even
intentionally and actively create new business environments) (e.g., Kodama, 2018a).
2.2.2 Evolution and patterns of capabilities building through time
The concept of dynamic resource-based theory, as well as dynamic capabilities with

adaptation and change (Teece et al., 1997; Teece, 2007, 2014), is an important foun-
dation for analyzing and considering the temporal evolution of capabilities. This
chapter presents the concept of a “capabilities building map” that integrates dynamic
resource-based theory and dynamic capabilities (as well as ordinary capabilities).
Although the capabilities and resource advantages or heterogeneity of each com-
pany are one of the foundations of resource-based theory, models and frameworks
describing capabilities building that explain how such advantages and heterogeneity
arise (also dynamically) from a resource-based perspective are ambiguous. Thus, it
is difficult to fully explain how companies use resources and capabilities to build
sustainable competitive advantage while it is unclear where the advantages and het-
erogeneity of resources and capabilities arise (Helfat and Peteraf, 2003).
The competitive advantage of a company becomes apparent after a certain amount
of time and changes through time. Therefore, to explain competitive advantage, it
is necessary to incorporate evolution through time of the resources and capabilities
underlying a competitive advantage into the resource-based perspective. The capa-
bilities building map contributes as a dynamic framework for resource-based theory
(Wernerfelt, 1984; Rumelt, 1984; Teece et al., 1997) by providing a framework for
understanding the evolutionary trajectory of capabilities over time.
The capabilities building map provides a more complete and dynamic approach
to resource-based theory and dynamic capabilities (and even ordinary capabilities)
while providing a common language and way of thinking about the evolution of
capabilities. Described in Section 2.2.3, the capabilities building map comple-
ments Helfat and Peteraf ’s (2003) “capabilities lifecycle” (CLC) theory, which is an
approach derived from evolutionary economics (Nelson and Winter, 1982). This
section outlines the main elements of the capabilities building map and explains the
theoretical and practical logic on which it is based.
The capabilities building map concept is based on the premise that the capa-
bilities possessed or demonstrated by a company are contingency-dependent. In
resource-based theories (Wernerfelt, 1984; Rumelt, 1984; Teece et al., 1997), there
are various streams, including “ordinary capabilities” (Teece, 2007, 2014), that
are the foundation of dynamic capabilities (Teece et al., 1997; Teece, 2007, 2014)
and “routine-based” (Nelson and Winter, 1982), “knowledge-based” (Kogut and
Zander, 1992; Winter, 1987; Grant, 1996) theory, and capabilities lifecycle (CLC)
theory (Helfat and Peteraf, 2003). The capabilities building map approach aims to
converge and integrate these various streams into one.
Helfat and Peteraf (2003) say that the concept of the capabilities lifecycle, which
is the subject of an earlier study, necessarily follows from Wernerfelt’s (1984, p. 171)
view that “for the firm, products and resources are two sides of the same coin”. The
logic is that just as product development path follows a distinct pattern known as a
product lifecycle, capabilities follow a similar pattern.
On the other hand, the capabilities building map concept is partially based on
the view that “resources and activities are, in a sense, duals of each other” (Porter,
1991, p. 109), and further that “resources and activities are two sides of the same
coin” (Mathews, 2006).
Porter (1991, p. 102) stated the following about activities:
A firm is a collection of discrete, but interrelated economic activities such as

products being assembled, salespeople making sales visits, and orders being
processed. A firm’s strategy defines its configuration of activities and how they
interrelate. Competitive advantage results from a firm’s ability to perform the
required activities at a collectively lower cost than rivals, or perform some
activities in unique ways that create buyer value and hence allow the firm to
command a premium price. The required mix and configuration of activities,
in turn, is altered by competitive scope.
In other words, the activities exhibited by companies imply the importance of

resources and capabilities in forming value chains and value systems.
Meanwhile, Mathews (2006, p. 5) held a similar view to Porter (1991) that
Firms are essentially instruments of action. They act on the real business
world, transforming inputs into outputs, for sale in product markets (where
products are goods or services). These transformations are what we shall desig-
nate as the activities of the firm. Activities generate revenues, which are earned
in product markets; they are accounted for in the income statement (profit
and loss statement).
And also said the following:
It is consistent with the fundamental process-based account of firms’ activities

by Georgescu-Roegen (1972), and with the idea of production as a combi-
nation of input-output activities (Leontief 1951). (On this, see Neill, 2003).
It is also consistent with the reconstruction of “design economics” (i.e., an
economics of the industrial design process) where Baldwin and Clark (2000)
define an economic process as “a method that converts inputs, tangible and
intangible, into outputs that have economic value”. Activities may thus be
viewed as the primary site of strategizing behavior by firms, reconfiguring
value chains to produce new products or product mixes and drawing profits
from the product markets. Simple activities are combined together to produce
more complex activities, involving more complex value chains. These might
be controlled by one firm, or by several, that combine forces in a value chain
or network. The firms link up in this way as a result of their strategic choices.
(Mathews, 2006, p. 5)
Process-view and Practice-view
The “activities-based view of the firm” of Mathews (2006) has two findings. The
first is the “Process-view” aspect of activities related to business process manage-
ment, such as innovation processes (product innovation and process innovation) and
a combination of input-output activities, including new product development. Sec-
ond, creativity generates new ideas, and these ideas are then used for strategic inno-
vation (e.g., Kodama, 2018a) to realize new economic value. Behind the creation of
economic value is “strategizing behavior” – corporate actions in which value chains
are flexibly and agilely restructured and integrated through a variety of activities
by mobilizing tangible and intangible assets that cross the inside and outside of the
company. Such strategizing behavior implies the importance of a “practice-view”
approach that creates economic value through new innovations – not just manage-
ment through a process approach.
From the perspective of strategic management research, the practice-view means
the human and organizational behaviors of strategizing and organizing to capture
ever-changing processes, changes and power of strategy and organizations over time,
where “Strategy as Practice” (Pettigrew, 2003; Whittington, 2004) and “Strategic
Management as Practice” (Kodama, 2007b) lead to new knowledge creation (Nonaka
and Takeuchi, 1995) and knowledge integration (Grant, 1996; Kodama, 2007a).
Another meaning of practice-view is activities to promote best practice, such as
improvement and enhancement of daily routines, from the perspective of knowledge
management. Furthermore, practice-view points to the importance of “signature
processes” (Gratton and Ghoshal, 2005) that go beyond best practice. Practice-view
is also important from the perspective of academic research on strategy as practice
and knowledge management.
To reiterate, many of daily routine activities follow a process. Routines also
include improvement and enhancement activities, and new practices created by best
practices become routine over time and are incorporated into an organization as
processes. This is because smart companies understand how to embed best prac-
tices as internal processes. Many of the day-to-day routines in formal organizations
are formalized processes. These processes are the basis for mainly driving ordinary
capabilities (OC). Daily routines made into processes consist, in a micro sense, of a
variety of practices. In this sense, the concept of processes can be said to encompass
practice.
On the other hand, practice also includes elements of non-routine practice (e.g.,
non-routines) other than routines that have been turned into processes, and the
concept of practice can be said to encompass processes. For example, the follow-
ing is a case in point. One company that currently gains a lot of attention for its
world-leading innovation business is undeniably Apple of the United States. In an
interview about Apple’s product development (Burrows, 2004), Steve Jobs describes
product development as a mixture of creativity and routine.
Regarding the management system that generates innovation at the Apple, the
late Steve Jobs left us with the expression “the mechanism does not have a mecha-
nism”. He said, “There is no system. That doesn’t mean we don’t have process.
Apple is a very disciplined company, and we have great processes. But that’s not what
it’s about. Process makes you more efficient”. And, on bringing about innovation:
But innovation comes from people meeting up in the hallways or calling each
other at 10:30 at night with a new idea, or because they realized something
that shoots holes in how we’ve been thinking about a problem. It’s ad hoc
meetings of six people called by someone who thinks he has figured out the
coolest new thing ever and who wants to know what other people think of his
idea. And it comes from saying no to 1000 things to make sure we don’t get
on the wrong track or try to do too much. We’re always thinking about new
markets we could enter, but it’s only by saying no that you can concentrate on
the things that are really important.
Jobs spoke of how innovations were born through these types of situations and
discussions.
Jobs’ explanation suggests that Apple’s ordinary capabilities (OC) are based on
processes. On the other hand, Jobs suggests that product development is also a rou-
tine activity that involves the use of technical knowledge from past experience and
the execution of individual processes in project management, but emergent thinking
and action through informal and dynamic interactions with members of the team
are separate activities (Teece, 2012). This “separate activities” can be considered to
be elements of “non-routine” practices that are not based in processes. These non-
process “non-routines” are informal behaviors (or practices) of practitioners, and are
the primary basis that drives dynamic capabilities (DC).
Realizing true innovation comes from a balance between efficiency and crea-
tivity (Kodama, 2007a). Decision-making rules, strict regulations and routines in
formal organizations in companies bring efficiency to routines (the so-called ele-
ments of OC). In contrast, as creativity, ideas for innovations are mainly brought
about through non-routine interactions between human beings in informal human

networks, in other words, informal organizations (the so-called elements DC). Put
differently, creativity emerges in dynamic and diverse non-routine practices between
human beings through non-continuous trial and error that has departed from effi-
cient processes.
As Teece (2012) says regarding dynamic capabilities, not only routine but also
the unique non-routine behaviors of middle managers, including top manage-
ment, provide important theoretical and practical insights. Therefore, OC follows a
routine-driven process-view. On the other hand, the practice-view contains a variety
of non-routine elements and is primarily the basis that drives DC (see Figure 2.2).
Trinity & triad – the capabilities building map
The “activities-view” consists of elements of integration (or compatibility) with

the process-view and practice-view. Essentially, from a knowledge management
perspective, the process-view, which drives OC and emphasizes the efficiency
of corporate activities, is at odds with the practice-view, which drives DC and
emphasizes creativity, such as generating new economic value (Brown and Duguid,
2000). However, by balancing these two views in corporate activities and dynami-
cally embedding them within a company (and even within customers and partners),
capabilities are created to dynamically build and restructure the value chains and
value systems of Porter’s (1991) framework. The activities-view spans and integrates
formal and informal organizations inside and outside companies and includes cus-
tomers, and integrates various types of knowledge (assets) (intangible and tangible)
(“asset orchestration” in the context of dynamic capabilities), and is the strategizing
behavior of practitioners (see Figure 2.2).
From the above perspective, and in light of previous studies, the capabilities
building map is derived from the view that includes and integrates the concepts
that “products and resources are two sides of the same coin” (Wernerfelt, 1984) and
“resources and activities are two sides of the same coin” (Mathews, 2006). It is busi-
ness activities as corporate activities that give rise to a variety of businesses, including
products and services, and it is the capabilities of a company that make these business
activities possible (and vice versa). In other words, products and services, business
activities, and capabilities are in a “triad and trinity” relationship (see Figure 2.3).
Therefore, the chronological patterns of the evolution over time of capa-
bilities buildings and its characteristics follow the path of business development –
commercialization – diffusion activities – mature business activities, including products,
services, etc., that is, the characteristics of business activities (basic research –
commercialization development – manufacturing – sales – improvement, etc.).
Similar to innovation processes such as the product innovation process (radical and
incremental innovation), the capabilities building map includes various stages of
capabilities that show clear characteristics at each stage, such as basic research, practi-
cal development, manufacturing, sales, and improvement.
The capabilities lifecycle of Helfat and Peteraf (2003) is a theoretically and prac-
tically useful theory but differs from the capabilities building map concept in the
Figure 2.2 Activities-based view of capabilities building

Source: Created by the author based on Brown and Duguid (2000)
Figure 2.3 Contrasting the capabilities building map and capabilities lifecycle
Source: Wernerfelt (1984), Helfat and Peteraf (2003).
Comprehensive integration of Wernerfelt (1984), Porter (1991), Mathews (2006)
following perspectives. The first is that not all products, services, or application of
business is necessarily successful and leads to new business growth. In practice, many
projects must overcome the “valley of death” (Branscomb et al., 2001; Markham,
2002; Merrifield, 1995) for R&D success in the face of uncertainty, or, even worse,
in a fast-changing competitive environment, make it through the “Darwinian sea”
(e.g., Philip and Lewis, 2003; Dismukes, 2004) (e.g., Kodama, 2011, 2017). This
implies that projects are greatly affected by uncertainty and the speed of environ-
mental change, and correspondingly, the resources and capabilities required for each
new business project will differ. The capabilities building map focuses on the factors
(variables) of uncertainty and the speed of environmental change in response to
changes in business activities over time, and focuses on which capabilities with dif-
ferent characteristics are needed in response to the domain (phase) of each process.
Second, the capabilities lifecycle has multiple stages, including the founding,
development, and maturity stages, but the details of the characteristics of capabilities
in these stages (e.g., dynamic and/or ordinary capabilities) are unclear. The capabili-
ties building map clarifies what capabilities with what characteristics are needed for
each process domain (phase) in response to changes in business activities over time.
Third, in the capabilities lifecycle, various events occur at or before a capabil-
ity reaches a stage of maturity, which affects the future evolution of the capability.
In such cases, it is noted that capabilities branch into six phases in the capability
life cycle: retirement (death), retrenchment, renewal, replication, redeployment, and
recombination. Correspondingly, the capabilities building map clarifies what capa-
bilities with what characteristics are needed in response to changes in business activi-
ties over time, in each of the six phases of branching.
Next, this chapter describes the business activities map that forms the capabilities
building map.
2.2.3 The business activities map

Business activities as a whole consist of elements that form value chains, such
as basic research (research and development of elemental technologies), practical
application development (practical application of products and services), manu-
facturing, sales, and improvement of existing products and services. From a more
macro perspective, business activities can be divided into “business activities related
to new businesses” and “business activities related to existing businesses” (how-
ever, these new and old business activities are interrelated). Also, when interpreted
in the context of the innovation process, business activities refer to product and
service innovation processes (radical and incremental innovation) (e.g., Kodama
and Shibata, 2014a). In the new product and service development process, overall
business activities, including the innovation process from basic research to prac-
tical development and from commercialization to business maturity, are realisti-
cally complex, but from an academic research perspective (e.g., Kodama, 2017;
O’Connor, 2006; Burgelman et al., 2004; Branscomb, 2004; Wessner, 2001), four
sub-processes are generally considered, which are described by the “business activi-
ties map” (see Figure 2.4).
Figure 2.4 “Business Activities Map” for corporate activities
The business activities map is divided into the following sub-processes based on
the characteristics of the business process: Domain I (basic research and elemental
technology research), Domain II (practical development), Domain III (new busi-
ness development), and Domain IV (matured existing business). In other words,
Domain I, Domain II, and Domain III are business activities related to new busi-
ness and Domain IV corresponds to business activities related to existing business.
In Figure 2.4, (a) is the inter-process shift in the new business development area,
which generally results in a Domain I  II  III inter-process shift (including
the feedback loop between processes). In particular, the Domain I  Domain
II process is the so-called new product development (NPD) area, and as shown
in Figure 2.5, four patterns of linear to nonlinear models have been reported in
previous studies.
For example, the linear model, which is well known and utilized in practice, is a
logical project management method that attempts to deliver appropriate results (out-
puts) within a given time and cost with given resources (inputs) (e.g., Cooper and
Kleinschmidt, 1986; Cooper, 1990). This model is often used in the product devel-
opment process (including improvements and upgrades) and is generally dominated
by the Domain I  II  III inter-process shift. On the other hand, the recursive
model is applied in the NPD process where market and technological uncertainties
exist (e.g., Kline, 1985; Kline and Rosenberg, 1986).
In the recursive model, a feedback loop is formed within and between Domains
in the Domain I  II  III process. In addition to this, there are also chaotic and
24
NPD Characteristics Adaptive area Position on the References
Capabilities building through DC approach

Framework business activities map
Linear Logical project management methods Routine phase product Domain I  II  III For example, Cooper and
seeking to provide appropriate results development work/ Kleinschmidt (1986),
(outputs) with a given resource improvement (incremental Cooper (1990)
(input) in a defined time and cost innovation)
Recursive Complex feedback loops form between NPD processes requiring Domain I  II  III For example, Kline (1985),
each stage of innovation, overlapping market and technology (Feedback within and Kline and Rosenberg
the NPD stages and creating uncertainty (radical between domains) (1986)
ambiguity and disorder in processes. innovation)
Chaotic A model that suggests the innovation Processes suitable for very Domain I  II  III For example, Cheng and
process begins disorderly and ends radical innovation or (The first half of the Van de Ven (1996),
in stability, suggesting that the later aspects of the search and process is a recursive Koput (1997)
stages of product innovation are more exploration of truly new process/the second
suited to a linear framework (an products (breakthrough half is a linear process)
extended concept of the recursive innovation)
model)
Complex Frequent but ambiguous requests Increase the adaptability Domain I  II  III For example, Lewis and
Adaptive for subtle control. Team focus and of dynamic processes (A mixed model of the Kelemen (2002), Brown
System scheduling maintained while fostering between order and chaos linear and chaotic and Eisenhardt (1997)
member motivation and creativity. and the potential for processes)
Demonstrated adaptability to make diverse behaviors and
diverse paradoxes manageable. innovation outcomes.
(Innovation in highly
uncertain and rapidly
changing environments)
Figure 2.5 Positioning various new product development (NPD) on the business activities map
Source: Created by the Author, citing McCarthy et al. (2006)
complex adaptive models. However, in the three NPD models other than the linear
model, there are complex feedback loops within and across domains ((a) and (c) in
Figure 2.4) at the micro level, but at the macro level, these four patterns generally
follow the Domain I  Domain II  III shift.
Both the phase of basic research and elemental technology research in Domain
I and the phase of practical application development in Domain II are highly uncer-
tain. Furthermore, the degree of difficulty of technology development and the
degree of market acceptance often have a significant impact on the decision-making
process at the top levels of a company. New business development projects also face
many challenges in obtaining resources (e.g., human resources, capital, and intellec-
tual assets), and in many cases, projects are terminated midway through the process.
In practice, this is sometimes expressed as the “valley of death”.
Domain III is the area where products (or businesses) successfully turned into
products in Domain II are commercialized. In the context of the product life cycle,
this shift is the introduction phase  growth phase (although there are many cases
where there is not necessarily growth). In the context of the innovation process, it
also leads to the birth of an S-shaped curve (if the new venture is successful) (Foster,
1986). It is important to note that not all commercialization necessarily takes place
in Domain III. Depending on the characteristics of the product or business (e.g.,
Internet businesses), there are many cases where trial services are first introduced
into the market in Domain II during their practical application development phase
(e.g., Kodama, 2005).
In Domain III, the more the market value of a new product increases, the more
competitors enter with imitation strategies (e.g., Schnaars, 2002), and the more
the market turns into a so-called “Darwinian Sea”. During this phase, products are
improved and enhanced to beat the competition, and the market gradually expands.
However, not all succeed, as exemplified by the withdrawal of several Japanese cell
phone manufacturers from the smartphone market. During this Domain III phase,
the dominant design of the product is generally solidified and there is often a shift
from product innovation to process innovation (Abernathy and Utterback, 1978;
Abernathy, 1978). Realistically, however, many companies, especially those in high-
tech industries, aim to combine product innovation and process innovation (e.g.,
Kodama, 2011; Kodama and Shibata, 2014b).
Finally, Domain IV, that of maturing existing business, corresponds to business
that will survive and mature in stable market environments as product lines that sur-
vived in the competitive environment of Domain III. However, in the context of the
product lifecycle, this domain is also the phase that gradually changes from maturity
to decline as technology and markets change.
In Figure 2.4, “(d) Shift to new R&D activities” means a shift from existing
businesses (growing businesses and mature or declining businesses) to new business
development. One such case is when a product line (or industry) that has reached
maturity, with the dominant design of the product established and the process inno-
vation described earlier becoming mainstream, shifts again toward product innova-
tion to de-mature (Abernathy et al., 1983). Examples include a number of high-tech
products (major topics include the shift in technical methods from analog to digital,
from real-world business to online business, etc.), signifying a shift from Domain III
and/or IV to Domain I.
The second is a case where a company embarks on completely new business
development based on the technological know-how accumulated in Domain III
and Domain IV, or by integrating in-house and external technologies through open
innovation (Chesbrough, 2003) (e.g., Kodama and Shibata, 2016). On the other
hand, a direct shift from Domain III and/or IV to Domain II for practical develop-
ment is also possible, but in practical terms, even if R&D on elemental technologies
does not occur (i.e., non-technical new business), new business models need to be
examined and Domain I is required as a minimum.
This shift from Domain III and/or IV to Domain I triggers the search for new
business (products and services), which then leads to the creation of a new product
lifecycle in Domain II and beyond. In the context of the innovation process, it also
leads to the birth of a new S-shaped curve (if the new venture is successful) (Foster,
1986).
As described earlier, the business activities map is divided into four domains:
Domain I (basic research and elemental technology research), Domain II (practi-
cal development), Domain III (new commercialization), and Domain IV (matured
existing business). The characteristics of organizational capabilities in each domain
are different, which raises the issue of how companies should manage, foster, and
operate these different capabilities. Hereafter, each of these Domains is be referred
to as “Domain I (strategic emergence)”, “Domain II (strategic selection)”, “Domain
III (strategic concentration)”, and “Domain IV (strategic efficiency)”.
The competitive advantages of a company, as noted earlier, become apparent
after a certain amount of time and may change over time. The heterogeneity and
advantages of each company’s capabilities is one of the foundations of resource-based
theory, although there is no dynamic theoretical model in previous studies that takes
into account time axes to explain how such heterogeneity and dominance arise.
Thus, it is difficult to fully explain how firms use capacities to build a sustainable
competitive advantage while it is unclear where the advantages and heterogeneity
of capabilities arise.
Therefore, to explain a company’s competitive advantage, it is necessary to
incorporate the business activities map, which is the foundation of the competitive
advantage practice process, and incorporate the corresponding dynamic evolution
of capabilities into the resource-based perspective. The business activities map is a
fundamental concept in business administration and a common language in practice,
and is considered to provide a framework, the capabilities building map, to under-
stand the changes of business activities and the corresponding dynamic evolution of
capabilities building, and furthermore, contribute to making resource-based theory
more dynamic.
The next section details the concept of the capabilities building map, which
incorporates the dynamic construction and sustainable development of capabilities
building corresponding to the business activities map.
2.2.4 The capabilities building map concept – the two axes of speed of

environmental change (market and competition) and uncertainty
Several prior studies show that the effectiveness of specific dynamic or ordinary
capabilities is determined by market dynamics (e.g., Dosi et al., 2000; Eisenhardt
and Martin, 2000; O’Connor, 2008; Kodama, 2017). Teece et al. (1997) refer to
dynamic capabilities as capabilities that allow adaptation to external environments
characterized by rapid or discontinuous change.
Notably, the dynamic capabilities framework was developed with the goal of
serving as a guide for decision-making and action regarding company and company-
level competitive advantage in rapidly changing and complex environments (char-
acterized by deep uncertainty) (Teece, 2016). The effectiveness of such dynamic
capabilities (and even ordinary capabilities) is considered to depend on two factors:
the speed of environmental change (market and competition) and uncertainty.
Therefore, the adaptability and effectiveness of these two types of capabilities
are discussed later in terms of the four areas indicated by the two axes of environ-
mental change and uncertainty (see Figure 2.6). Figure 2.6 shows the four domains
(Domains I, II, III, and IV) corresponding to the business activities map shown in
Figure 2.4. The capabilities of companies required in each of these domains are
discussed later.
Figure 2.6 Capabilities building map – capabilities building through the dynamic capabilities
approach
Domain IV (strategic efficiency)
Of the four domains, Domain IV represents environments of gradual change and

low uncertainty. The industry structure is relatively stable, market boundaries (as
well as company boundaries) are clear, stakeholders in value chains are known, and
ordinary capabilities, where existing knowledge and prior learning are effective,
are demonstrated (e.g., Teece, 2014). Managers and strategists can use a structured
analytical approach and existing knowledge to make decisions. Conventional or
classical strategic management (e.g., Porter’s “Five Forces”) (Porter, 1990) implicitly
assumes, in effect, a relatively predictable environment.
In the analytical approach, risks may be recognized, but deep uncertainties are
ignored (Teece, 2016). In such gradually changing and less uncertain market envi-
ronments, a combination of well-structured, well-understood, efficient processes
and the ability to execute them quickly and appropriately is key to building com-
petitive advantage. Prescribing routines creates organizational memory and storage
for execution, as well as improve predictability and the ability of the organization to
make corrections when errors occur.
Domain I (strategic emergence)
Strong dynamic capabilities are critical to success, especially when an innovative

company seeks to open up a market or new product category. Dynamic capabilities
based on entrepreneurial skills are particularly important in the creation (and co-
creation) of markets to generate economic value relevant to the capitalist economic
system (Teece, 2012).
Domain I indicates a high degree of uncertainty, but not necessarily the speed of
environmental change. Helfat and Winter (2011) found that capabilities supporting
existing mainstream operations and seemingly non-radical changes may have impor-
tant dynamic attributes, and companies may maximize revenue through iterative
application of dynamic capabilities (Helfat and Winter, 2011).
For example, research and development of new semiconductor materials and
design technology development require significant R&D investment and human
resource development, and there is a great deal of uncertainty regarding its success.
For example, the blue light-emitting diode, the subject of the Nobel Prize in Phys-
ics, effectively required an extremely long period of time from basic research to
practical development (Kodama, 2018c). As a result, the corporation that succeeded
in the research, development, and commercialization of blue light-emitting diodes
generated the greatest revenue.
Helfat and Winter (2011) point to the case of Levinthal (1998), who analyzed
the development of wireless telephony, where years of plodding, incremental change
eventually established a completely new communications technology. Thus, the
changes brought about by dynamic capabilities are often far from radical in the short
term, especially in Domain I, and do not necessarily assume a rapidly changing
environment.
Domain II (strategic selection)
As business expands, the division of labor increases and the market and competitive
environment becomes more rapid, dynamic capabilities become more important.
The dynamic restructuring of vertical integration and horizontal division of labor
systems (e.g., Kodama, 2009, 2011) increases the need to integrate assets (or knowl-
edge) among collaborating firms (and sometimes competing partners) to deliver
customer value. Thus, responding to (or causing) changes in the business environ-
ment requires analysis of the structure of new strategic issues, good strategic plan-
ning through creativity and imagination of managers and entrepreneurs, and good
execution skills.
Dynamic capabilities are the higher-level competencies that determine a com-
pany’s ability to integrate, build, and reorganize internal and external resources and
competencies to cope with rapidly changing business environments and, in some
cases, to shape new market environments (Teece, 2007, 2010; Teece et al., 1997).
For a company to maintain proper congruence (or fit) (Kodama, 2018a) in its busi-
ness ecosystem (and sometimes transform the ecosystem) in fast-changing markets
and competitive environments, it must continually modify and, if necessary, com-
pletely reform its business practices and execution.
However, fast-paced market and competitive environments (Domains II and III)
are not only fast-paced, but also different in nature from Domains I and IV. In the
details of the Domain II process, from the creation of new knowledge through
to the discovery of new science and invention of new technologies through cor-
porate R&D activities, to the creation of new markets through the resulting new
business development (commercialized development), the uncertainty for success is
extremely high (O’Connor, 2008).
In environments of high uncertainty and fast change, such as Domain II,
although there may be some degree of forecasting and certain strategic guidance,
frequent changes occur both outside and inside companies, and it is not always pos-
sible for companies to respond entirely by leveraging existing knowledge, as in the
low uncertainty, slowly changing environments (Domain IV) described earlier. In
Domain II, the speed of market changes and the competitive environment (and even
activities within a company) can create uncertainty.
Teece (2016) mentions that the type of environments that most require strong
dynamic capabilities are those with medium to high levels of competitive condi-
tions, and that terms such as “volatility” or “hypercompetition” or “turbulence”
reflect levels of uncertainty. In other words, this points to the importance of dynamic
capabilities in Domain II, fast-paced changing markets and competitive environ-
ments that are also highly uncertain.
For example, when a company is in a very uncertain situation (not necessar-
ily changing very fast), as in Domain I, and management recognizes that there are
promising possibilities for application of a technology the company has developed in
a market area completely different from its current business area, market boundaries
become very blurred. Because new value chains must be created for businesses to
take advantage of new technologies, new business models are needed (Eisenhardt
and Martin, 2000). To create new markets in environments of great uncertainty,
innovative companies are often forced to integrate forward or backward in value
chains with the goal of filling voids in value or supply chains that players are unwill-
ing (or have no plans) to enter. Therefore, in the process of reconstructing new
value chains for practical development of new business, companies become active
in building new project organizations and in coordinating work with in-house and
external players, and the speed of change in organizational activities inside and out-
side companies will increase. As a result, the shift from Domain I to Domain II will
accelerate.
Furthermore, in real business activities, existing business units are often unable
to adapt (respond) to new business opportunities using new elemental technologies,
new products, service technologies (prototypes) that have just sprouted in Domain
I. These market aspects and internal organizational structure issues increase organi-
zational uncertainty and the need to consider organizational structure and resource
allocation, especially within a company, and involve many members of the company.
The shift from Domain I to Domain II induces an increase in the speed of change
within companies.
In this Domain II, company management and even project members who pro-
mote business face situations of the aforementioned volatility or hypercompetition
or turbulence. Also, situations of deep uncertainty in Domain II require entrepre-
neurship, exploration, learning, adaptation, and transformation, rather than the
optimization of operational efficiency in Domain IV. The presence of deep uncer-
tainty requires strong dynamic capabilities (Teece, 2016).
On the other hand, the process of building dynamic capabilities in Domain II, in
environments of rapid change and extreme uncertainty, involves the creation of new
knowledge in response to the situations at hand (Kodama, 2007d; Eisenhardt and
Martin, 2000). This requires frequent repetition of experimental behaviors that lead
to rapid learning to compensate for deficiencies in knowledge and repeated trial-
and-error of diverse practices to respond to newly available information and chang-
ing circumstances as well as absorption of new knowledge (Eisenhardt and Martin,
2000; McGrath, 2001; Kodama, 2005, 2007a). What is needed in the feedback loop
of such frequent iterative actions and active communication and collaboration with
partners inside and outside the company is the formation of “strategic communi-
ties” (Kodama, 2007a) and “teams of boundaries” (Kodama, 2007c) through real-
time information and cross-functional interactions across professions and disciplines.
These formations will interconnect new and discontinuous learning experiences
and lead to the final goal. The real-time acquisition of information and knowledge
fosters imagination and intuition among organizational members regarding market
uncertainties and issues in general. Then, with the passage of time, diverse experi-
ences accumulate (Kodama, 2007a; Eisenhardt, 1989).
Particularly in Domain II, parallel consideration of multiple alternatives (Eisen-
hardt and Martin, 2000), prototyping and trial-and-error experimentation (Kodama,
2007a; Lynn et al., 1996; O’Connor, 1998; Pisano, 1994; Veryzer, 1998) leads to
engagement with the market (customers) in an experimental rather than analytical
manner and advances rapid improvisational learning. Other initiatives include col-
laboration with multiple co-development partners, addressing multiple potential
application areas, partnering within and outside the company to establish and launch
joint ventures with a variety of partners. For some ventures, finding multiple sources
of funding to do these things can be a significant challenge (Kodama, 1999, 2002).
Domain III (strategic concentration)

In Domain III, where environmental change is very fast and competition with other
companies is fierce, it is necessary to survive the so-called “Darwinian Sea” (e.g.,
Philip and Lewis, 2003; Dismukes, 2004), and dynamic capabilities at the business
side plays an important role (see Figure 2.6). The “Darwinian Sea” illustrates a sea
burgeoning with new organisms in competition with each other. Since compet-
ing in the rough sea and being culled is the process of evolution of organisms, this
metaphor has been advocated because of its similarity to the essential meaning of
evolution in business. With the shift into Domain III, newly developed products
and businesses burst into these environments of competition with other companies
as time passes. Nevertheless, while the degree of shift into a competitive environ-
ment is influenced by the industry or product characteristics, the actual birth of a
competitive market means that uncertainty lowers in such market environments.
Meanwhile, on the business side (business divisions, companies, etc.), product
planning and technology development divisions upstream on the value chain estab-
lish solid value chains through dynamic capabilities in Domain III after Domain
I and Domain II. In Domain III, organizational managers and staff upstream in the
value chain, such as product planning and technology development departments on
the business side, need to demonstrate strong dynamic capabilities, while supervi-
sors and staff of routinized departments (sales, marketing, technical management,
procurement, production, after-sales support, etc.) downstream in the value chain,
need to engage in thorough and enhanced operation management based on strong
ordinary capabilities (O’Connor, 2006). These downstream-positioned organiza-
tions require strong ordinary capabilities to bring current products (and their suc-
cessor upgrades, improvements, and new versions) to market, win out amid stiff
competition, and turn a current profit.
In Domain III, the characteristics of capabilities are not the same as those Domains
I and II, and there is particular importance on strong integration of DC and OC
(see Figure 2.6). Another argument for this logic is deeply related to the perspective
of “including and aligning existing capabilities” (Teece, 2018) in the transforming
function of dynamic capabilities. Such existing capabilities are the long-term routine
and operational capabilities of a company and correspond to ordinary capabilities.
New findings from the capabilities building map
Considering the four domains from the perspective of the time axis of the busi-
ness context, that is, the exploration and exploitation processes of a company, a
continuous loop is formed among the four domains (see Figure 2.6). Domain I
(strategic emergence) and Domain II (strategic selection) correspond to the explora-

tion process, which is also the core process of new product and service development
(NPSD). Domain III (strategic concentration) is the domain that shifts from explo-
ration process to exploitation process to rapidly launch a market for a new product,
service, or business model that has gone through the search process of Domain I
(strategic emergence) and Domain II (strategic selection). Thus, Domain III (stra-
tegic concentration) is the origin of the emergence of new paths of new innovation
different from existing business – those in Domain IV (strategic efficiency).
New businesses that emerge in Domain III (strategic concentration) are generally
businesses that underwent significant change (external and internal) in their initial
stages. In the initial phases, companies change their internal management elements
to create optimal value chains and supply chains to respond to external changes.
Meanwhile, for Domain III (strategic concentration) businesses that have success-
fully launched their markets and reached a stable pattern as mainstream businesses,
measures to further streamline operations and business processes (the so-called pro-
cess innovation mentioned earlier) are subsequently promoted. After the growth
of the business in Domain III (strategic concentration), business shifts to Domain
IV (strategic efficiency), where change is slow (or small) and matures (and later
declines), just as the product life cycle theory tells us. At this time, matured busi-
nesses will be either lined up alongside mainstream, established businesses or inte-
grated (where business process efficiencies will be further promoted).
On the other hand, businesses (e.g., those in the ICT industry) that continue
to experience significant external changes in market and technology and inter-
nal changes in strategy, organization, resources, and operations after growing as
core (mainstream) businesses in Domain III (strategic concentration) will always be
located in this Domain III (strategic concentration). In other words, businesses that
have newly grown into the mainstream will be placed in both (or either) Domain III
(strategic concentration) and Domain IV (strategic efficiency). However, although
new businesses in Domain III (strategic concentration) are mainstream reserves, not
all businesses can grow into the mainstream in highly competitive environments
of change, and business retreat in Domain III is possible (especially in the ICT
industry).
Thus, the flow of corporate innovation shifts from Domain I  Domain II 
Domain III (some growing businesses with a high rate of change retain their posi-
tioning in Domain III)  Domain IV (see Figure 2.6). In this context, existing
businesses in Domain IV (strategic efficiency) may be subject to a new/old business
conversion with Domain III businesses (or businesses shifted from Domain III to
Domain IV), a new path created by an innovation.
Markides’ (2001) discussion of simultaneously managing existing and new posi-
tions means a combination of Domains IV and III, while the shift from an old posi-
tion to a new one implies that existing businesses in Domain IV shift to accelerate
and grow as new business in Domain III. In reality, however, many innovation
projects underway in large companies are weeded out and selected in the shift of
Domain I  Domain II  Domain III, and only a few innovation projects survive
and develop as successful cases. In addition, often in large companies, excellent ideas
and business models are born in Domain I, but their realization (commercialization)
is handled by a different organization (i.e., people), often resulting in the downsiz-
ing or failure of such ideas (Amabile and Khaire, 2008). This is because knowledge
boundaries exist between product planning departments in charge of creating busi-
ness concepts and ideas, and commercial development departments in charge of
realizing such ideas, and production and manufacturing departments (Carlile, 2004;
Kodama, 2007a). This is one of the challenges of innovation in large companies.
Thus, the most important shift between domains is the shift from Domain III
and/or Domain IV to Domain I, which is the path for creating new strategic inno-
vation (see Figure 2.6). This corresponds to the process of creating new business
model ideas, new technology discoveries, and inventions by accelerating interactions
with external and internal parties based on the high-quality tacit knowledge and
experiential knowledge that has been cultivated by researchers, engineers, market-
ers, and strategists who have experienced the “transformational experience” (King
and Tucci, 2002; Amburgey et al., 1993) of routines of existing business and stra-
tegic innovation in the past through the practice of the Domain I  Domain II
 Domain III  Domain IV (integration of existing business practices with new
practices through innovation) shift (e.g., Kodama, 2007a).
King and Tucci (2002) found that practitioners’ “transformational experience”,
continuous organizational innovation in product development teams (Katz and
Allen, 1982) or large-scale organizational change (Tushaman, 1985; Amburgey,
1993) has been shown to lead to continuous new product innovation or trigger
resetting of rigid organizational inertia. In other words, the transformational expe-
rience increases the likelihood of creating new routines to transform an organiza-
tion and embedding new capabilities in organizational members to achieve strategic
innovation.
For new knowledge integration (e.g., Kodama, 2005, 2011), excessive adherence
to existing knowledge is a constraint; however, knowledge absorption of science
technology and market perspectives from different fields and industries can also trig-
ger new innovation. Various innovation theories, such as the importance to humans
of escaping their mental models (e.g., Spender, 1990), attention to “boundaries
vision” (Kodama, 2018d), the challenge of “disruptive innovation” (Christensen,
1997), provide valuable insights for innovators, although more detailed theory
building is underdeveloped.
Advanced routines grown and diversified through higher-order learning from
Domain III and Domain IV routines essentially evolve sustainable innovation (or
incremental innovation) (Christensen, 1997). The integration of this incremental
innovation with new in-house and external knowledge triggers the Domain III and/
or Domain IV  Domain I shift (see Figure 2.6), and should raise the probability of
realization of innovation, the integration of knowledge through new business activities.
As will be discussed in detail in Chapter 7, the behavior of entrepreneurs that
creates dynamic capabilities is the business activity of forming strategic communities
(Kodama, 2007a, 2018a) as informal organizations through their non-routine activi-
ties. Chapter 7 presents a theoretical model for the creation of knowledge in the
form of such breakthroughs and new ideas.
Four new insights obtained from the capabilities building map above are pre-
sented here.
[Insight-1] To realize the capabilities building map, a “Trinity and Triad” rela-
tionship of products and services, business activities and capabilities is necessary.
Innovative companies acquire and demonstrate different capabilities in each of the
four domains to realize and establish their products and services, and perform a vari-
ety of business activities in each domain.
[Insight-2] Innovative companies have a dynamic view of strategy and intention-
ally (and partially, including emergent elements) maneuver the loop of continuous
inter-domain shifts. A dynamic strategic view balances the different modes of the
exploration process and the exploitation process to ensure the long-term growth of
the company.
[Insight-3] In the business activities of a company, each domain (Domains I–IV)
with different business contexts always exists in a multilayered manner when observed
at a certain point on a time axis. As multiple projects are executed in innovative com-
panies, inter-domain shift loops are layered and functioning on different time axes.
[Insight-4] The interface and interaction between management elements such as
different strategies, organizational structures, core competencies, organizational cul-
tures, and leadership of the two separate archetypes of exploration and exploitation,
and incremental and radical, are important.
These insights are discussed in detail in Chapter 5.
2.3 Contrasting the capabilities building map and the capabilities

lifecycle
This section details the relationship between the aforementioned capabilities building
map and prior study of the capabilities lifecycle. The analysis and discussion that fol-
lows show that these two theoretical frameworks are complementary to each other.
The capabilities lifecycle represents general patterns and potential pathways that
characterize the evolution of organizational capabilities (Helfat and Peteraf, 2003).
This framework is general enough to incorporate the emergence, development,
and advancement of virtually any type of capability in any type of organizational
environment, from small start-ups to large, diversified companies. The capabilities
lifecycle can also be applied to the development of capabilities that span corporate
boundaries, for example, strategic alliances and supply chains.
There are multiple stages in the capabilities lifecycle. The lifecycle of new capabili-
ties in an organization with no prior history begins with the founding stage, in which
the foundations are laid for subsequent capability development. This initial stage is
followed by the development stage, in which capabilities are gradually built. Eventu-
ally, capabilities building is completed, and capabilities reach the maturity stage.
In addition, various events may occur at or even before capabilities reach the
maturity stage, which may affect their future evolution. Helfat and Peteraf (2003)
argue that capabilities then branch into at least six other stages in the capabili-
ties lifecycle: retirement (death), retrenchment, renewal, replication, redeployment, and
recombination.
2.3.1 The founding stage
The capabilities lifecycle begins with the founding stage. In the NPD process and
the strategy process of project management described in Chapter 3, the founding
stage begins when the creation of a capability is required, and people are organized
around the goal of making that capability the central issue. Helfat and Peteraf (2003)
argue that in the founding stage, there are two requirements: (1) an organized group
or team where some leadership exists and joint action is possible and (2) a central
goal whose achievement will create a new capability. Such groups and teams include
R&D teams, new business development teams, and marketing teams in charge of
basic research and practical development in companies.
Ultimately, to build a capability, a new team needs inputs and resources (knowl-
edge) other than those inherent in the team members. However, the ability of a new
team with no previous experience to access resources (knowledge) such as capital
and new technology depends on the ability of individual team members to acquire
these resources (Burton et al., 2002). Therefore, the social capital that each team
member brings to the table, as well as their connections inside and outside the com-
pany, including customers, are important qualities of the team in the founding stage.
From practical experience, in research and development and the practical applica-
tion of achievements in companies, the key is overcoming the so-called “valley of
death” (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995).
As discussed in Chapter 3, in this founding stage, interpreted in the context of
the NPD process and the strategy process of project management, it is necessary to
practice “conceptualization” and “experimentation” by utilizing various resources
(knowledge), and dynamic capabilities corresponding to each phase “Domain I
(strategic emergence)” and “Domain II (strategic selection)” are required.
2.3.2 The development stage
The development stage begins after the team is organized (e.g., formal business
units) with the goal of developing a specific capability. In this stage, as the organi-
zation seeks effective means to develop the capability, the capability is developed
through experience over time through commercialization of the business model.
Efforts are made to improve business processes and solve problems through learn-
ing through business practices of individual members of the organization and the
organization as a whole and through reconstruction of existing knowledge (know-
how, skills, etc.) accumulated in the past. This leads to functional improvements
in the organizational capability. For an organization to survive in the marketplace
through the implementation of the business model it has devised, it must overcome
its competitors and cross the Darwinian Sea to earn a profit or at the very least
recover costs. As discussed in Chapter 3, in this stage of development, interpreted in
the context of the NPD process and the strategy process of project management, the
practice of commercialization of the business model takes place, which requires the
ability to integrate dynamic capabilities (DC) and ordinary capabilities (OC), which
corresponds to the Domain III (strategic concentration) phase.
2.3.3 The maturity stage
As discussed in Chapter 3, the maturity stage is a new stage (sub-process) that has
not been discussed at all in the NPD process, the strategy process of project manage-
ment, and the building process of dynamic capabilities). This maturity stage is the
capability to maintain existing products and businesses that have matured through the
founding stage (Domain I (strategic emergence) and Domain II (strategic selection))
and the development stage (Domain III (strategic concentration)). There are many
such existing products and businesses in all kinds of companies, ranging from major
ones (standard products) to minor ones (low profit margins). In general, these entail a
low level of uncertainty, the pace of environmental change is soft, and product line-
ups feature various models. In addition, there are many necessities in the B2B and
B2C fields, including finished products, various components of finished products,
household goods, and foodstuffs. These capabilities for creating existing products
and businesses are embedded in organizations over the years, and daily upgrade and
improvement activities to make the business more efficient become routine.
In the maturity stage, as mentioned in the previous section, companies demon-
strate ordinary capabilities (OC) and seek efficiency in best practices and “doing
things right” (Teece, 2014). OC work effectively in relatively stable business envi-
ronments with slow environmental change and low uncertainty. Demonstrating
OC in businesses in relatively stable environments where environmental change is
gradual and there are low levels of uncertainty is crucial. This chapter refers to the
maturity phase, where uncertainty is low and environmental changes are slow, as the
Domain IV (strategic efficiency) “maturity phase”.
Figure 2.7 shows the capabilities lifecycle from the founding stage to the maturity
stage. As Helfat and Peteraf (2003) mention, with respect to the founding and devel-
opment stages, the nature of the capabilities lifecycle makes it difficult to pinpoint
the exact point of transition from one stage to the next. Helfat and Peteraf (2003)
mention that in some cases only the starting point of the graph is the founding
stage, while in other cases the entire first half of the graph is the founding stage. In
Figure 2.7, the maturity stage is represented by straight lines. This means capabilities
to maintain task performance at about the same level through the demonstration of
the aforementioned OC over time.
2.3.4 The self-producing process of capabilities
The early capabilities lifecycle shows the potential for capability development over
time. However, not all capabilities reach the stage of maturity, if selection events
intervene from outside the capability. In addition, Helfat and Peteraf (2003) point
out that selection events can also affect the evolutionary process of a capability in its
mature stage (see Figure 2.7).
As discussed in Chapter 3, this transformation of capabilities has not been dis-
cussed at all in the NPD process, the strategy process of project management, or
the process of building dynamic capabilities. Helfat and Peteraf (2003) refer to the
branching of the lifecycle by a transformation of capabilities as represented by the six
Figure 2.7 The process of building capabilities in the capabilities lifecycle

Source: Created by the author, citing Helfat and Peteraf (2003)
Rs (retirement (death), retrenchment, renewal, replication, redeployment, and recombination).

Of these, renewal, redeployment, and recombination, which have the characteristics
of self-reproducing capabilities, are outlined in Figure 2.7.
Figure 2.7 shows a graph of the branches of the capabilities lifecycle (renewal,
redeployment, and recombination). Although branching can also occur in the devel-
opment stage of the capabilities lifecycle, for simplicity, Figure 2.7 shows a capability
that has already entered the maturity stage and reached the technical limits of its
development. For a branching of a capability to occur during the development stage,
the performance of the activity must meet the conditions to be considered a capabil-
ity, in the sense that it has reached the minimum functional threshold required. In
Figure 2.7, the three branches of renewal, redeployment, and recombination are rep-
resented by the same curve. This is because these three stages follow a similar trajec-
tory, even though the original mechanisms are different (Helfat and Peteraf, 2003).
First, in certain extreme situations, when companies face threats to a capability
(market or technology changes, or the recent damage by COVID-19 to industries or
businesses), they are forced to withdraw from the capability altogether. This means
the retirement (death) of the capability. In Domain IV (the maturity stage), product
and service lineups gradually become more susceptible to influence from changes
in customer tastes or technical innovations, etc. For instance, there are good exam-
ples of analog products having been gradually pushed out by digital products over
a long period, or telephone services shifting to become Internet services. While
these might not happen abruptly, in many cases, by the time they are noticed, it is
too late. In other words, OC begin to become a hindrance, and as environmental
changes loom, product lineups that lag behind go down the path to retrenchment
or retirement (see Figure 2.7).
However, instead of shrinking or withdrawing from a capability, a company may
try to improve or renew the capability in some way. As Winter (2000) describes,
organizations faced with threats are likely to be motivated to raise the level of their
capabilities. For example, if purchase prices rise sharply, companies may explore
ways to improve their capabilities to increase efficiency. When capabilities are
renewed, new methods are sought out and developed that bring about a stage of
new progression.
On the other hand, a company may consider redeployment to another product
market instead of replication of a capability. Redeployment is not the same as rep-
lication of the same products and services in different regional markets, but rather
involves targeting markets for products and services with a strong association. Such
transfer requires the capability to be modified to some extent to accommodate new
markets, and the capability must be further created and developed in new directions
(Helfat and Raubitschek, 2000). Therefore, as part of redeployment, capabilities
newly enter the founding and development stages.
Furthermore, when companies transfer capabilities to different yet strongly related
markets, there are cases that involve recombining capabilities with other capabili-
ties instead of replication and redeployment (Helfat and Peteraf, 2003). In addition,
capability recombination may lead to other approaches for capability renewal in
current product markets. The concept of capability recombination is derived from
the concept of knowledge recombination in innovation (Kogut and Zander, 1992;
Kodama, 2009).
For example, Kodak was a company that took the path of retrenchment and
retirement from Domain IV due to the effects of digitalization, whereas Japanese
Fujifilm successfully and strategically shifted from Domain IV to Domain I with
redeployment/recombination. Kodak felt the threats from the market changes
accompanying digitalization early on, but persisted in sticking to its existing OC
to seeking to maximize its profits and shareholder value. The company consistently
engaged in rigid strategies such as stock measures using its own substantial capital
to buy its own shares. Furthermore, Kodak’s top management at the time had no
idea about innovating the company’s high-level intangible assets to respond to the
environmental changes brought about by digitalization.
In contrast, Fujifilm used the high-grade photographic film technologies it
already had to develop a protective film for LCD screens which the company then
successfully commercialized (applying its film technology to LSD TVs – redeploy-
ment). In another example of redeployment/recombination of existing technology,
the company used the collagen technologies it had used to prevent photographic
film from drying out to develop a cosmetic product that is now a hit. Hence, the
company successfully moved into the cosmetics business, a completely different field
(Kodama and Shibata, 2016). In addition, Fujifilm is also involved in medical prod-
uct developments that are gaining attention in the fight against the Ebola virus and
COVID-19. Differing from Kodak, to survive, Fujifilm didn’t set out to maximize
profits and shareholder value, but avoided zero profits, and by seizing and transform-
ing its existing high-level intangible assets that it had accumulated, it succeeded
with radical innovation by shifting from Domain IV to Domain I  Domain II 
Domain III. The success of Fujifilm is a good example of strategy transformation
due to capability threats and can also be thought of as the result of the processes of
renewal, redeployment, or recombination functioning through the demonstration of
DC from beginning to end.
While the above focuses on capabilities threats, there are also new opportuni-
ties that may arise and become commercial opportunities. Many of the branches
shown in Figure 2.7 are options for companies to take when responding to such
opportunities. Specifically, Domain III to Domain I  Domain II  Domain III
(inter-domain shift) (Figure 2.7) can also be considered. This is the concept of new
radical innovation by discovering capability opportunities in rapidly changing envi-
ronments and wars of attrition with rival companies.
There are many cases of this, most remarkable in the world being the case of strat-
egy transformation though DC of Apple’s radical innovation in its business shift from
the PC to the music distribution business (Kodama, 2017). Apple succeeded in creat-
ing new business by integrating and innovating the best in-house and external intan-
gible assets, instead of its traditional Mac development method (self-development).
This was the result of DC enabling the processes of renewal, redeployment, or recom-
bination to function through to the end. As strategies aiming at undeveloped markets
and technologies, the new Nintendo Wii and DS game concepts were also radical
innovations of gaming machines though redeployment to target brand new customers
in completely different customer segments (such as the elderly or housewives who
had no previous interest in computerized games) to the Sony PlayStation, a hugely
popular product at the time.
In summary, the following three new perspectives can be obtained. The first
point is the existence of capabilities in “the maturity stage (phase)” (named Domain
IV – strategic efficiency in this chapter), which has not been discussed in the
NPD process, the strategy process of project management, or the process of build-
ing dynamic capabilities (as discussed in Chapter 3). The second point is the self-
producing process of capabilities. The third point is the clarification that the two
frameworks, the capabilities lifecycle and capabilities building map, are in a comple-
mentary relationship with each other.
2.4 Conclusion
The capabilities that a company should demonstrate (or be required to demonstrate)
depend on the environmental conditions it faces. From this perspective, this chapter
presented the capabilities building map, a dynamic theory of capabilities building
that takes into account the variable elements of capabilities demonstrated by compa-
nies (the speed of market change, the presence of uncertainty, and the time axis of
company activities). The capabilities building map, a framework for understanding
the dynamic evolution of capabilities, contributes to making resource-based theory
more dynamic. The capabilities building map provides researchers and practitioners
with a common language and way of thinking about the evolution of capabilities, as
well as a more complete, dynamic, and comprehensive approach to resource-based
theory and dynamic (and even ordinary) capabilities.
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3 Capabilities building through
the innovation process
approach
3.1 The need for a new theoretical model, and the research

approach of this chapter
To date, there has been much research, mainly in Europe and the United States, on
the strategy transformation process and organizational capabilities that are necessary
to realize radical innovation. However, most of this existing research has focused on
empirical studies and case studies of one-off successes or failures of individual R&D
and commercialization projects within companies (large or small), or independent
ventures (e.g., Miles and Covin, 2002; Kuratko et al., 1990; Greene et al., 1999).
On the other hand, much of the literature emphasizes the important role played by
dedicated and enthusiastic leaders (Chakrabarti, 1974; Greene et al., 1999; Howell
and Higgins, 1990; Kuratko et al., 1990; Maidique, 1980; Pinchot, 1985; Shane,
1994; Kodama, 1999; Sharma, 2000). While this accumulated research is extremely
valuable, it is also undeniably dependent on the success of individual champion-like
projects and the special abilities of the heroes who carry them out.
With Apple, for example, the existence of a visionary leader with fortitude and
skills (the late Steve Jobs) is important for achieving radical innovation, but since the
leader is one element (a subsystem) in the corporate system, the organization will
never be able to maximize its resources and advantages if it remains dependent on
the leader. Therefore, for companies to generate radical and strategic innovation sys-
tematically and continuously without relying on the abilities of specific individuals,
it is becoming increasingly important to study the systemic and process perspectives
of strategy and organizations.
On the other hand, as mentioned in the previous section, for a company to grow
sustainably, there is almost no research on the importance of promoting strategic
innovation (both exploitation, which is incremental innovation, and exploration,
which is radical innovation) and reasonably managing both the opposing corporate
activities of exploitation (growth of existing businesses) and exploration (develop-
ment of new businesses) at the same time. In existing research to date, there have
been discussions about the two separate archetypes of exploration and exploitation
and incremental and radical innovation (e.g., Greenwood and Hinings, 1993; Tush-
man and O’Reilly, 1997), or on the ambidextrous organization (e.g., O’Reilly and
Tushman, 2004) etc., in management. However, it is important to understand both
DOI: 10.4324/9781003305057-3
46 Innovation process approach
in practice and academically the systems and processes in which companies demon-
strate capabilities for the exploration and exploitation processes (March, 1991; Hol-
land, 1975) while balancing both strategic activities so that they complement each
other in the execution of strategy (He and Wong, 2004).
The purpose of this book is to deepen the understanding of the question of
how companies can change and even evolve their capabilities to achieve strate-
gic innovation, using the latest findings of the systems-view, the process-view, and
dynamic capabilities. The main focus of this book is to clarify management systems
that achieve sustainable strategic innovation by utilizing knowledge assets inside and
outside of organizations, including those of leaders, rather than simply relying on
leaders with strong will.
3.2 New insights from the “innovation process approach”

From reviews of each of the three research streams discussed in Chapter 1 (the
dynamic capabilities approach, the innovation process approach, and the exploration
and exploitation approach), the book discusses the importance of raising issues for
companies to sustainably acquire and transform capabilities. Based on the analysis
and discussion of capabilities building through the dynamic capabilities approach
discussed in Chapter 2, this chapter reveals new insights into the process of build-
ing sustainable and dynamic capabilities in companies through the research stream
of “capabilities building through the innovation process approach” (prior research
from the process- and system-views: [1] the new product development process, [2]
the innovation model, [3] the project management process, and [4] the new business
strategy development and implementation process).
3.2.1 The process of building capabilities in the new product development process
Eisenhardt and Martin (2000) present dynamic capabilities (DC) as “The firm’s pro-
cesses that use resources – specifically the processes to integrate, reconfigure, gain
and release resources – to match and even create market change. Dynamic capabili-
ties thus are the organizational and strategic routines by which firms achieve new
resource configurations as markets emerge, collide, split, evolve, and die” (Eisen-
hardt and Martin, 2000), and inductively derived the concept of corporate dynamic
capabilities required in slow and fast market environments. They also indicate the
importance of “learning by doing” with simple rules to emphasize results rather than
prior learning and processes, especially in high-speed market environments where
uncertainty is high and corporate boundaries in industries are blurred (Eisenhardt
and Sull, 2001).
On the other hand, O’Connor (2008), while respecting Eisenhardt and Martin’s
(2000) theory of dynamic capabilities, argues that many radical innovations develop
gradually from slow (or very slow) market environments and are put to practical use
over several years to several decades. He argued that the concept of dynamic capa-
bilities is a theory that can be evaluated and applied not only in terms of the degree
of market speed but also in terms of business uncertainty (including risk).
Innovation process approach 47
O’Connor (2008) argues that dynamic capabilities to adapt to highly uncertain

situations regardless of the degree of market environment speed are necessary as
capabilities to drive exploration and achieve radical innovation in environments of
high uncertainty and risk. This concept encompasses the concept of dynamic capa-
bilities in high-speed markets (including high uncertainty) of Eisenhardt and Martin
(2000) mentioned earlier.
In addition, Helfat and Winter (2011) assert that slow changes, projects currently
in progress, and relatively peaceful external environments should be incorporated
into research on dynamic capabilities. This is because dynamic capabilities should
not be limited to brand-new businesses, environments moving rapidly, or radical
changes.
For example, there are plenty of cases of new product development like the Intel
MPU that are essentially cases of dynamic capabilities derived from ongoing busi-
nesses in relatively peaceful environments. However, many of these businesses appear
to be demonstrating routine business (called “ordinary capabilities”, discussed later),
although they ultimately expand the size and scope of their business resources while
forming business ecosystems to achieve major economic effects as radical innova-
tion. Behind technological innovations like the MPU is the deep involvement of sci-
entists, engineers, and business partners across a wide range of different fields (EDA
vendors, semiconductor production equipment manufacturers, etc.), and propulsion
by R&D processes in high business uncertainty (including risk) and novelty.
In reality, much of radical innovation emerges from environments of slow (or
very slow) basic scientific and technological research through the stages of discovery
and invention. Then, based on discoveries, inventions, and other ideas, core tech-
nologies are developed, and business models are tentatively formulated, and through
improvisation and other trial-and-error processes (including selection processes),
such as prototyping, experimentation, and incubation, markets for products and ser-
vices that utilize and apply the technologies and ideas are gradually established. After
that, markets for new products and services (expected to grow or have prospects for
growth) become competitive with other companies, and companies enter high-
speed market environments and accelerate the investment of necessary resources.
O’Connor (2008) used the term “MI dynamic capability” for capabilities that
promote the “exploration” process (March, 1991) and realize major innovation
(radical or really new innovation) under conditions of uncertainty and high risk. MI
dynamic capability differs from the other capability theories (e.g., King and Tucci,
2002; Nelson and Winter, 1982; Winter, 2000) that emphasize the evolution of the
original “exploitation” (March, 1991) process.
From the perspective of systems-view and process-view, O’Connor and DeMar-
tino (2006) and O’Connor (2006), who conducted a long-term observational analy-
sis of radical innovation in large U.S. companies, pointed out the importance of
management in the three phases of discovery  incubation  acceleration as the
development framework of radical innovation in large companies (see Figure 3.1).
They also found that the capabilities, that is, the skills and processes required of
individuals and organizations, are different in these three phases. They then named
the ability to implement these processes “breakthrough innovation capability”, and
Figure 3.1 Capabilities – management systems in NPD processes

Source: Created by the author, citing O’Connor (2006, p. 74)
suggested that building this capability into the company is key to management sys-
tems that lead to successful radical innovation (O’Connor et al., 2008).
The discovery phase requires capabilities to create, recognize, refine, and inte-
grate opportunities for radical innovation. Depending on the capacity for discovery,
scientists, mainly in corporate R&D laboratories, might not only conduct closed
innovation within the company but also open innovation (Chesbrough, 2003;
O’Connor, 2006) at the same time. As mentioned, in this phase, new products are
launched through the discovery and invention stages in an environment of slow (or
very slow) market speed and market uncertainty.
In the incubation phase, the context in which opportunities for radical innova-
tion are created by the capabilities for discovery is developed into concrete busi-
ness proposals. This is the phase for setting up working hypotheses for building
business models and implementing strategic learning through trial and error. In
the incubation phase, through the development of core technologies and tenta-
tive formulation of business models based on the ideas obtained with discoveries
and inventions, improvisation and trial-and-error processes such as prototyping,
experimentation, and incubation (including the weeding out process) are carried
out in the midst of uncertainty (indeterminacy) at a speed that is full of change
within the company.
The acceleration phase is the commercialization phase where nascent business
models are turned into profitable and self-sustaining businesses within the in-house
departments (e.g., business units) that take them on. In this phase, the uncertainty
(indeterminacy) of the market and technology is removed through experimenta-
tion and learning in the incubation phase, the value chain at the business level is
established at a speed that is full of change within the company, and the newborn
business model is implemented. In this phase, market and technological uncertainty
(indeterminacy) decreases and competitive market environments emerge.
O’Connor et al. (2008) identified that a built-in capability to carry out the pro-
cesses of discovery  incubation  acceleration is an important management sys-
tem that leads to the success of radical innovation. Based on these previous studies,
Figure 3.1 depicts the three development processes (discovery  incubation 
acceleration) by O’Connor and DeMartino (2006) in relation to the two evaluation
axes of uncertainty (indeterminacy) and speed of change.
This kind of three-phase management (discovery, incubation, and acceleration)
is performed in projects in large corporations (and similarly in venture enterprises)
to develop various new products, services, and businesses. Different practitioner
(and organizational such as project team) capabilities are required in the individual
business processes in each of the three phases, depending on the degree of business
uncertainty and environmental change being faced. Dynamic capabilities robustly
function in response to these externalities (uncertainly and environmental change)
and are also a framework for demonstrating difficult-to-imitate competitiveness.
Referencing the dynamic capabilities approach discussed in Chapter 2, the phases
of discovery  incubation  acceleration are referred to as Domain I (strategic
emergence), Domain II (strategic selection), and Domain III (strategic concentra-
tion), respectively.
3.2.2 The process of building capabilities in the innovation model
The “linear model” is one pattern of the NPD process referred to in Figure 2.5 of
Chapter 2. The idea of a linear model (e.g., Zaltman et al., 1973) of the innovation
process, such as new product development (NPD), stems from a logical project man-
agement approach that tries to deliver the right result (output) on time and within a
given cost. In prior research, the innovation process has been interpreted as a series
of events or activities. The linear model takes the form of a linear and stepwise flow
in one direction, starting with basic research, followed by applied research, develop-
ment, production, and market launch.
However, innovation in corporate activities rarely proceeds smoothly like that,
and thus the linear model does not reflect the real innovation process (e.g., Kline
and Rosenberg, 1986; Leonard-Barton, 1988; Schroeder et al., 1989). In addition,
the linear model does not account for the fact that, in the development of a new
product or service in a company, each stage is interrelated, and that even if the final
product or service does not achieve market value (or is eliminated in a competitive
market), or even if the R&D fails or is terminated midway (or the results of the
R&D are not accepted by the market), the tacit knowledge, such as the technologi-
cal knowledge gained through the process, is accumulated within the company and
can become a driving factor for future seeds and innovations.
Linear models can reveal that inadequate structure and insufficient control can
cause planning and coordination problems, but they tend to ignore the behaviors
and systems that govern the diverse innovative capabilities of the NPD process
(McCarthy et al., 2006; Bonner et al., 2002). In addition, such linear models tend
to focus excessively on the upstream R&D process (so-called radical innovation),
and overlook processes such as sales activities directly related to the market and con-
tinuous improvement and upgrading of products (so-called incremental innovation).
Therefore, linear models are seen as simplifications of complex innovation processes
and only explain partial aspects of such processes involving various factors.
In contrast to the problems of the linear model, radical innovations or really new
products have the potential to significantly change and redefine markets (Cooper
and Kleinschmidt, 1993; Schmidt and Calantone, 1998; Song and Montoya-Weiss,
1998). Therefore, it has become important to distinguish between the characteristics
of the NPD process that usually produce incremental product innovations (incre-
mental innovation: exploitation) and those that can produce breakthrough product
innovations (radical innovation: exploration) (e.g., McCarthy et al., 2006).
Kline (1985) and Kline and Rosenberg (1986) presented one alternative to the
linear model (see Figure 3.2). They presented a chain-linked model with feed-
back loops to explain the relationships and iterations of research, invention, innova-
tion, production, and sales. Leonard-Barton (1988) also presents a series of small
and large recursive cycles that represent NPD project setbacks and restarts. These
recursive NPD frameworks aim to represent events in which activities are multiple,
Figure 3.2 The dynamic chain-linked model – recursive framework

Source: Created by the author, citing Kline (1985), and Kline and Rosenberg (1986)
simultaneous, and divergent and show that processes involve feedback and feedfor-
ward loops (McCarthy et al., 2006; Adams, 2003, p. 232).
The chain-linked model (see Figure 3.2) is similar to the linear model in its core,
but the left end is not R&D, but market needs discovery and potential markets. The
major differences from the linear model are as follows: First, innovation does not
necessarily start with research activities, but can have a variety of starting points,
such as the discovery of market needs or issues at the mid-stage of development or
production. Second, since complex feedback loops are formed between each stage
of innovation, progress is not linear. Third, even if the knowledge obtained at each
stage of the process does not ultimately lead to the realization of market value (or is
eliminated in a competitive market), or if the R&D fails or is discontinued midway
(or the results of the R&D are not accepted by the market), there are cases where
knowledge and technical knowledge obtained from these processes accumulates as
tacit knowledge within the company, and is used as elements of future seeds or as the
basis for subsequent innovations.
Viewed from the perspective of the dynamic capabilities approach in Chapter 2,
in contrast to the linear model, an orderly sequence of ideas, the chain-linked model
can be interpreted as representing the process of radical innovation (exploration:
Domain I  Domain II), in which NPD stages overlap and create ambiguity and
disorder in the process, as well as the process of incremental innovation (exploita-
tion: Domain III  Domain IV), such as production and sales activities directly
related to the market after market launch, and continuous improvement and refine-
ment of products.
In particular, in the innovation model of Figure 3.2, there are capabilities for
production and sales activities that were not clear in the aforementioned NPD pro-
cess model. In the context of the product lifecycle, these capabilities are necessary
for corporate activities in the maturity and decline phases and are also demon-
strated in the Domain III and Domain IV (strategic efficiency) areas. In Figure 3.2,
there are not only product improvement and enhancement activities in Domain III
and Domain IV, but also feedback from distribution and sales activities (market) to
R&D activities in Domain I, which is similar to the “Capabilities Building Map” in
Figure 2.6 of Chapter 2.
However, in the chain-linked model, there is no strategic management analysis
and consideration of what capabilities are needed in which domains, as discussed in
Section 3.2.1 “The process of building capabilities in the new product development
process”.
3.2.3 The process of building capabilities in project management processes
Kodama (2007) analyzed in detail the business processes of project-based organiza-

tions in several Japanese companies, and how projects are constructed and strategies
implemented in companies. As shown in Figure 3.3, projects interact with the envi-
ronment to develop and implement market-creating strategies and market-adaptive
strategies. Market-creating strategies create unconventional products, services, and
business models, materialize them, and establish positioning in new business areas
Figure 3.3 Micro strategy formulation and implementation in project management

Source: Created by the author, citing Kodama (2007, p. 214)
as a company. On the other hand, market-adaptive strategies are cases of developing

customized products and providing solutions for specific customers, as well as devel-
oping products to respond to changes in markets and technologies.
Market-creating strategies require consideration of new products, services, and
business models in the presence of uncertainty (indeterminacy). Brainstorming takes
place within projects to build new business concepts for products, services, and new
businesses. Project members are a group of staff members who come from various
fields of expertise, and who are responsible for developing a business concept from
an image to a document-based reality (content of new products and services, busi-
ness model structure) for the strategic goals to be achieved.
In a market-creating strategy, in the midst of slow-paced environmental change,
the various costs (for development, production, and sales promotion, etc.) necessary
to realize a new business with a high degree of uncertainty (indeterminacy) are not
clear from the start, which means in some cases, it is necessary to consider not only
the conditions needed to realize the new business (product functions, service speci-
fications, etc.), but at the same time the costs involved in realizing the new business.
Such phases correspond to the discovery phase (Domain I: strategic emergence)
referred to in the NPD process in the previous section.
In addition, project members consider the core knowledge (core capabilities)
inside and outside their company to realize new business and enter into considera-
tion of network strategies for new business formation inside and outside the com-
pany. Of course, it is important to utilize the core in-house capabilities to develop
new products through in-house projects and utilizing the accumulated knowledge
within the company. However, in recent years, many high-tech companies have
been promoting open innovation (Chesbrough, 2003) by incorporating superior
knowledge from outside the company, instead of in-house innovation alone.
In recent years, especially in projects responsible for exploratory practice for radi-
cal innovation in high-tech companies, not only the development of products that
become hits, but also the reduction of development costs and the shortening of
development periods are major goals. There is no guarantee that the task of new
development will be successful if the project is entirely self-directed, or if the project
only has access to internal resources. Therefore, access to excellent external knowl-
edge is the most important issue, and thus a dynamic knowledge network must
be built in cooperation with internal and external development partners (Kodama,
2005, 2006). Building this dynamic knowledge network inside and outside of com-
panies is the network strategy (see Figure 3.3).
Therefore, companies need to have a dynamic view of strategy (e.g., Markides,
1997; Eisenhardt and Sull, 2001) not only to deepen and refine their own knowl-
edge, but also continuously implement market-creating and market-adaptive
strategies through the acquisition of different and new knowledge (including path-
breaking knowledge) across industry boundaries.
Such projects that entail a dynamic view of strategy are carried out in highly
uncertain (indeterminate) market environments with a sense of speed and change
within the company, through repeated trial and error processes such as hypothesis
formulation and business simulation. In this way, the optimal conditions to achieve
new business (specific business models, product/service specifications, business for-
mation, etc.) are narrowed down (see Figure 3.3). At the same time in the processes
of trial and error, as specialists in various fields, project members consider “who”,
“why”, “what”, “when”, “with whom”, and “how” to formulate micro strategies
to optimize strategy (see Figure 3.3). This phase corresponds to the incubation
phase (Domain II: strategic selection) referred to in the NPD process in the previ-
ous section.
In addition, project members implement micro strategies formulated in detail.
However, in reality, there are many cases where the formulation and implementa-
tion of strategies cross over. For example, since the results of coordination and
negotiation with internal and external partners also affect the details of strategy for-
mulation, project members often form internal and external partnerships in parallel
with the strategy formulation process. Then, in the implementation process, pro-
ject members focus on thinking and actions to specifically decide “who”, “why”,
“what”, “when”, “with whom”, and “how” to implement strategies. Deep dia-
logue and shared values among actors across boundaries between different organiza-
tions and different fields of expertise are important for the formation of networks
inside and outside the company (Kodama, 2001). However, in the process of imple-
mentation, unexpected situations (problems, new issues, etc.) may arise, and in such
cases, depending on the situation, project members might have to engage in trial
and error or improvisational actions between the implementation and formulation
of micro strategy (see Figure 3.3). In this phase, the uncertainty (indeterminacy)
of the market and technology is removed through experimentation and learning

in the incubation phase, and the value chain at the business level is established at a
speed that is full of change within the company, and the newborn business model
is implemented for commercialization. In other words, this phase corresponds to
the acceleration phase (Domain III: strategic concentration) referred to in the NPD
process in Section 3.2.1.
Importantly, as described earlier, in fast market environments (Eisenhardt, 1989;
Brown and Eisenhardt, 1997; D’Aveni, 1994, 1995; Chakravarthy, 1997; Eisenhardt
and Sull, 2001), projects implementing market-creating or market-adaptive strate-
gies must be able to have process capabilities to flexibly adapt to changing environ-
ments by strengthening and maintaining conventional competitive core capabilities
while actively incorporating knowledge from outside the company. For this reason,
Kodama (2007) asserts that the elements of dynamic capabilities (Teece et al., 1997;
Eisenhardt and Martin, 2000) are needed.
3.2.4 Process for building capabilities for the business strategy formulation and
execution processes
Responding to the research question of why some companies skillfully anticipate

and capitalize on opportunities created by technological advances and rapid market
changes, while others struggle or go bankrupt, Day and Schoemaker (2016) analyze
and discuss three important elements of dynamic capabilities for successful organi-
zational adaptation: sensing, seizing, and transforming, from a process and systems
approach.
Day and Schoemaker say that companies with dynamic capabilities are able to
sense commercial opportunities ahead of competitors in the process of formulating
and executing new business strategies and make the organizational changes necessary
to leverage and maintain their advantage more effectively. Moreover, dynamic capa-
bilities, directed by a clear strategic vision, enable adaptation to fluid and uncertain
situations. Their research is useful for a better understanding of dynamic capabilities
to provide guidance for adaptation in the process of developing and implementing
new business strategies.
Day and Schoemaker (2016) deduced six sub-capabilities that make up the three
subsystems (sub-processes) of DC from existing theories on best practices (see
Figure 3.4). Sensing, which to succeed, can be understood through two interrelated
learning processes that function as DC. These two processes are peripheral vision
(detecting weak signals from the boundaries of business) and vigilant learning (cor-
rectly interpreting the meaning of these weak signals). The sensing function is par-
ticularly important in the R&D and marketing departments of companies.
With seizing, it is necessary for leaders to actively nurture and support a cul-
ture that tolerates, and in some cases encourages, failure through trial and error
and learning through probe-and-learn experimentation. From practical experience,
there exists the so-called “valley of death” (Branscomb et al., 2001; Markham, 2002;
Merrifield, 1995), which can be a serious impediment to R&D and commercializ-
ing its outcomes. However, it is important for companies to learn from their mistakes
Figure 3.4 Components and processes of dynamic capabilities

Source: Created by the author, citing Teece (2018) and Day and Schoemaker (2016)
and necessary to foster a culture in which experimentation and incubation are the
norm. Deploying real options, experimenting with different means, investigating
puzzling conundrums in detail, and keeping an eye out for the unexpected can be
an excellent way to learn quickly.
Although sensing and seizing create business opportunities for companies, to
properly implement new strategies and commercialize their business models (prod-
ucts, services, etc.), companies need the capability to set a direction in the exter-
nal environment and shape it in addition to the capability to adjust their internal
organizational design. This is transforming. A transformational organization is one
that actively fosters an agile, entrepreneurial mindset and takes a broad approach to
building external networks.
As described earlier, each of the three subsystems (sub-processes) of DC, namely
sensing, seizing, and transforming, can be interpreted in the context of the micro
core functions of DC as “Domain I (strategic emergence)”, “Domain II (strategic
selection)”, and “Domain III (strategic concentration)”, which are the three-phase
management (discovery, incubation, and acceleration) processes referred to in the
NPD process (Figure 3.1 and 3.2) and the strategy process of project management
(Figure 3.3) (see Figure 3.4).
As discussed in Section 3.2.1, managing the three phases with “MI Dynamic
Capability (Major innovation)” (O’Connor, 2008) and “Breakthrough Innovation
Capability (the phases of discovery, incubation, and acceleration)” (O’Connor et al.,
2008) can be described with the three DC functions (sensing, seizing, transforming),
which can be applied in highly uncertain and rapidly changing environments, as DC
also can be said to encompass the theoretical concepts of “MI Dynamic Capability
(Major innovation)” (O’Connor, 2008) and “Breakthrough Innovation Capability
(the phases of discovery, incubation, and acceleration)”.
In the dynamic environments of “hypercompetition” (D’Aveni, 1994) or “next-
generation competition” (Teece, 2012) gaining attention in recent years, DC is also
a crucial theoretical concept for companies to drive their “ecosystems strategies”
(Teece, 2014). In addition, the core DC function of “asset orchestration” (Teece,
2007) is reinforced by the three organizational processes of (1) coordination/integra-
tion, (2) learning, and (3) reconfiguration (Teece et al., 1997). With regard to such
asset orchestration, Teece (2014, p. 333) states that “In terms of the three primary
clusters of dynamic capabilities, asset orchestration is most relevant as an underpin-
ning for seizing and transforming”.
Teece (2007, 2014) clearly distinguishes these DC from ordinary capabilities (OC
hereinafter). Teece (2014, p. 330) states that “ordinary capabilities have also been
called static (Collis, 1994), zero-level (Winter, 2003), first order (Danneels, 2002),
and substantive Zahra et al. (2006). The zero-, first- and second typology is used
by Easterby-Smith and Prieto (2008) and Schilke (2014). The more common usage
seems to be equating first-order with ordinary”. Hence, these OC generally fall into
three categories: administration, operations, and governance. Clarified as specific
details of corporate activity, it can be said that OC enable a firm to perform an activ-
ity on an ongoing basis using more or less the same techniques on the same scale
to support existing products and services for the same customer population. Such
capabilities are ordinary in the sense of maintaining the status quo (i.e., not out of the
ordinary; Winter, 2003) (Helfat and Winter, 2011).
Nevertheless, OC, to pursue efficiency in terms of a company’s best practices and
“doing things right”, are not to be underestimated – they are often fundamental and
can support competitive advantage for decade-long periods (Teece, 2014). In other
words, OC are valid functions in gently changing environments with low levels of
uncertainty, and business environments of relative stability, but cannot ensure corpo-
rate sustainability over the long term. However, in large traditional companies that
operate many businesses, to a greater or lesser degree, there will always be business
domains in which OC must be demonstrated. Demonstrating OC in businesses in
relatively stable environments where environmental change is gradual and there are
low levels of uncertainty is crucial.
Accordingly, companies must apply ordinary capabilities (OC), and systematically
and analytically formulate and implement strategies under relatively stable or slow-
moving conditions with little business uncertainty. “Learning before doing” (Pisano,
1994), that is, formulating and implementing detailed strategy planning and policies,
is a key element of OC in market structures with clear corporate boundaries, and
also enables understanding of the players in value chains.
However, in such a discussion of OC, it should be noted that there is one perspective that
has not been mentioned in this existing research. It is a form of capabilities in the accelera-
tion phase, corresponding to Domain III (strategic concentration) in Figures 3.1 and
3.3. Domain III is the phase of “commercialization” of business models (products

and services) created by radical innovation, and it is also the phase in which compa-
nies face competitive environments with other companies.
O’Connor (2006) mentions that the skills (capabilities) required in the accelera-
tion phase, Domain III, are management capabilities in high-growth businesses. In
contrast to the discovery phase of Domain I and the incubation phase of Domain
II, in Domain III the focus is on exploiting the existing capabilities accumulated
within the company (i.e., the aforementioned ordinary capabilities (OC)). Domain
III requires the development of exploitation capabilities to make the investments
necessary to drive business, to develop sales strategies and modifications to take
the lead in the marketplace, and to utilize common business process iterations
such as manufacturing, ordering, delivery, customer service, and support. Simi-
larly, Kodama (2007) emphasizes the need for “full mobilization of resources and
knowledge” in Domain III of Figure 3.3, which is consistent with the argument of
O’Connor (2006).
In Domain III, where environmental change is very fast and competition with
other companies is fierce, the role of transforming at the business division side plays
an important role in surviving the so-called Darwinian sea (e.g., Philip and Lewis,
2003; Dismukes, 2004) (see Figure 3.4). Here, the Darwinian sea illustrates a sea
burgeoning with new organisms in competition with each other. Since competing
in the rough sea and being culled is the process of evolution of organisms, this meta-
phor was advocated because of its similarity to evolution in business. As time passes,
with the shift into Domain III, newly developed products and businesses burst into
these environments of competition with other companies. Nevertheless, while the
degree of shift into a competitive environment depends on the industry or product
characteristics, the actual birth of a competitive market means that uncertainty low-
ers in such market environments.
On the other hand, on the business side (business headquarters, divisions, etc.),
product planning and technology development departments upstream on the value
chain establish a solid value chain through sensing in Domain I, seizing in Domain
II, and transforming in Domain III. In Domain III, organizational supervisors and
staff in product planning and technical development departments on the business
side upstream in the value chain must demonstrate strong DC, however in con-
trast, as mentioned by O’Connor (2006), staff and directors in routine departments
downstream in the value chain (sales, technical management, procurement, manu-
facturing and after support, etc.) need thoroughly reinforce operational management
through strong OC. These downstream-positioned organizations require strong OC
to bring current products (and their successor upgrades, improvements, and new
versions) to market, win out amid stiff competition and turn a profit in the present.
Thus, in Domain III, the qualities of capabilities are not the same as those in
Domains I and II, and there is particular importance on strong integration of DC
and OC. Another argument for this logic is deeply related to the perspective of
including and aligning existing capabilities (Teece, 2018) in the transforming function
shown in Figure 3.4. Such existing capabilities are the long-term routine and opera-
tional capabilities of a company and correspond to OC.
In summary, in the NPD process (Figure 3.1), the project management strategy
process (Figure 3.3), and the new business strategy formulation and execution pro-
cess (Figure 3.4), we can confirm the Domain I  Domain II  Domain III shift
in capabilities, and the Domain III and/or Domain IV  Domain I shift in the
innovation model (Figure 3.2).
3.3 Revisiting the capabilities building map

From [1] the NPD process (Figure 3.1), [2] the innovation model (Figure 3.2), [3] the
project management strategy process (Figure 3.3), and [4] the new business strategy
formulation and implementation process (Figure 3.4), this section presents the basic
domain components that make up the capabilities systems of a company. Integrating
these four research streams, this section presents the capabilities building map (four
domains of capabilities), a group of domains with four different capability character-
istics corresponding to external and internal corporate conditions, namely, the speed
of environmental change and uncertainty factors faced by companies (see Figure 3.5).
As discussed in Section 3.2.4, Process for building capabilities for the business
strategy formulation and execution processes, the demonstration of DC is especially
important in Domains I, II, and III on the capabilities building map in Figure 3.5
(in fast-changing and/or highly uncertain business environments). The three phases
of management (discovery, incubation, and acceleration) mentioned in Figure 3.1
Figure 3.5 Capabilities building map – capabilities building through the innovation process
approach
are named Domain I, Domain II, and Domain III, respectively, from new tech-
nology or new business inventions through to conception and commercialization.
These three domains are the business fields in which DC is demonstrated (and, in
Domain III, the integration of the DC and OC is required). This kind of three-
phase management (discovery, incubation, and acceleration) is performed in projects
in large corporations (and similarly in venture enterprises) to develop various new
products, services, and businesses. Different capabilities are required of practitioners
(and organizations such as project teams) in the individual business processes in each
of these three phases depending on the degree of business uncertainty and environ-
mental change they are facing.
As mentioned, DC robustly function in response to such external conditions
(uncertainly and environmental change) and are also a framework for demonstrating
difficult-to-imitate competitiveness. As discussed in Sections 3.2.1 and 3.2.4, manag-
ing the phases with MI Dynamic Capability (Major innovation)” (O’Connor, 2008)
and “Breakthrough Innovation Capability (the three phases of discovery, incubation,
and acceleration)” (O’Connor et al., 2008) can be described with the three DC
functions (sensing, seizing, transforming), which can be applied in highly uncertain
and rapidly changing environments, as DC also can be said to encompass the theo-
retical concepts of MI Dynamic Capability (Major innovation)” (O’Connor, 2008)
and “Breakthrough Innovation Capability (the phases of discovery, incubation, and
acceleration)”.
Conversely, OC function in pursuit of best practices (Teece, 2007, 2014) in stable
environments with low uncertainty and slow change (Domain IV). Thus, the model
of capabilities building from the innovation process approach yields similar results to
the capabilities building map (see Figure 2.6) derived from the dynamic capabilities
approach mentioned in Chapter 2.
3.4 Conclusion
As discussed in Chapter 1, from reviews of each of the three research streams (the
dynamic capabilities approach, the innovation process approach, and the explora-
tion and exploitation approach), this chapter discussed the importance of models for
companies to sustainably acquire and transform capabilities. Based on the analysis
and discussion of the capabilities building through dynamic capabilities approach
mentioned in Chapter 2, this chapter has clarified the capabilities building map,
the process of building sustainable and dynamic capabilities in a company, from the
research stream on the capabilities building through innovation process approach
(based on previous studies from the process- and system-views: [1] new product
development process, [2] new product development process, [3] project manage-
ment process, and [4] innovation model).
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4 Capabilities building
through the exploitation and
exploration approach
4.1 Exploitation and exploration

In general, paradoxes within a company are observed at all levels of the organization,
and various paradoxes are inherent not only in the company as a whole but also in
a company’s business units, divisions, teams, and other areas such as between com-
panies. Examples include the “paradox of management” (Thompson, 1967), which
refers to resilience and certainty, the “paradox of organizational culture” (Pascale,
1985), which refers to autonomy and socialization of organizational members, and
the “paradox of strategy” (Mintzberg, 1987), which refers to “deliberate strategy”
and “emergent strategy”. If such paradoxes are what trigger innovation in a com-
pany, the context of the paradox will also have a significant impact on the content
and quality of innovation. It is important to view paradoxes as constructive and
positive ideas that drive innovation in companies (e.g., Graetz and Smith, 2007;
Lewis, 2000).
To survive as an innovation company and grow sustainably, it’s essential that com-
panies cleverly create and use knowledge to combine both creativity and efficiency.
The most important thing for business to remain competitive over the long term is
the establishment of unique strategies to bring about high-quality and hard-to-copy
knowledge. The business models of Apple in the United States (iPod, iPhone, iPad)
are good examples of this. Creativity is sought after to bring about unique products
and services that will differentiate a company through knowledge creation, and cre-
ating difficult-to-copy structures at low cost to differentiate from other companies
also requires creativity – creativity is essential. Thus, how much unique customer
value can be brought about is an important aspect of knowledge creativity.
Nevertheless, once a company has taken risks to create new products and services,
companies have to acquire value efficiently and productively by making derivative
products and improving, upgrading, and standardizing business processes and supply
chains using their existing knowledge, to shift to process innovation from product
innovation (e.g., Abernathy and Utterback, 1978). Thus, how much value can be
productively brought about by the knowledge created is an important aspect of the
efficiency of knowledge.
There is also a dynamic relationship between the creation and use of knowledge.
As knowledge is used to forge technology, accumulated knowledge becomes the fuel
DOI: 10.4324/9781003305057-4
64 Exploitation and exploration approach
for new knowledge creation. Accordingly, it is important that companies understand

how to balance the creation and use of knowledge, and they must be proactive in
its management. Using knowledge both creatively and efficiently, in other words
bringing about leading innovations through the creation of knowledge at the same
time as using knowledge to maintain competitiveness of existing core businesses has
been described as “exploration and exploitation” (March, 1991).
Also, in research to date, most discussions on observations of the two separate
archetypes of “exploration and exploitation”, or “incremental and radical innova-
tion” (e.g., Greenwood and Hinings, 1993; Tushman and O’Reilly, 1997), or on the
ambidextrous organization (e.g., O’Reilly and Tushman, 2004), have dealt which
managerial processes or organizational structures to use. Not only the role of top
management (Smith and Tushman, 2005; Tushman and O’Reilly, 1997), the roles
of middle management and staff (Nonaka, 1988; Kodama, 2003; Govindarajan and
Trimble, 2005) are also important in combining contradictions.
Aaker (2011), while respecting the position of the ambidextrous organization,
mentions that in successful marketing innovation companies, three distinct con-
cepts need to be considered simultaneously: dynamic strategic commitment, which
promotes incremental innovation of exploitation activities; selective opportunism,
which promotes radical innovation of exploration activities; and centralized resource
allocation, which is the resource allocation ability to appropriately execute these
activities.
The main theme of this chapter is how companies should build their capabilities
to promote the combination of exploration and exploitation.
4.2 The valley of death and Darwinian sea models – from the

perspective of exploration and exploitation
In a report by the U.S. House of Representatives Committee on Science entitled
“Unlocking Our Future: Toward a New National Science Policy”, Congressman
Vernon Ehlers, Vice Chairman of the Committee, used the metaphor of a “valley
of death” to describe the ever-widening gap between basic research funded by the
federal government and applied research and development conducted by the pri-
vate sector (Ehlers, 1998). The metaphor of the valley of death is also inescapably
inherent in the process of industrialization of technology led by the private sector
(Branscomb et al., 2001; Markham, 2002; Merrifield, 1995).
Meanwhile, Congressman Ehlers’ “valley of death” has been introduced as an
example of the existence of a gap and the danger of crossing it, but the desert is
a poor metaphor for the gap except in emphasizing the danger. The metaphor of
a “Darwinian sea”, or an ocean full of new creatures competing with each other,
has been proposed in lectures and reports by the National Institute of Science and
Technology (NIST), which is affiliated with the U.S. Department of Commerce
(Branscomb, 2001; Branscomb and Auerswald, 2002). In other words, the process of
moving from invention to innovation does not proceed smoothly as if it were follow-
ing a single path from one shore to the opposite shore. Economic upheavals, ideas,
Exploitation and exploration approach 65
entrepreneurship, and the birth and death of various collaborative ventures become
as essential in terms of economic evolution as they are in biological evolution.
On the other hand, in OECD lecture materials called “Crossing The Valley Of
Death only to Arrive in The Waters of The Darwinian Sea”, Dr. Charles Wessner
of the National Academy of Science (US) states that new businesses (new products,
services, etc.) that overcome the valley of death will subsequently be faced with
the Darwinian sea (Wessner, 2001, 2003). In other words, he presented a view that
juxtaposes the valley of death and the Darwinian sea, making the distinction that the
valley of death is the barrier between invention and the launch of a new business,
while the Darwinian sea is the barrier between the launch of a new business and its
certainty once it is launched. These new businesses that swim across the Darwinian
sea will survive to become mature industries. Although some argue that the valley
of death and Darwinian sea are the same concept (e.g., Auerswald and Branscomb,
2003; Dismukes, 2004; Markham et al., 2010; Saguy, 2011), this empirical “Wessner
model” is accepted by practitioners and researchers from the perspective that it cor-
responds to realistic business processes (e.g., Kimura, 2009; Iwasaki, 2010; Hayashida
and Katayama-Yoshida, 2011; Tanikawa, 2018).
Dr. Akira Yoshino, who won the Nobel Prize in Chemistry in 2019, mentions
the following points (THE SANKEY NEWS, 2019). The first experience of the
project is the “Devil’s River” at the basic research stage. Most of the projects drop
out here without being able to swim to the opposite shore. In other words, it ends
at the research stage. In addition, the “Valley of Death” awaits the project at the stage
of the project’s commercialization process. There, one problem after another stands
in the way, and most of the projects drop out before commercialization. Finally, the
project faces “Darwin’s Sea”. However, there are cases in which the efforts of the
project bear fruit and the business finally reaches commercialization, but the market
does not pay attention to it. According to Fig. 4.1, “Devil’s River” corresponds to
Domain I, “Valley of Death” to Domain II, and “Darwin’s Sea” to Domain III.
Based on the Wessner model, this paper categorizes macroscopic processes from
basic and applied research to the launch of new businesses (new products or services)
and their commercialization (market formation from the competitive environment)
as follows. This process is modeled as (1) Domain I [basic research (creation of seeds/
basic technology)]  (2) Domain II [practical development and commercializa-
tion (product development based on market needs)]  (3) Domain III [accelerating
commercialization through market launch (accelerating competitive strategies)] 
(4) Domain IV [industrialization (market share consolidation/maturation)] phase
(see Figure 4.1).
The aforementioned valley of death refers to the barriers that must be overcome
in the processes from research and development (R&D) to commercialization to
realize innovation based on technology and exists in Domain II above. In particular,
the valley of death is a barrier that exists between the development stage and the
commercialization stage. To manufacture and successfully sell products, it is nec-
essary to appropriately procure management resources such as funds and human
resources inside and outside companies.
Figure 4.1 The valley of death and the Darwinian sea models

Source: Created by the author, citing Wessner (2003)
The Darwinian sea is the barrier that exists in the process of accelerating com-
mercialization through market introduction, and it exists in Domain III. To succeed
in business, it is necessary to build a competitive advantage for new businesses and
win out in the race for survival with many rival companies. Darwin called natural
selection the essence of evolution. Hence, the market in which this selection occurs
is described as the “Darwinian sea”.
This section outlines each Domain from the perspective of the “dynamic
capabilities-view” mentioned in Chapter 2. In Domain I, the basic research and
creation of ideas that are the source of new strategic innovation require (depending
on the field) a longer period of time as the proportion of scientific elements and
the degree of technological difficulty (uncertainty) rises. Achievements in Domain
I are largely due to the creative thinking and actions of middle managers and staff
in company R&D departments and business development divisions (e.g., Kodama,
2005). However, as shown in Figure 2.1 in Chapter 2, there are also substantial
commitment and strategic contributions made by top and upper-level managers
in demonstration of dynamic capabilities (DC) based on the fundamental policy of
“doing the right things” (Teece, 2014). Also, importantly, there are also “signature
processes” (Bruch and Ghoshal, 2004) in large traditional (leading) corporations
that are difficult for other companies to copy. These signature processes also raise
the quality of R&D. This Domain I is also the “exploration” stage that triggers the
aforementioned radical innovation. I call this domain “strategic emergence”.
In Domain II, the role of “seizing” by DC on the business unit side (practical
application development division) for the realization of radical innovation is sig-
nificant. Practical application development divisions “sense” matches between the
market and technical innovations while seizing and transforming for radical innova-
tion as the commercial development of new processes, new technologies, and new
businesses. Thus, practitioners must pursue entrepreneurial strategies (Mintzberg
and Waters, 1985), demonstrate commitment, and become strategically involved
based on the fundamental policy of “doing the right things”. Moreover, the qual-
ity of the signature processes unique to a company that were required in Domain
I are more strongly reflected in Domain II. This is because the practical applica-
tion (commercialization) of the results of research and development faces the major
obstacle known as the “valley of death”. The capabilities to surmount these hurdles
are largely down to these highly rarefied signature processes unique to companies.
This Domain II is also the “exploration” stage to achieve the aforementioned radical
innovation. I call this domain “strategic selection”.
Next, in Domain III, the domain in which the pace of environmental change
is fast and competition with other companies is fierce, “transforming” through DC
plays a large role on the business division side. As time passes, with the shift into
Domain III, newly developed products and businesses burst into these environ-
ments of competition with other companies. However, the shift to a competitive
environment depends on the industry or the features of a product, and the birth of
a competitive market means that uncertainty in the environment, in other words,
the market, decreases. In contrast, divisions such as product planning and technical
development positioned upstream in the value chain at the business side (HQ and
business units, etc.) also function to sense and detect changes in newly born mar-
kets through DC and establish robust value chains through seizing and transform-
ing for upgrades, improvements and new versions, by rapidly and incrementally
innovating (sustainably advancing technologies) new products and services that have
already been successfully commercialized. Thus, to get through the Darwinian sea,
practitioners pursue entrepreneurial strategies, demonstrate commitment and make
strategic contributions through the basic policy of “doing the right things”. As dis-
cussed later, Domain III is also the stage of exploitation to achieve rapid incremental
innovation by integrating dynamic capabilities (DC) and ordinary capabilities (OC).
I call this domain “strategic concentration”.
In the last Domain IV, where businesses have survived the Darwinian sea and have
matured (industrialized), DC elements will have less weight, and instead, best prac-
tices based on ordinary capabilities (OC) will be the main focus. Existing traditional
organizations (business divisions, etc.) observe slow changes in existing markets and
execute existing operations mainly in formal organizations and strict, top-down
centralized leadership (Kodama, 2019) through path-dependent, planned, and well-
thought-out deliberate strategies in business divisions (Mintzberg and Waters, 1985).
In Domain IV, the weight on DC diminishes, and the demonstration of best prac-
tices through OC comes to the fore. In existing traditional line organizations (busi-
ness units, etc.), slow changes in existing markets are sensed, and existing operations
in which formal organizations play the lead are executed through path-dependent,
planned, and carefully considered deliberate strategies in business divisions, and

strict, top-down centralized leadership (Kodama, 2004) is demonstrated. Driving
slow incremental innovation by strengthening OC in Domain IV requires bring-
ing about higher performance by evolving routines through higher-order learning
for short-term gain, depending on internal and external changes (King and Tucci,
2002; Benner and Tushman, 2003; Winter, 2000; Amburgey, 1993; Nelson and
Winter, 1982). Promoting such Domain IV process management accelerates the
speed that an organization responds to achieve incremental innovation (Benner and
Tushman, 2003). However, there is always a danger that product lineups in Domain
IV could be threatened by emergent technical innovations. I call calls this domain
“strategic efficiency”.
4.3 Combining exploration and exploitation

As mentioned in Section 4.1, research on exploration and exploitation is an impor-
tant theme in strategic management and entails the combination of exploration and
exploitation of information and knowledge in companies. The actions of explora-
tion and exploitation are contradictory and paradoxical, the way in which they
should be simultaneously applied has been the subject of research (e.g., Tushman and
O’Reilly, 1997), and recent research has shown that as constructive and motivating
ideas for maintaining corporate innovation, the viewpoint that appreciates this para-
dox is of importance (e.g., Graetz and Smith, 2007; Lewis, 2000).
Maintaining an appropriate balance between exploration and exploitation, (e.g.,
McCarthy and Gordon, 2011; Ahn et al., 2006; Kodama, 2003; Gibson and Birkin-
shaw, 2004) and promoting synergies between exploration and exploitation (He and
Wong, 2004) are said to be ways to improve corporate performance.
With the coexistence and simultaneous application of these two different arche-
types (exploration and exploitation) in a company, it is crucial that “strategic contra-
diction” (Smith and Tushman, 2005), “creative abrasion” (Leonard-Barton, 1995),
and “productive friction” (Hagel and Brown, 2005) are managed skillfully for syner-
gies between them to be brought about.
Moreover, it has been argued that organizations charged with radical innovation
in a company (e.g., Leifer et al., 2000) should be physically and culturally separated
from existing organizations (or line organizations) (the main stream), or set up as
independent venture businesses (e.g., Hill and Rothaermel, 2003; Benner and Tush-
man, 2003; Burgelman and Sayles, 1988; Kanter, 1985). There are also results of
analysis that suggest that the role of management is to use and integrate these two
different processes as in the so-called “ambidextrous organization” (e.g., O’Reilly
and Tushman, 2004).
Major previous studies on corporate activities that succeed with long-term inno-
vation show that a balance should be struck between the two conflicting strate-
gic activities of exploration and exploitation (see Table 4.1). For this purpose, it is
necessary to dynamically synthesize the activities of exploration and exploitation
in a synchronous (or asynchronous) manner. This means the simultaneous execu-
tion of exploitation activities, namely incremental innovation of existing businesses
Table 4.1 Paradoxical management of exploration and exploitation
Literatures Method Emphasized necessity for balance of Exploration and Exploration and exploitation
paradoxical management (the key exploitation forms execution
theme)
Author(s) Journal Dynamic Static Synchronous Asynchronous
synthesis synthesis
Markides (1999) SMR Case studies A dynamic view of strategy X X X

Kodama (2003) OS (1) Case studies Managing paradox for innovation X X X
O’Reilly and HBR Case studies Managing ambidextrous X X X
Tushman (2004) organization
Kodama (2004) SR&BS A case study Developing integrative X X X
competences
Exploitation and exploration approach

Andriopoulos and OS (2) Comparative case Virtuous cycles of ambidexterity X X
Lewis (2009) study
Dixon et al. LRP A case study Dynamic capabilities lifecycle X X
(2014)
Nonaka et al. EMJ Case studies Managing dynamic fractal X X X
(2014) organization
Laplume and Dass LRP Field study Outstreaming for ambidexterity X X
(2015)
Luger et al. (2018) OS (2) Survey/hypothesis Dynamic Balancing of X X
testing Exploration and Exploitation
SMR: MIT Sloan Management Review, OS (1): Organization Studies, HBR: Harvard Business Review, SR&BS: Systems Research and Behavioral Science, OS (2):
Organization Science, EMJ: European Management Journal, LRP: Long Range Planning
69
(including the latest businesses where innovation has been realized), and exploration
activities, namely radical innovation of new (future) business development. In other
words, the reciprocal circulation of exploration (radical innovation) and exploitation
(incremental innovation) in the valley of death and the Darwinian sea models shown
in Figure 4.1 is necessary.
The following analyzes and discusses the corporate capabilities building to pro-
mote the combination of exploration and exploitation by considering previous
studies; “dynamic capabilities lifecycle”, the “knowledge triad model”, and the
“strategic communities (SC) triad model”.
4.3.1 Dynamic capabilities lifecycle
Dixon et al. (2014) report on the need for reciprocal circulation between exploita-
tion and exploration from the dynamic capabilities-view perspective described in
Chapter 2. Regarding short- and long-term strategy and organizational reform,
Dixon et al. (2014) present a theoretical framework of the “dynamic capabilities
cycle” derived from an in-depth longitudinal case study on a Russian oil company
(see Figure 4.2). They cite two capabilities demonstrated by the company in its
development processes over the short and long terms.
Here, the first capability is the “adaption dynamic capabilities” as exploitation
activities of the company to regularly polish its extant knowledge (operational
Figure 4.2 Exploration and exploitation dynamic combination processes

Source: Created by the author, citing Dixon et al. (2014: Figure 1). Created by the author, citing Nonaka
et al. (2014: Figure 4)
capabilities, or put differently ordinary capabilities) to respond to environmental

changes and to temporarily gain a short-term competitive edge. This capability is
demonstrated in the incremental innovation (exploration) in Domain III (DC and
OC) and Domain IV (OC) in the valley of death and the Darwinian sea models in
Figure 4.1. Second are the “innovation dynamic capabilities” as exploration activities
of the company to acquire sustainable, long-term competitiveness through unique
creative ideas and actions found in no other company. This capability is demon-
strated in radical innovation (exploration) in Domain I (DC) and Domain II (DC)
in the valley of death and the Darwinian sea models in Figure 4.1.
These researchers named these patterns of execution of strategy the “dynamic
capabilities cycle” in which leading companies cycle these two different capabili-
ties through time (both asynchronously and synchronously). In other words, for
dynamic capabilities to reconfigure, divest, and integrate resources in response to
environmental changes (Teece et al., 1997), this model is a framework that takes
into account capability elements to create new innovations through new knowledge
creation (Nonaka and Takeuchi, 1995) processes, such as exploration and exploita-
tion (March, 1991) or path creation.
4.3.2 Knowledge triads model
Meanwhile, Nonaka et al. (2014) present a theoretical framework for the construc-
tion of “dynamic fractal organizations” that not only balances exploitation and
exploitation in the formulation and implementation of corporate strategies, but
also drives a dynamic view of strategy for synergies between different explorations
and exploitations, shifts from exploitation to exploitation, shifts from exploration to
exploitation, and interactions between exploitation (Domain III  Domain IV) and
exploration (Domain I  Domain II). This dynamic view of strategy synthesizes the
different modes of exploitation and exploitation through the “knowledge triad” –
tacit knowledge, explicit knowledge, phronetic knowledge – and ensures long-term
growth as well as short-term performance of companies (e.g., March, 1991; Benner
and Tushman, 2003; Tushman and O’Reilly, 1997). Exploration and exploitation
are not dichotomous strategic activities – companies should build knowledge triads
to skillfully combine the two strategic activities (exploration and exploitation) and
complement the two strategic activities (exploration and exploitation) to execute
the strategy.
Toyota’s Prius product development case (see Figure 4.2) was an innovation that
required the convergence of various technologies (exploration) which were com-
mercialized and continuously improved (exploitation), making it necessary to have a
dynamic synthesis of exploitation and exploitation. For those reasons, Toyota’s vari-
ous project teams and existing line organizations formed multilayered networked Ba
both horizontally and vertically within and between organizations to simultaneously
pursue the creation and utilization of knowledge.
Drawing attention in this case are Ba to drive exploration activities to create
knowledge for innovation (called exploration Ba) and that are the processes of
sharing tacit knowledge and converting it to explicit knowledge (SE in the SECI
process: Socialization, Externalization), and Ba that drive exploitation of knowl-

edge to commercialize, upgrade and improve products (called exploitation Ba) that
are for processes of synthesis of explicit knowledge, and internalization through
personal experience (CI in the SECI process: Combination, Internalization). In
other words, exploration Ba strongly involve tacit knowledge, while exploitation Ba
strongly involve explicit knowledge. Nevertheless, tacit and explicit knowledge exist
in a continuous and integrated in a spiral. Practical knowledge (phronesis) drives this
spiral and is also created and accumulated at the same time.
4.3.3 The strategic communities (SC) triad model
To achieve strategic innovation, Kodama (2017) presented the importance of build-

ing the strategic communities (SC) triad model by purposely forming organizational
groups with dissimilar characteristics (e.g., project and line organizations) in-house
by leader teams that include top management to manage the exploration and exploi-
tation processes simultaneously through business activities by these organizations.
The leader teams play the role of improving R&D and new business development
performance by strengthening the characteristics of the cross-functional or inter-
corporate integration of the exploration and exploitation SC. These multi-layered
SC networks form the triad model of SC from exploration SC, exploitation SC, and
synthesis SC. The multi-layered SC networks as the SC triad model have their roots
in the existence of aforementioned Ba triad model.
For radical innovation, in uncertain environments, project organizations inspire
and create new knowledge based on creativity and imagination, to bring about con-
cepts for new technical developments and business models (new products, services,
business frameworks, etc.) through trial and error. This activity induces the Domain
III and/or Domain IV  Domain I shift, in terms of corporate activities. Compa-
nies thus drive radical innovation by forming multiple multi-layered SC with strate-
gic business partners outside of the company, taking up knowledge from both inside
and outside the company in high-risk environments, and practicing emergent and
entrepreneurial strategies. Individual projects in projects organizations act autono-
mously and are dispersed as networked organizations (Kodama, 2003), but their busi-
ness activities are always monitored by organizational leaders to control the direction
and objectives of business across entire project organizations. These project organiza-
tions demonstrate dynamic capabilities (DC) to bring about new product and service
concepts and prototypes one after the other, and then incubate a range of these to
achieve commercialization (in other words, Domain I  II  III) (see Figure 4.3).
On the other hand, business processes such as production, facility construction,
maintenance, sales, distribution, and after-sales support are important to ensure
timely and efficient introduction, diffusion, and expansion of these new products and
services in the market. Line organizations (technology, production, facility, main-
tenance and sales departments, etc.) are in charge of these business processes. Line
organizations drive the spiraling of popularization and embedding in new markets,
by releasing new products and services on to the market in Domain III that have been
confirmed for marketability through the processes of concept making, marketing,
Figure 4.3 Leader teams, project and line networks in a corporation
elemental, practical and trial technology development, incubation and commerciali-

zation done by project organizations (Domain I  Domain II  Domain III).
Based on knowledge assets built up over many years, line organizations, as bureau-
cratic organizations, engage in incremental innovation to make improvements and
upgrades by forming line networks (exploitation SC) as multi-layered SC networks
with group companies and strategic outsourcing partners, etc. Well-thought-out
and orchestrated deliberate strategic plans based on strategic rules are adopted by
line organizations, and they proceed with routine business activities to pursue incre-
mental improvements and upgrades, and efficiency in exiting business processes by
demonstrating ordinary capabilities (OC) in Domains III and IV. Practice in line
networks in this way requires thorough productivity and efficiency. Then, through
product and service innovation, line organizations quickly and efficiently (by making
full use of process innovation) introduce the results of innovative new product and
service concepts created by project organizations to the market, and promote and
expand the products and services. This is then the interlocking of exploration SC
and exploitation SC (or shifting from exploration to exploitation) (see Figure 4.3).
Although being similar to the “ambidextrous organization” (Tushman and
O’Reilly, 1997; O’Reilly and Tushman, 2004), this SC trial model provides the
following new perspectives. The research above argues that in an ambidextrous
organization, the strategic goals of both new business development organizations and
existing business development organizations should be clearly defined, interaction
between these two organizations at the practical level should be limited as much as
possible, and a senior manager should oversee both organizations. In contrast, in the
SC triad model, close collaboration and interaction of exploration SC consisting of
project networks aiming to pursue new R&D and build and develop new business,
and exploitation SC consisting of line networks that continually improve and upgrade
commercialized products and services are driven by synthesis SC centered around a
leader team (Kodama, 2017). Practitioners at all levels of management (top, middle,
and staff) combine exploration and exploitation by driving smooth shifting between
the domains through the SC triad model. Kodama (2017) and Kodama and Shibata
(2016) demonstrate from case studies of NTT DOCOMO and Fujifilm that the SC
triad model combines exploration and exploitation. Such a perspective provides a
new theoretical framework that differs from that of the ambidextrous organization.
Leader teams synthesize the knowledge in these organizations (project networks
and line networks). It’s important that the apparent contradiction of simultaneously
creative and planned strategic methods are combined and synthesized in leader
teams. Thus, for leader teams, the configuration of the SC tried model to combine
both incremental and radical innovation processes is key.
Based on the above previous studies of the dynamic capabilities lifecycle, knowl-
edge triad model, and strategic communities (SC) triad model, it can be concluded
that companies that grow in the long term promote a reciprocating cycle of explo-
ration (Domain I  Domain II) and exploitation (Domain III  Domain IV),
or in other words, they combine dissimilar exploitation and exploration activities
and cyclically demonstrate (asynchronously or synchronously) dynamic strategic
activities (see Figure 4.4). Thus, the model of capabilities building from the exploi-
tation and exploration approach yields similar results to the capabilities building
map derived from the dynamic capabilities approach mentioned in Chapter 2 (see
Figure 2.6).
Figure 4.4 Dynamic capabilities building through exploration and exploitation processes

4.4 Conclusion
This chapter has explored the research question of how companies should build
their capabilities to promote the combination of exploration and exploitation. This
chapter has clarified that companies that grow in the long term promote a recipro-
cating cycle of exploration (Domain I  Domain II) and exploitation (Domain III
 Domain IV), or in other words, they combine dissimilar exploration and exploi-
tation activities, and cyclically demonstrate (asynchronously or synchronously)
dynamic strategic activities, based on the above previous studies of the dynamic
capabilities lifecycle, knowledge triad model and strategic communities (SC) triad
model. Thus, the model of capabilities building from the exploitation and explora-
tion approach yields similar results to the capabilities building map derived from the
dynamic capabilities approach mentioned in Chapter 2.
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5 Strategic innovation system – a
new theory from synthesis of
prior literature
5.1 New theoretical development – the strategic innovation

system
Based on the synthesis from the three research areas discussed in Chapters 2, 3,
and 4, this section describes the capabilities that diverse organizations in companies
(R&D organizations, new business development organizations, project teams, exist-
ing line organizations, etc.) need at any given time for the various business contexts
that they face on a daily basis, analyzed from the perspective of dynamic and ordi-
nary capabilities, and presents a new theoretical framework – the strategic innova-
tion system. The strategic innovation system also includes a theoretical framework
for dynamic capabilities building to achieve innovations through strategic collabora-
tion with stakeholders such as partnering corporate players, etc.
First, this chapter presents the basic domains that make up a company’s capa-
bilities building systems from “Capabilities building through the dynamic capabili-
ties approach (Chapter 2)”, “Capabilities building through the innovation process
approach (Chapter 3)”, “Capabilities building through the exploration & exploita-
tion approach (Chapter 3)”. The chapter presents the capabilities building map (four
domains of capabilities), which is a group of domains with four different capability
characteristics corresponding to external and internal corporate conditions, namely,
the speed of environmental change and uncertainty factors faced by companies (see
Figure 5.1).
It is especially important to demonstrate DC in Domains I, II, and III on the
capabilities building map in Figure 5.1 (business environments that are changing
rapidly, and/or business environments that have high levels of uncertainty). The
three-phase management mentioned in Figure 3.1 in Chapter 3 (discovery, incuba-
tion, and acceleration), respectively, proposed as Domains I, II, and III, from inven-
tion or proposal to commercialization of new technologies and businesses. These
three domains are business fields in which DC are demonstrated (integration of
DC and OC is also required in Domain III). Such three-phase management (dis-
covery, incubation, and acceleration) is performed in projects in large corporations
(and similarly in venture enterprises) to develop various new products, services,
and businesses. For practitioners (and organizations such as project teams), different
capabilities are required in the individual business processes in each of these three
DOI: 10.4324/9781003305057-5
80 Strategic innovation system
Figure 5.1 Capabilities building map – the dynamic and ordinary capabilities view
phases, depending on the degree of business uncertainty and environmental change

being faced.
As mentioned, DC robustly function in response to such external conditions
(uncertainly and environmental change) and are also a framework for demonstrat-
ing difficult-to-imitate competitiveness. As discussed in Chapter 3, managing the
phases with “MI Dynamic Capability (Major innovation)” (O’Connor, 2008) and
“Breakthrough Innovation Capability (the 3 phases of discovery, incubation, and
acceleration)” (O’Connor et al., 2008) can be described with the three DC func-
tions (sensing, seizing, transforming), which can be applied in highly uncertain and
rapidly changing environments, as DC also can be said to encompass the theoretical
concepts of “MI dynamic capability (major innovation)” (O’Connor, 2008) and
“breakthrough innovation capability (the phases of discovery, incubation, and accel-
eration)”. Conversely, OC function in pursuit of best practices (Teece, 2007, 2014)
in the low uncertainty and slow change in the stable environments in Domain IV.
The following describes the characteristics of the capabilities in each domain, and
a capabilities building system for integrating these domains.
5.1.1 DC in Domain I
Slow or very slow environmental change with a highly uncertain domain (domain I)
observed at the initial stage of radical innovation is the technology creation stage aris-
ing from new ideas, business concepts, discoveries, and invention, and corresponds
Strategic innovation system 81
to the “discovery phase” of O’Connor and DeMartino (2006). In this domain, the
exploration process is advanced through the MI dynamic (or breakthrough innova-
tion) capability mentioned earlier. Moreover, the role of the sensing element of
DC in this domain is significant. To achieve radical innovation, R&D organiza-
tions in large corporations (research laboratories, development centers, new business
development organizations, etc.) seek out and detect latent market potentials with
sensing, and continuously or semi-continuously set down and execute medium to
long-term R&D plans through the seizing and transforming processes. Needless to
say, there is a need for ordinary capabilities as routines to promote R&D activities.
The basic research and creation of ideas that are the source of new strategic inno-
vation require (depending on the field) a longer period of time as the proportion of
the scientific element and the degree of technological difficulty rises. Achievements
in Domain I are largely due to the creative thinking and actions of middle manag-
ers and staff in company R&D departments and business development divisions
(Nonaka, 1998; Kodama, 2005), but there are also substantial strategic commitments
and contributions made by top and upper-level managers based on the fundamental
policy of “doing the right things” (Teece, 2014). Importantly, there are also “signa-
ture processes” (Bruch and Ghoshal, 2004) in large traditional (leading) corporations
that are difficult for other companies to copy. These signature processes also raise the
quality of R&D. I call this domain “strategic emergence”.
In the asset orchestration process in Domain I, practitioners learn with hypoth-
eses verification in line with R&D objectives and pursue reconfiguration/transfor-
mation through coordination/integration of a wide range of intangible assets. Many
patterns of asset orchestration exist. In many traditional large companies, there are
still many cases of closed innovation under conventional hierarchical systems cen-
tered on internal laboratories and development divisions (Japanese manufacturing is
a typical example of this) (e.g., Kodama, 2009b). To develop incremental innovation
or sustaining innovation (Christensen, 1997) through path-dependent knowledge
accumulated in the past, closed innovation is still an important process. In traditional
high-tech fields such as heavy electrical, renewable energy systems, aviation, vehi-
cle equipment, machine tool, medical and semiconductor production equipment
industries, closed innovation plays a critical role.
In contrast, in industries in which technologies are rapidly advancing such as IT,
the best technical achievements and know-how are becoming increasingly spread
out across the globe. In such fast-moving environments, the processes of adopt-
ing open innovation (Chesbrough, 2003) and incorporating parts of external core
intangible assets to merge and integrate intangible assets both within and from the
outside of companies are critical (e.g., Kodama, 2009b). In these processes, there is
particular importance on the processes of coordination and integration in an entre-
preneurial fashion in asset orchestration of the various resources of top and leading
middle managers (Teece, 2007).
In Domain I, companies must think about how to find business models. Specifi-
cally, with the aim of bringing about completed items that are the final goals of the
business divisions, such as products and services, etc., or core technologies such as
parts, for example, should a company adopt a vertical integration model? or should
it focus on its area of specialization in the industrial structure of horizontal disinte-

gration? or should a company reinforce in-house technologies while searching out
strategic alliances (strong or weak ties) with other companies? Or should a company
build new value chains through coordination and integration of intangible assets –
the strengths of the company and other companies – through strategic collaboration
with different types of business? Thus, allowing for expanded diversification of asset
orchestration, practitioners have to concentrate on learning through experiments
and trial activities with trial and error.
In strategic emergence in Domain I, companies have to hypothetically test their
corporate boundaries in response to their strategic objectives or business environ-
ments and attempt reconfiguration/transformation of various entrepreneurial asset
orchestrations through the processes of trial and error. If it is advantageous to develop
or manufacture in house, then it is better to configure a vertical value chain model
with a focus on creativity (Kodama, 2009b). In contrast, in many cases, if another
company has achieved more with its developments than those in-house, a company
should focus on efficiency, dare to abandon its development efforts, and access and
acquire external intangible assets not only through strategic outsourcing but also
through strategic alliances, joint developments, and M&A. In such asset orchestra-
tion processes, “cospecialization” (Teece, 2007) is important. The important point
is how to increase the synergies of business elements such as core technologies – the
process of cospecialized asset orchestration is an important element that raises a com-
pany’s dynamic internal and external congruence in capabilities.
5.1.2 DC in Domain II
Next, the core technologies and business concepts that migrate from the slow-moving
environment of Domain I, with rapidly changing of the in-house (or occasionally
external) acquisition of human resources and the maintenance and upgrading of
organizations oriented to business incubation to a dramatically transforming Domain
II environment that sustains speed of change and uncertainty. In this domain, the
exploration processes arising from DC (MI dynamic or breakthrough innovation) by
O’Connor (2008) are promoted. This domain corresponds to the incubation phase
of hypothetical setups, experiments, and assessments mentioned by O’Connor and
DeMartino (2006). Learning through trials and experiments also leads to less risk
and uncertainty of markets and technologies and a greater probability of success for
incubations aimed at realizing radical innovation (O’Connor et al., 2008). Campbell
and Park (2005) indicate that since reducing organizational and resource uncertainty
is difficult, projects that are high-risk in terms of organization and resources should
be rejected after screening. Then top and middle management make decisions aimed
at selecting and bringing to market the rigorously tested and evaluated products,
services, and business models.
In Domain II (the incubation phase), the role of seizing is important in com-
mercial development divisions on the business side to achieve radical innovation.
Divisions developing for commercialization must use the sensing function to match
technical innovations with markets (latent customer needs, etc.), while engaging
the functions of seizing and transforming for radical innovation as the commer-
cial development of new businesses, new technologies, and new processes. Thus,
practitioners must pursue entrepreneurial strategies (Mintzberg, 1978), demonstrate
commitment and become strategically involved based on the fundamental policy of
“doing the right things”.
Moreover, the quality of the signature processes unique to a company that were
required in Domain I is more strongly reflected in Domain II. This is because of
the so-called “valley of death” (Branscomb et al., 2001; Markham, 2002; Mer-
rifield, 1995), which can be a serious impediment to R&D and the commerciali-
zation of its outcomes. The ability to overcome this major hurdle is largely due
to rarefied signature processes unique to a company. Needless to say, it is neces-
sary to have ordinary capabilities as routines to promote practical development
(commercialization).
On the other hand, O’Connor et al. (2008) confine this incubation domain to
trial experiment and assessment models, but in many cases, current business activities
go beyond trial experiments with uncertainty in dramatically changing, fast-moving
environments through to the launch of commercial businesses, where companies
may boldly undertake risky cases with a high degree of uncertainty. In this domain,
numerous cases arise where excessive trust and commitment of the leaders and man-
agers lead to strategic activities based on the creation of business through trial-and-
error even though is still unclear whether the newly developed ideas and prototypes
have the potential for new business models and value chains.1 These correspond to
cases in the new online business world where products are both trialed and launched
in dramatically changing domains of general high risk and uncertainty. A key point
is how to select and implement promising, valuable business. I call this domain
“strategic selection”.
The asset orchestration process in this domain entails selection and narrowing
down of the diverse intangible and tangible assets trialed and experimented on in the
strategic emergence domain. In this domain, through the processes of (1) coordina-
tion/integration, (2) learning, and (3) reconfiguration, the level of completeness of
asset orchestration as products, services, and business models is raised. Depending on
circumstances, a corporation might have to rethink its corporate boundaries (both
vertical and horizontal) or its relationships such as partnerships with other compa-
nies and realign or reconfigure its assets.
5.1.3 DC and OC in Domain III
New businesses (including new products and services) chosen through strategic
selection in Domain II that have prospects for the future and somewhat reduced
uncertainty shift to Domain III, where uncertainty is reduced to some extent while
external (environmental) and internal change is sustained. Domain III is the stage
where the radical innovation incubated (or partially commercialized) in Domain II
enters a growth orbit, and corresponds to the “acceleration phase” mentioned by
O’Connor and DeMartino (2006). According to O’Connor et al. (2008), this is
where the exploitation process is promoted by breakthrough innovation capability.
In this domain, the building and optimization of processes and value chains for the
selected new businesses are achieved.
Then, new business functions are wholly or partially transferred to the business
divisions appropriate to accelerate commercialization (or else new business divi-
sions are newly established, or made independent as external ventures), and further
resources are intensively invested through the strategic commitment of top and mid-
dle management by “doing the right things”. I call this domain “strategic concen-
tration”. In the past, a large number of product and service development projects
for major corporations (e.g., Kodama, 2005, 2007d) invested management resources
through asset orchestration in commercialization through this kind of shift from
strategic selection to strategic concentration.
In Domain III, where environmental change is fast and competition with other
companies is fierce, transforming at the business side plays an important role in
surviving the so-called “Darwinian sea” (e.g., Philip and Lewis, 2003; Dismukes,
2004). Here, the “Darwinian sea” illustrates a sea burgeoning with new organisms in
competition with each other. This metaphor was advocated because of its similarity
to evolution in business, since competing in the rough sea and being culled is the
process of evolution of organisms. As time passes, with the shift into Domain III,
newly developed products and businesses burst into these environments of competi-
tion with other companies. Nevertheless, while the degree of shift into a competi-
tive environment depends on the industry or product characteristics, the actual birth
of a competitive market means that uncertainty of the market environment lowers.
In contrast, divisions such as product planning and technical development posi-
tioned upstream in the value chain on the business side (HQ and business units, etc.)
also function to sense and detect changes in newly born markets and establish robust
value chains through seizing and transforming for upgrades, improvements, and new
versions, by quickly and incrementally innovating (sustainably advancing technolo-
gies) new products and services that have already been successfully commercialized.
For this reason, practitioners pursue entrepreneurial strategies (that include elements
of both deliberate and emergent strategies) and demonstrate commitment and stra-
tegic engagement based on the fundamental policy of “doing the right things”.
Moreover, to win out over the competition in Domain III, there is significant
dependence on unique corporate “willpower” (Bruch and Ghoshal, 2004) in a com-
pany’s signature processes. Willpower is the energy and concentration for thinking
and action that come with a sense of purpose. Energy is vigor, and concentration is
directing energy toward a particular outcome. It is critical that practitioners clearly
picture in their minds the scenario of their intended strategy and concentrate on its
planning to consciously achieve the strategy in tough competitive environments.
In this domain, much of the burden is also on signature processes enabled by the
unique and highly rarefied corporate willpower. Just as Teece (2014, p. 314) argued,
a strategy can be defined as “a coherent set of analyses, concepts, policies, arguments,
and actions that respond to a high-stakes challenge” (Rumelt, 2011, p. 6). The best
strategies require the preparation of the elements of (1) a diagnosis, (2) a guiding
policy, and (3) coherent action (Rumelt, 2011) brought about by the unique signa-
ture processes of a company based on willpower. Currently, the global smartphone
market is also in this Domain III stage. In Domain III, the processes of asset orches-
tration promoted and concentrated to complete business value chains, and the com-
pletion level of products and services is raised for rapid incremental innovation as
upgrades, improvements, and new versions following commercialization.
However, robust value chains must be configured in Domain III to get new
products, services, and businesses off the ground and win out over the competi-
tion and survive the Darwinian Sea. As mentioned, organizational supervisors and
staff in the organizations upstream in the value chain such as product planning and
technical development divisions on the business side must demonstrate strong DC.
However, staff and directors in routinized divisions positioned downstream in the
value chain (sales, technical management, procurement, manufacturing and after
support, etc.) need to thoroughly manage operations through strong OC. These
downstream-positioned organizations require strong OC to bring current products
(and their successor upgrades, improvements, and new versions) to the market, win
out amid stiff competition, and turn a profit currently and in the near term. Thus, in
Domain III, the characteristics of capabilities are not the same as those in Domains
I and II, and there is particular importance on strong integration of DC and OC
(see Figure 5.1).
5.1.4 OC in Domain IV
Meanwhile, a great deal of existing business is positioned in Domain IV, in slow-

moving market environments with low uncertainty and a low rate of change. Here,
incremental innovation is promoted with the aim of systematically enhancing busi-
ness efficiency through the exploitation process, which consists of activities to
improve existing business using mainstream organizations that inherently demon-
strate ordinary capabilities (OC) (Teece, 2007, 2014).
In Domain IV, the weight on DC diminishes, and the demonstration of best prac-
tices through OC comes to the fore. In existing traditional line organizations (busi-
ness units, etc.), slow changes in existing markets are sensed, and existing operations
in which formal organizations play the lead are executed through path-dependent,
planned, and carefully considered deliberate strategies in business divisions, and
strict, top-down centralized leadership (Kodama, 2004) is demonstrated. Driving
slow incremental innovation by strengthening OC in Domain IV requires bring-
ing about higher performance by evolving routines through higher-order learning
for short-term gain, depending on internal and external changes (King and Tucci,
2002; Benner and Tushman, 2003; Winter, 2000; Amburgey, 1993; Nelson and
Winter, 1982). Promoting such Domain IV process management accelerates the
speed that an organization responds to achieve incremental innovation (Benner and
Tushman, 2003). However, there is always a danger that product lineups in Domain
IV could be threatened by emergent technical innovations. I call this domain “stra-
tegic efficiency”.
Domain IV businesses (products and services) mostly include those that have
survived the competitive environment of Domain III and later shifted into Domain
IV and entail the conversion of old and new businesses (Markides, 2001) over long
periods of time. In other words, this is replacement of the strategic concentration

of new business in Domain III, arrived at through the path of radical innovation
(Domain I  Domain II  Domain III), with the existing strategic efficiency busi-
nesses of Domain IV (the conversion of new and old businesses). The simultaneous
management of new strategic positions and existing positions discussed by Markides
(2001) combine in Domains III and IV, and in shifting from an old position to a
new one, existing businesses initially positioned in Domain III are replaced by new
businesses that have grown and accelerated in Domain III (though the Domain I
 Domain II  Domain III shift), which means the businesses initially existing in
Domain III shift to Domain IV.
Above, particularly important in describing the dynamics of the shifts between
domains in the capabilities building map are the strategic actions in Domains III
and IV that aim for sustainable growth through continued corporate strategic inno-
vation. According to the “capabilities lifecycles” framework of Helfat and Peteraf
(2003), companies uncover capabilities opportunities to achieve further radical inno-
vation, and sometimes drive new DC in Domains III and IV to handle capability
threats to achieve the shift into Domain I (see Figures 5.1 and 5.2). In other words,
as discussed following, leading companies engage in a spiral of strategic activity
through these four domains (Domain I  Domain II  Domain III  Domain IV
 Domain I and/or Domain III  Domain I  . . .) to achieve strategic innova-
tion through interactions with dynamic environmental change.
As illustrated in “Capabilities building through the dynamic capabilities approach
(Chapter 2)”, “Capabilities building through the innovation process approach
Figure 5.2 The strategic innovation system

(Chapter 3)”, “Capabilities building through the exploration & exploitation

approach (Chapter 4)”, companies that grow over the long term promote a recipro-
cal cycle of exploitation (Domain III  Domain IV) and exploration (Domain I
 Domain II). In other words, they are able to balance different exploitation and
exploration activities and demonstrate dynamic activities cyclically (asynchronously
or synchronously) on a time axis.
In this chapter, this corporate system of achieving strategic innovation is called the
strategic innovation system. The following describes the strategic innovation loop
and strategic innovation capabilities that make up the strategic innovation system.
5.2 The “strategic innovation loop” and “strategic innovation

capabilities”
When considered from the viewpoints of corporate exploration and exploitation
processes based on radical and incremental innovation, and the time axis of busi-
ness contexts, the four domains form a continuous domain loop (see Figure 5.2).
The strategic emergence (Domain I) and selection (Domain II) domains, which are
exploratory processes through DC (asset orchestration), are the core processes for
radical innovation. “Strategic concentration (Domain III)” is the acceleration phase
indicated by O’Connor and DeMartino (2006). In this phase, new product, service,
and business models and markets are rapidly set up through the exploratory pro-
cesses of strategic emergence and selection and the domain shifts from exploration
to exploitation. Strategic concentration becomes the origin of a new path of newly
generated radical innovation that differs from the existing business of the strategic
efficiency domain (Domain IV).
In the strategic concentration domain, newly generated business always under-
goes a major internal or external change in its initial phase. At this stage, inter-
nal elements aimed at building optimal value and supply chains are transformed in
response to external change. This is the strategic concentration domain in which the
aforementioned strong integration of DC and OC is required.
Among these strategic concentration businesses, which are subject to major
change, businesses that successfully establish themselves in the market and achieve
stability as mainstream operations shift to the slow-moving (or small) “strategic
efficiency” domain while still greater operational and business process efficiency
measures are promoted, and either become part of the existing mainstream lineup
or undergo business integration (in which still greater business process efficiency
through strong OC is promoted).
However, businesses subject to major external change in markets and technolo-
gies following mainstream growth, and major internal changes in areas such as strat-
egy, organization, technology, operations, and leadership (e.g., IT industry involving
broadband and smartphones, online businesses, and digital consumer electronics)
always become positioned in this strategic concentration domain. Put another way,
businesses growing in the mainstream direction become deployed in one or both of
the strategic concentration and efficiency domains. Although new business in the
strategic concentration domain is the “mainstream reserve”, this does not mean that
all businesses can grow in a mainstream environment subject to major changes, and
some businesses have to withdraw. This is especially true of the IT industry.
In this way, the flow of radical innovation for major corporations shifts from
Domain I to Domain II, then Domain III (where some businesses undergoing major
changes maintain their position), and finally to Domain IV (see Figure 5.2). Domain
IV businesses (products and services) mostly include those that have survived the
competitive environment of Domain III and later shifted into Domain IV, and entail
conversion of old and new businesses (Markides, 2001) over long periods of time. In
other words, this is the replacement of the strategic concentration of new business in
Domain III, arrived at through the path of radical innovation (Domain I  Domain
II  Domain III), with the existing strategic efficiency businesses of Domain IV
(the conversion of new and old businesses). As mentioned, the simultaneous man-
agement of new strategic positions and existing positions discussed by Markides
(2001) combine in Domains III and IV, and in shifting from an old position to a
new one, existing businesses initially positioned in Domain III are replaced by new
businesses that have grown and accelerated in Domain III (though the Domain I 
Domain II  Domain III shift), which means those businesses initially existing in
Domain III shift to Domain IV.
Realistically, however, only some major corporations survive to become success
stories after the natural selection process involved in the shift from Domains I to
III, even though many promote various strategically innovative projects. Amabile
and Khaire (2008) note a number of cases of outstanding ideas and business models
born in Domain I that were diluted and ended in failure after a major corpora-
tion employed a different managing organization to realize (commercialize) them.
This is due to the existence of the knowledge boundaries between the product
planning divisions that supervise the creation of business concepts and ideas, the
development divisions that realize them, and the production and manufacturing
divisions (Kodama, 2007a). This is one issue surrounding radical innovation in a
major corporation.
Observing the above domain shifts at the micro level in organizations, there are
feedback mechanisms enabled through the interactions in each domain, while at
the macro level, there are spiraling feedback loops. Thus, this model also covers the
chain-linked model of Kline (1985).
The most important inter-domain shift is that from III and/or IV to I. This is
the path that creates new radical innovation (see Figure 5.2). In the Capabilities
Lifecycles of Helfat and Peteraf (2003), large corporations involved in businesses in
Domains III and IV find new capability opportunities and even sometimes take new
strategic actions demonstrating DC as they face capability threats. It corresponds to
the process that accelerates environmental and internal interaction and creates new
ideas and new technological inventions and discoveries based on high-quality tacit
knowledge (Nonaka and Takeuchi, 1995). This knowledge is cultivated through the
practice of researchers, engineers, marketers, and strategy specialists in shifting from
Domains I through IV (accumulating and integrating new practice through existing
business practice and incremental, and even radical innovation) via the “transfor-
mational experience” (King and Tucci, 2002; Amburgey et al., 1993) of previously
existing business routines and strategic innovation. King and Tucci (2002) suggested
that the “transformational experience” of practitioners involved in the continual
(Katz and Allen, 1982) and large-scale (Tushman and Romanelli, 1985; Amburgey,
1993) organizational innovation of product development teams leads to continuous
new product innovation and resets rigid organizational inertia. Put another way, it
enhances the potential for embedding new capabilities in organization members
aimed at creating new strategic non-routines based on DC to transform organiza-
tions and realizing radical innovation.
Although excessive adherence to existing knowledge to create new knowledge
integration (e.g., Kodama, 2009b) becomes a hindrance, the absorption of knowledge
from different sectors and industries from a scientific technological, and marketing
viewpoint and the knowledge integration process can trigger new radical innova-
tions. Various innovation theories including the importance of shedding the “mental
model” (e.g., Spender, 1990), the focus on “peripheral vision” (Day and Schoemaker,
2005) and “boundary vision” (Kodama, 2011), and the challenge of achieving “cross
innovation” (Johansson, 2004), and “destructive innovation” (Christensen, 1997)
confer precious insights as regards innovators, but more detailed theory building is
yet to be undertaken. Although discussed later, I consider, as a proposition, that the
evolution and diversification of high-level strategic non-routines through the forma-
tion of strategic communities in Domains III and IV fundamentally promote DC
(asset orchestration) while inducing a shift from domains III and/or IV to I arising
from the incremental innovation of integrating new knowledge (assets) inside and
outside the company (Kodama, 2009b), and raise the probability of achieving new
knowledge integration as radical innovation.2
I would like to explain the following three new insights obtained from this frame-
work and use them as a basis for explaining the “strategic innovation capabilities”.
The first point is that outstanding companies possessing the dynamic view of the
capabilities deliberately (including some emergent elements) drive loops com-
prised of continuous shifts among domains (termed “strategic innovation loops”
[see Figure 5.2]) from Domain Ⅰ  Domain II  Domain III  Domain IV 
Domain I and/or Domain III  Domain Ⅰ. The dynamic view of the capabili-
ties co-establishes the different modes of the exploratory and exploitative processes
and secures long-term corporate growth (e.g., March, 1996; Benner and Tushman,
2003; Tushman and O’Reilly, 1997). These two processes (March, 1991; Holland,
1975) do not employ opposing strategic activities; rather, companies must imple-
ment strategy while skillfully balancing the strategic activities in a mutually comple-
mentary way (He and Wong, 2004).
Meanwhile, Zollo and Winter (2002) propose a knowledge evolution pro-
cess based on adjusted evolutionary theory. The continuous routine activity well-
considered within this process can become a trigger to shift from the exploitation
to the exploration process, and experiential knowledge accumulated from learning
activities also becomes an element in creating new dynamic capabilities (DC) (cor-
responding to a shift from Domain IV and/or Domain III to Domain I). I explain
how the recursive processes and co-evolution of these different modes simultane-
ously promote corporate challenges and process routines.
The second point is that observing large corporations at selected times on a time
axis indicates the constant presence of each of Domains I to IV possessing different
business contexts. With large corporations, multiple projects oriented to strategic
innovation function as layered strategic innovation loops on different time axes. Top
and middle management must therefore manage appropriately within and among
these domains. Management to smoothly implement the domain shift through the
strategic innovation loop is also key. Different strategies, organizational structures,
technology, operation, and leadership are required within each of these domains.
However, from this discussion, an especially important question is how the skills
and expertise that create strategic emergence (Domain I), the new discovery and
invention domain, from accumulated experiential knowledge (which arises from
diverse high-level strategic non-routines through DC via the continuous strategic
innovation loop) and absorb and integrate new knowledge outside the company can
be created by the asset orchestration process. Regardless, learning through higher-
order routines alone (Amburgey et al., 1993; Nelson and Winter, 1982; Winter,
2000) does not make it easy to shift from Domain III and/or Domain IV to Domain I.
Teece (2014, p. 338) said, “First, I reject the notion that dynamic capabilities
reside only in high-level routines”, and continued that “creative managerial and
entrepreneurial acts (e.g., creating new markets) are, by their nature, often non-
routine”. In the same vein, Teece (2014, p. 332) quotes Steve Jobs, the late CEO of
Apple, who said “Innovation has nothing to do with how many R&D dollars you
have. When Apple came up with the Mac, IBM was spending at least one hundred
times more on R&D. It’s about how much you get it”.
In another interview about product development at Apple (Burrows, 2004), Jobs
described it as a blend of routine and creative acts:
Apple is a very disciplined company, and we have great processes. But that’s
not what it’s about. Process makes you more efficient. But innovation comes
from people meeting up in the hallways or calling each other at 10:30 at night
with a new idea, or because they realized something that shoots holes in how
we’ve been thinking about a problem.
That means Apple’s daily processes are based in OC. However, even if a new
product development entails a number of routine components, Jobs said at least one
part has to be different. Those different things are equivalent to the non-routine
establishment of strategy and the activities of entrepreneurs. Hence, with his deep
market understanding gained through his own sensing, Jobs was a driving force of
new product development projects at Apple and the success of the company, as he
prioritized the future based on his insatiable obsession to achieve easy-to-use prod-
ucts with attractive designs and advanced technologies (cospecialization through
asset orchestration integrating hardware, software, applications, and contents). The
creative acts of seizing and transforming brought about through diverse strategic
non-routine activities at Apple could also hint at exposing the secret of what Jobs
described earlier as “getting it” (Teece, 2012). As a chain of creative actions, asset
orchestration can itself be attributed to the demonstration of DC.
From the research, I and research collaborators conducted into organizations in

corporations that achieve innovations as new products or businesses (including my
direct and indirect involvement in business practice) (e.g., Kodama, 2002, 2005,
2006, 2007a, 2007b, 2007c, 2007d, 2007e), I would like to present the hypothesis
that DC are generally demonstrated through strategic non-routines in configura-
tions of informal organizations (or informal networks, which are also strategic com-
munities), whereas practitioners demonstrate OC mainly in formal organizations
and in set routines.
The research that I and research collaborators have accumulated to date clarifies
that depending on the characteristics of a business and environmental circumstances,
the characteristics of informal organizations change in accordance with changes in
boundaries (knowledge and organizational boundaries) in and between organiza-
tions (between practitioners at the micro level) (Carlile, 2002, 2004; Kodama and
Shibata, 2014b). To promote the absorbing and integration of new knowledge assets
or capabilities, in other words, asset orchestration through DC, entails the formation
of “strategic communities” with pragmatic boundaries to promote strategic non-
routing activities (e.g., Kodama, 2004, 2005, 2006, 2009a).
The third point is that the exploration and exploitation processes are especially
interactive. It has been argued that organizations within major corporations under-
taking radical innovation should either be isolated both physically and organiza-
tionally from the mainstream organization, or else operate as independent venture
companies (e.g., Hill and Rothaermel, 2003; Benner and Tushman, 2003; Burgel-
man and Sayles, 1988; Kanter, 1985). Nevertheless, an appropriate interface with
existing organizations is also potentially significant for accelerating radical innova-
tion from the viewpoint of strategy and resource integration (e.g., Heller, 1999;
Kodama, 2003). Questions of organizational design (How much should a new
business integrate with, or separate from, existing businesses? Is it better to have
complete separation, complete integration, or something in between?) (e.g., Chris-
tensen, 1997; Goold and Campbell, 2002; Tushman and O’Reilly, 1997) are argu-
ably more important in achieving strategic innovation.
Much of the previous research discussed management processes and organizations
division, such as two distinct archetypes-exploratory and exploitative, or incremental
or radical (e.g., Greenwood and Hinings, 1993; Tushman and O’Reilly, 1997) and
the ambidextrous organization (e.g., O’Reilly and Tushman, 2004). Little detailed
analysis has appeared, however, of the interfaces and interaction among management
elements such as strategy, organizational structure, technology, operations, and lead-
ership, each of which differ for each of these two archetypes (e.g., Kodama, 2003,
2004). Nevertheless, the co-establishment and coexistence of these two archetypes
within the same large corporation, and the skillful management of strategic contra-
diction (Smith and Tushman, 2005), creative abrasion (Leonard-Barton, 1995), and
productive friction (Hagel and Brown, 2005) to create synergies are also important
elements of successful strategic innovation. The coexistence of contradictions high-
lights the important roles not just of the top management (Smith and Tushman, 2005;
Tushman and O’Reilly, 1997), but also of middle management and staff (Govindara-
jan and Trimble, 2005). I call this “dialectical management” (Kodama, 2003, 2004).
Based on the three insights above, strategic innovation capabilities is a concept that
embraces the following four capabilities: Company-wide capabilities that integrate
dynamic capabilities (DC) and ordinary capabilities (OC); capabilities to imple-
ment the spiral strategic innovation loops; capabilities within and among domains,
including shifts; and capabilities to achieve the coexistence of two different arche-
types through dialectic management (see Figure 5.2). Moreover, strategic innovation
capabilities embrace the existing dynamic and MI dynamic capability (or break-
through innovation capability) concepts illustrated in Figure 5.1 while aiming to
expand the concept of “dynamic apabilities (DC) and ordinary capabilities (OC)”
for individual product development projects at large corporations in the direction of
innovation capabilities for the corporate or management system. This book calls a
management system that uses strategic innovation capabilities to activate the spiral of
the strategic innovation loop and continuously co-establishes existing business with
strategic innovation business a “strategic innovation system” (see Figure 5.2).
I would like to note the points of difference between the “strategic innovation
system” and the “management system” arising from “breakthrough innovation capa-
bility” (O’Connor et al., 2008). One such point is that since O’Connor’s model
is sequential – it shifts from discovery through cultivation to acceleration – it is
weak on the positive feedback process of reflection on, and practical application of,
the practical knowledge and accumulated transformational experience of in-house
expertise, skills, and routines acquired through executing breakthrough innovation
and existing business. Another is that the sequential model provides a weak frame-
work for shifting to a strategic emergence domain that gives rise to discovery, inven-
tion, and creativity. Third, it provides a weak dynamic strategy view framework for a
company to acquire and sustain new strategic positions over many years. With regard
to this, the strategic innovation system in this article (see Figure 5.2) comprehen-
sively considers the three points above while creating corporate and management
system models for sustainable strategic innovation.
They presented a chain-linked model with feedback loops to describe the rela-
tionships and iterations among research, invention, innovation, and production. In
this strategic innovation system, the sensing, seizing, and transforming loop func-
tions continuously or semi-continuously in each domain (Domain I to Domain
III) while forming feedback loops as shifts from Domain IV and/or Domain III to
Domain I (see Figure 5.2). Moreover, at the microlevel, this also means there is feed-
back in interactions between each domain. Hence, the strategic innovation system
also encompasses Kline’s (1985) chain-linked model (see Figure 3.2 in Chapter 3).
5.3 DC and OC positioning in capabilities building map –

clarifying the blurry line between DC and OC
Helfat and Winter (2011, p. 1425) assert that it is impossible to draw clear bounda-
ries between the two types of capabilities, that of DC and OC. They reason that
(1) change is always occurring to at least some extent; (2) we cannot distinguish
dynamic from operational (ordinary) capabilities based on whether they support
what is perceived as radical versus non-radical change, or new versus existing
businesses; and (3) some capabilities can be used for both operational (ordinary) and
dynamic purposes.
In relation to this, from “Heraclitus” and “Ecclesiastes”, Helfat and Winter
(2011, p. 1425) mention as follows: “Nothing ever stays exactly the same, so ‘one
does not step into the same river twice’ (Heraclitus). Yet we often say that ‘there is
nothing new under the sun’ (Ecclesiastes)”. As Birnholtz et al. (2007, p. 316) put it,
this is the “paradox of the (n)ever-changing world”. If everything is changing all the
time, what then is the basis of the impression that some things do not change at all?
Part of the answer to this conundrum lies in one’s perspective. If you examine small
details close in, you see much more change than if you attend to large phenomena
or high-level descriptions, or perceive from afar.
This is a classification of changing nature of capabilities in business organizations
from a perspective on how people view things and is described by the capabilities
building map so far discussed. The capabilities building map clearly positions the
weight to which DC and OC function in terms of the degrees of uncertainty which
corporate organizations and the practitioners involved in them sense and recognize
and the degree of the speed of change inside and outside of the corporate organiza-
tion. Nevertheless, as Helfat and Winter (2011, p. 1428) identify grounds for ambi-
guity of the boundaries between DC and OC, in this section, I would like to discuss
the nature of dual-purpose and multiple-variant capabilities that they identify from the
perspective of the capabilities building map.
5.3.1 Dual-purpose and multiple-variant capabilities
Helfat and Winter (2011) assert that the problem is further complicated because
certain types of capabilities can be used for both operational capabilities (or ordi-
nary capabilities: OC) and dynamic capabilities (DC). There are capabilities with
multiple variables (some operational-oriented, some dynamic-oriented), and capa-
bilities that simultaneously satisfy both operational and dynamic objectives. In these
cases, Helfat and Winter (2011, p. 1248) assert that it is certainly difficult to draw
clear boundaries between operational and dynamic capabilities. Below is a discussion
on dual-purpose capabilities and multiple-variant capabilities from the perspective of the
capabilities building map.
5.3.2 Dual-purpose capabilities
Helfat and Winter (2011, p. 1248) discuss capabilities providing “market access” in
the cases of P&G and Microsoft. “Market-access capability” is the capability required
for distribution, marketing and sales, etc. At P&G, brand development for new
products is done with DC, while at the same time, established brands are managed
with OC. Moreover, brand managers rely on common corporate routines and pro-
cesses as OC to promote sales of both the old and new products, which means brand
management involves capabilities with both DC and OC objectives. On the other
hand, Microsoft formed a new ecosystem by establishing a new market through
positive feedback formed using network externalities to expand sales of its new
Figure 5.3 The Helfat and Winter (2011) position in the capabilities building map
browser by demonstrating DC. At the same time, the OC component of market-

access capabilities helped the company maintain sales of existing browser versions
and served as a catalyst for sales of the new generation of browsers, giving it a long-
term market advantage.
Regarding such “market-access capability”, it is important to note that the brand
managers execute the sales strategy for the new product brands created through the
demonstration of DC in the Domain I  Domain II  Domain III process, by lev-
eraging existing sales routines, OC, in Domain III. At the same time, they execute
the sales strategies for existing brand product lines in Domain III (one generation
earlier) and Domain IV (several generations earlier) by leveraging existing OC (see
Figure 5.3). Hence, “dual-purpose capabilities”, or market access capabilities with
dual objectives, are equivalent to the simultaneous demonstration of DC and OC in
Domain III (DC and OC) and Domain IV (OC).
5.3.3 Integrated capabilities – multiple-variant capabilities
Helfat and Winter (2011, p. 1248) assert that integrated capabilities can serve an
operational purpose, for example, by facilitating shared activities that produce econ-
omies of scope across stages of production or product lines. An integrated capability
to facilitate common activities means that the R&D department can demonstrate
DC to develop new technology and production platforms and put them into practi-
cal use through the Domain I  Domain II  Domain III process, and at the same
time, business units demonstrate OC to streamline production activities, product
lineups and version upgrades in Domain III, which are operations management (i.e.,
ordinary capabilities: OC) leveraging these new platforms.
Such integrated capabilities simultaneously realize “new platform development”
through the execution of Domain I  Domain II  Domain III processes through
the demonstration of DC, mainly in R&D departments, and efficient operations by
demonstrating OC in Domain III in the development, production, sales, and other
business departments that utilize those achievements. Integrated capabilities have
several different variants (some dynamically oriented, some operationally oriented),
such as DC and OC, and enable communication and collaboration across organiza-
tional units and across entire corporations including across R&D, production, sales,
etc., in the timeframe of the Domain I  Domain II  Domain III processes.
In addition, as different types of integrated capabilities, Helfat and Winter (2011,
p. 1248) assert that “Other types of integrative capabilities can make change pos-
sible, such as through the coordination of design and manufacture in new product
introduction” (Iansiti and Clark, 1994, p. 1248). Specifically, this corresponds to
that organizational structures (CFT, R&D department, etc.) separated from exist-
ing organizations, demonstrate DC to develop and design elemental technologies
for new product development, and to execute commercialization processes related
to new production technologies through the Domain I  Domain II  Domain
III processes. Thus, development and design engage in close coordination to solve
numerous technological challenges and issues.
In achieving new products, to develop elemental technology, and commercial-
ize processes for new product development and design or production technologies
based on basic or applied research done through Domains I  Domain II, R&D
and related organizations face many difficulties and must overcome the so-called
“valley of death”. DC are demonstrated in the Domain I  Domain II processes –
many prototypes are developed and much testing for commercialization is done,
and as R&D and related division overcome these hurdles, uncertainties for R&D
projects’ success reduce, and commercialization is achieved in Domain III. In the
commercialization stage of Domain III, existing routines of operations manage-
ment are emphasized and OC is demonstrated, while at the same time, through the
demonstration of DC and OC, new products are brought to market and subsequent
product improvement and enhancement activities is promoted. Thus, integrated
capabilities can be dynamic or operational, depending on the type of capability
leveraged in each of these domains and its intended use in the timeframe of the
Domain I  Domain II  Domain III processes (see Figure 5.3).
Moreover, Helfat and Winter (2011, p. 1248) say an integrative capability also
may serve a dual purpose, such as its use in ambidexterity to manage both new and
existing businesses (Tushman and O’Reilly, 1996). This means not only expanding
sales by upgrading existing competitive (best-selling) products in Domain III and
maintaining long-selling product businesses in Domain IV, but also managing new
business development by shifting to Domain III and/or Domain IV  Domain I
(see Figure 5.3). For this reason, the management of ambidexterity identified by
O’Reilly and Tushman (2008) is partially reliant of the DC (Adner and Helfat) of
top management who perform the integration of new and mature business. The
important perspective here, as identified by Helfat and Winter (2011, p. 1248), is

that some types of capabilities enable the management of ambidexterity (e.g., the
dynamic capabilities of top management). The DC of managers can contribute to
organization-level integrated capabilities for the management of ambidexterity.
As described earlier, the concept of “Dual-purpose and multiple-variant capa-
bilities” can be explained from the perspective of the capabilities building map pre-
sented in this book. The intensity of ambiguous DC and OC boundaries can be
clarified by the capabilities building map that clearly positions the weight to which
DC and OC function using the axes of the degree of uncertainty and the speed of
change inside and outside of the corporate organization.
5.4 Implications – dynamic restructuring of corporate

boundaries through strategic innovation capabilities
IoT, AI, big data, and robots are further evolving conventional Internet technolo-
gies. The technical revolution of this advanced IT is developing at never-before-seen
speed and bringing about never-before-seen impacts. The IoT enables bidirectional
exchanges of all kinds of information in actual society via the Internet, while big
data technologies collect massive amounts of data (e.g., IoT/M2M data, cloud com-
puting information, SNS data, real and virtual commercial information, location
information) and analyze it to provide new forms of value creation. In addition, AI
learns by itself enabling it to make advanced judgments and act beyond the capabili-
ties of ordinary humans. Various robotics technologies are enabling the automation
of a wide range of complex tasks, which is not only bringing efficiency to business
but also enabling the realization of societies previously thought to be impossible.
Moving away from the one-size-fits-all services of conventional mass production,
these technical innovations have the potential to dramatically change the structure of
industry and employment, and enable companies to provide products customized to
suit individual user needs, and to radically improve efficiency and productivity across
entire supply chains by sharing data in real time. In future, advanced IT will bring
about new markets by combining the core technologies and business models of
various different fields as shared platforms (platform technologies) that revolutionize
technology in all industries. For example, the incorporation of various biological
data and fusion of genome editing technologies and such data with advanced IT
will bring about new pharmaceuticals, agricultural products and bioenergy, etc. (see
Figure 5.4).
Such technical convergence of different professions with advanced IT is a crucial
research issue in the technology and innovation management (TIM) field (e.g., Cur-
ran and Leker, 2011), and will also become a major factor in bringing about radical
innovation creating brand-new markets (e.g., Kodama, 2007a). In particular, in the
context of IT, technological convergence has been called the mixing of technical
knowledge across clearly definable areas of specialization (Duysters and Hagedoorn,
1998; Rosenberg, 1976).
In technological convergence, the knowledge convergence process (e.g., Hacklin
et al., 2009; Rafols and Meyer, 2010; Kodama, 2012), which is the combination
Figure 5.4 Cospecialization through convergence
of the knowledge of different specialist fields, occurs at the level spanning differ-
ent areas of expertise (Kodama, 2014). Therefore, the integration of knowledge
across different specialist fields is of paramount importance for successful technology
convergence (Lei, 2000; Klein, 1990; Kodama, 2005, 2009a, 2011). This fusion or
integration process of different knowledge corresponds to the aforementioned asset
orchestration (Teece, 2007), which is a core function of DC.
IT usage across various industries and integration of dissimilar technologies accel-
erate convergence and raise the potential to bring about new products, services, and
business models that span differing industries through cospecialization (Teece, 1986,
2010, 2007). Teece (2012) also asserts that entrepreneurship in top management is
necessary for the management of cospecialization. Entrepreneurship means sensing
opportunities for convergence, understanding them, getting things going, discover-
ing new or better ways to combine things and get things done, which is the process
of asset orchestration.
As mentioned, the function of asset orchestration (Teece, 2007), which is the
core of DC, is reinforced by the three organizational processes of (1) coordination/
integration, (2) learning, and (3) reconfiguration (Teece et al., 1997). The coordi-
nation/integration routine brings together various resources in an entrepreneurial
fashion for the purpose of developing new products, and so forth. Learning is an
outcome of practice and experimentation and allows for more efficient task per-
formance. Reconfiguration or transformation leads to recombining and modifying
existing resources. Asset orchestration is most relevant as an underpinning for seizing
and transforming (Teece, 2014, p. 333, Note 7) with respect to the three major DC
subsystems (sensing, seizing, transforming) mentioned earlier. Teece (2014, p. 333)
asserts that clever orchestration of knowledge and capabilities requires entrepreneur-
ial capabilities, but many business executives simply do not have them.
For example, clever orchestration is also about creatively coordinating and assem-
bling disparate elements that have the potential to be cospecialized. Entrepreneurial
management has almost no relationship with (or requirement for) standardized anal-
ysis or optimization. Rather than maintaining and elaborating existing procedures,
it is more important for the corporate executive to know in advance what the next
big opportunity or challenge will be and come up with a way to deal with it. As
Teece noted (1986), the conventional significance of economies of scale and scope
in the definitions of corporate boundaries will gradually weaken and the economic
elements of cospecialization will affect those definitions.
In response to these changes in the environment, companies need to acceler-
ate collaboration across similar and different industries through open innovation
(Chesbrough, 2003) and collaborative innovation (Kodama, 2015), and to dynami-
cally restructure to optimize corporate boundaries (redefinition of new vertical and
horizontal boundaries). Corporate vertical boundaries determine value chains for
the growth of existing businesses, while horizontal boundaries determine value
chains for new business development, such as strategy transformation and innova-
tion (Kodama, 2009a). Practitioners’ perception and recognition of the changing
external environment of convergence and the dynamic asset orchestration process of
a company’s internal knowledge (assets) with partners’ external knowledge (assets)
drives the dynamic construction of corporate boundaries.
Asset orchestration comes about through the internal and external asset net-
works within and outside of a company (or organization) (see Figure 5.5). Internal
knowledge (internal assets) is integrated in in-house company networks, and exter-
nal knowledge (external assets) is integrated in external networks (external asset
networks) that transcend vertical and horizontal boundaries outside companies. In
the “asset orchestration firm”, new knowledge (assets) that transcends corporate
boundaries is created through asset orchestration processes using these networks
through open innovation and collaborative innovation inside and outside the com-
pany. These processes bring about strategic innovation (see Figure 5.5).
Realizing strategic innovation through the asset orchestration process requires
company-specific high-quality organizational capabilities, which are the “strategic
innovation capabilities (SIC)” to achieve the dynamic integration process of DC and
OC described earlier. Asset orchestration is the reconfiguration or transformation of
internal and external assets through internal and external asset networks inside and
outside companies by DC. As shown in the capabilities building map in Figure 5.1,
it is important to integrate and use DC and OC according to the corporate environ-
ment, including reconfiguration or transformation of internal assets by OC – the
daily routine capabilities of the company. Such SIC determine corporate boundaries
(vertical and horizontal boundaries) and form new value chains.
Figure 5.6 conceptualizes expected value chains and capabilities required
by companies in advanced IT environments. As IoT, AI, and robotics advance,
Figure 5.5 The asset orchestration model (asset orchestration firm)

Source: Created by the author, citing Kodama (2009a)
improvements in process efficiency and productivity mainly in downstream pro-

cesses in the value chain (design, procurement, manufacturer, logistics, services, etc.)
are predicted. Examples include routine operations in sales and services, automation,
mass customization, labor saving and unmanned operations in design, procurement
and production, and supply chain automation and efficiency in logistics and support.
In contrast, it is inferred that the weight on the asset orchestration activities of
highly skilled personnel rises because of the high potential to expand new busi-
ness markets in various fields of industry upstream in the value chain (in manage-
ment, business and product planning, marketing and R&D). For example, people
or organizations at the center of asset orchestration play an important role in setting
down and executing strategies and business plans for R&D activities and busi-
ness creation involved with the creation of advanced IT. Also, the weight on asset
orchestration activities in marketing and commercial planning rises with planning
and developing business involved in data science, etc. Even in sales and service
operations, high-value-added operations such as high-value goods and services
where a sense of security determines purchasing cannot be replaced by advanced
IT itself.
This suggests that in the advanced IT era, there is growing importance on explo-
ration work such as creating new business trends and business models by devel-
oping new IT (e.g., AI and robots) and creating new businesses by utilizing IT.
In Domains I and II in Figures 5.1 and 5.2, corporate capabilities for exploration
Figure 5.6 Value chains and capabilities in advanced IT environments
are mainly DC, which are a source of new value chains and coevolution models
(e.g., Kodama, 2009b). Exploration activities are also engines for sustained growth
of companies that bring about competitive advantage, difficulty of imitation, rare
value, and cospecialization through dynamic re-establishment of corporate bounda-
ries (vertical and horizontal).
In contrast, in Domain IV, the corporate capabilities for exploitation that pur-
sue best practices such as improvements and upgrades by making full use of IT to
achieve thorough efficiency and labor saving of existing routine work are mainly
OC. In Domain III, capability characteristics differ from Domain I and Domain II,
and strong integration of DC and OC is particularly important. Companies must
have both DC and OC functioning at the same time. These integrated capabilities
are the strategic innovation capabilities (SIC).
5.5 Conclusion
In the knowledge economy, and the advanced IT era, diverse human knowledge
is a source of valuable products, services and business models that gives companies
new competitiveness. Through convergence across different industries and diverse
technologies, asset orchestration raises the potential for new products, services and
business models spanning various boundaries, and raises the potential to bring about
value chains and business ecosystems that will become new strategic models. There-
fore, to build new businesses, companies need to reaffirm the perspective of pro-
cess management to create new assets by dynamically sharing and integrating the
intangible assets of people, groups, and organizations across organizational bounda-

ries within and outside companies through the process of asset orchestration.
From a systems approach, this chapter has clarified the dynamic innovation
processes that companies need to achieve strategic innovation (the combination
of incremental and radical innovation). In addition, the book has extracted ele-
ments of capabilities (strategic innovation capabilities) required for strategic innova-
tion through the continued execution of incremental and radical innovations by
companies. To achieve rapid and slow incremental innovation for exploitation and
radical innovation for exploitation, companies must demonstrate strategic innova-
tion capabilities to skillfully use and combine dynamic and ordinary capabilities on
the capabilities building map, and execute the dynamic spiral of these two different
capabilities through time.
The concept of strategic innovation capabilities covers the four capabilities of:
(1) Company-wide capabilities to integrate DC and OC

(2) Management capabilities to execute the spiral “strategic innovation loop”
(3) Management capabilities in and between Domains (including shifts between
Domains)
(4) Capabilities to combine the two different archetypes with dialectic management
Increasingly in recent years, collaborative research systems that span organizational

boundaries among industry, government, and academia have expanded the scope of
exploration of business opportunities, and outstanding middle managers, including
executives, work with suppliers to understand customer needs and actively engage in
“open innovation” (Chesbrough, 2003) and “hybrid innovation” (Kodama, 2012) to
incorporate external technologies. Here, the new knowledge of dynamic strategic
management processes in which practitioners activate the core “sensing” element
of DC (the ability to search, filter, and analyze business opportunities), draw grand
designs for new “boundary designs” and build new business models will become a
key management element in the era of convergence.
In the cutting-edge business field of advanced IT, leading core technologies are
distributed and innovated all over the world. Accordingly, in the age of convergence,
in which valuable cospecialized assets create wealth, management with open systems
and engagement in multi-perspective orchestration of intangible assets dispersed
within and outside of organizations and companies, including among customers,
will become increasingly important in the knowledge economy.
Notes
1 The likelihood of experiencing a certain amount of failure in the strategic selection do-
main rises with outstanding leaders and managers. This is also a working hypothesis from
the author’s own office experience. See Kodama (2017).
2 Numerous studies (e.g., Nonaka and Takeuchi, 1995; Kodama, 2007a, 2014) exist regard-
ing the theoretical frameworks relating to the creation of knowledge such as breakthrough
or new ideas. Analysis from various viewpoints will be the subject of future research topics.
One such example relates to the creative process for business concepts arising from the
synthesis of market and technology paradigms (see Kodama, 2007a).
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6 The strategic innovation
system – multi-case analyses in
high-tech companies
6.1 Developing strategic innovation – A balance of radical

innovation and incremental innovation
As discussed in Chapter 1, while accumulating and developing core competence by
strengthening the core business as the mainstay business, a new perspective of culti-
vating new business that will create new markets is essential for corporate leaders and
managers. Practicing strategic innovation (SI), which simultaneously executes and
balances these two different kinds of innovation processes, also signifies the pursuit
and cultivation of a new, highly unique strategic position, which is also an excellent
corporate strategy that will ultimately result in achieving a sustainable competitive
advantage (e.g., Markides, 1999).
This chapter presents a theoretical model of how companies can create a strategic
innovation system (hereinafter referred to as “SIS”) that not only realizes radical inno-
vation (hereinafter referred to as “RI”) but also incorporates the evolution of incre-
mental innovation (hereinafter referred to as “II”) that lies behind RI, and clarifies the
model through field research including multi-case analysis in high-tech companies.
SI in large companies, however, has a significant impact on success (or failure)
through complex interaction between subsystems that comprise the corporate sys-
tem. Therefore, strategic innovation systems (SIS) are regarded as “corporate sys-
tems” and, as such, there is a need to identify individual subsystems that have an
impact on SI and conduct an in-depth analysis of the characteristics of these subsys-
tems and the relationship of interactions between these subsystems. It is possible to
treat the above perspectives comprehensively with systems theory (e.g., Von Berta-
lanffy, 1960; Capra, 1996) and complex adaptive theory (e.g., Morel and Ramanu-
jam, 1999; Stacey, 1996). O’Connor (2008) believes that systems theory is effective
in elucidating RI systems in large corporations and offers several propositions con-
cerning elements of their subsystems.
The objective of this chapter is to deepen the reader’s understanding of the issue as
to how companies can develop capabilities to achieve SI, by applying the latest results
of systems theory and dynamic capabilities (DC) in recent years. The focus of this
chapter is on identifying elements of the necessary sustainable SI management sys-
tems for organizational metabolism and robustness not simply through dependence
on promoters with a strong will within an organization but through the effective
DOI: 10.4324/9781003305057-6
The strategic innovation system 107
use of knowledge assets including those of such promoters. To do this, I surveyed a

number of the most advanced global corporations, particularly in the ICT industry,
and from various raw data derived from this research and reviews of existing research
obtained new insights and arrived at a new framework for SI in companies.
SI in corporations has a major impact on success (or failure) through the complex
interaction of the elements of the subsystems that make up the “corporate system”.
The chapter will then identify individual subsystem elements that have an impact on
SI and will consider their characteristics and the relationships of the subsystems (e.g.,
organizations responsible for RI vs. existing organizations responsible for II). Then, the
chapter will present a basic SIS framework and several new propositions and insights
from the perspective of systems theory. Finally, it will describe future research issues.
6.2 The capabilities building map and strategic innovation

system (corporate system)
6.2.1 Positioning “capabilities lifecycles” in a strategic innovation system
Practitioners perceive and recognize changes in the external environment such as

technology convergence in different fields of specialization, while dynamic knowl-
edge integration (convergence) of internal knowledge and external knowledge
promotes dynamic structuring of the corporate boundaries (Kodama, 2011, 2014).
Therefore, companies require unique corporate organizational capabilities1 high in
quality. Such organizational capabilities are also drivers of SI as mentioned earlier.
I refer to these as “strategic innovation capabilities” (SIC) (Kodama, 2011, 2014;
Kodama and Shibata, 2014). Based on the field research by I and fellow research-
ers, SIC has dynamic integrating characteristics for integrating dynamic capabilities
(DC) with ordinary capabilities (OC) (which are also referred to as “operational
capabilities” in some literary references).2
To indicate elements of SIC necessary for dynamic innovation processes for
achieving SI (RI and II) for sustainable corporate growth, in Chapter 5, I devised
a “Capabilities Building Map” consisting of four domains (Domains I through IV)
together with an SIC concept that includes the individual characteristics of each
(and their relationships with each other) of the four capabilities related to their over-
all (comprehensive) elements (see Figure 6.1).
SIC is a concept that encompasses the following four capabilities:
(1) Capabilities integrating DC and OC throughout the company

(2) Management capabilities for achieving a spiral “strategic innovation loop”
(3) Management capabilities within and among domains (including the shift
between domains)
(4) Capabilities for balancing two different archetypes through dialectical manage-
ment (see Figure 6.1).
The framework of Figure 6.1 indicates that for an outstanding company to

achieve both II through exploitation and RI through exploration in a balanced
108 The strategic innovation system
Figure 6.1 Capabilities building map (CM) and strategic innovation capabilities (SIC)
manner, it is important for that company to skillfully and selectively apply DC and
OC on the capabilities building map while allowing for both of these to coexist and
dynamically execute these two distinct capabilities in a spiral-like manner on a time
axis. I call this framework a strategic innovation system (SIS).
On the other hand, Figure 6.2 shows the framework of the position of the four
domains and their relationship with each other on the capabilities building map
based on the framework of the “Capabilities Lifecycles” of Helfat and Peteraf (2003),
considered from the perspective of “the dynamic view of capabilities”. On the capa-
bilities building map, the capabilities needed by a company (organization) as a result
of each shift between domains to adapt to environmental changes (uncertainty and
speed) change dynamically.
The shift from Domain III and/or Domain IV to Domain I on the capabili-
ties building map in Figure 6.2 is also a framework that succeeds in RI through
the acquisition of new knowledge based on the accumulation of experience in an
organization. Thus, the concept of SI is to create RI through the inspiration and
acquisition of new knowledge from the accumulation of experience through II in
Domain III and Domain IV. The accumulation of experience through II practice is
a fundamental component of DC (Zollo and Winter, 2002).
I studied the shift from Domain III and/or Domain IV to Domain I of the CM,
the mechanism by which new capabilities are incorporated into organizations, in
the case studies presented in the next section (those of high-tech companies of Fuji-
film, Qualcomm, TSMC, Xiaomi, Huawei, and Zoom Video Communications).
These cases illustrate how dynamic capabilities (DC) were leveraged to acquire new
Figure 6.2 Relationship between the capabilities building map and the capabilities lifecycle
capabilities while leveraging and evolving current capabilities, and how radical inno-
vation was achieved.
The demonstration of “sensing” (Teece, 2007), one of the characteristics of
DC, increases the diversity of knowledge and induces a shift to Domain III and/or
Domain IV  Domain I on the CM in Figure 6.2. According to Cohen and Levinthal
(1990), capabilities to evaluate and use external knowledge are largely determined by
the level of previously developed relevant knowledge. Nevertheless, it is important
for practitioners to increase diversity by exercising sensing functions. Therefore, to
generate sustainable RI, both II and RI processes must be compatible in SI.
In other words, for the sustainable growth of a company, it is important to con-
sider not only radical innovation systems (hereinafter referred to as “RIS”), which
corresponds to subsystems that constitute SIS, but also incremental innovation sys-
tems (hereinafter referred to as “IIS”) (including the interaction and consistency
between the two systems, RIS and IIS). The SIS, which consists of RIS and IIS, is
also the very corporate system that guarantees the sustainable growth of companies.
6.2.2 Case studies in high-tech companies
(1) Fujifilm
For example, while Kodak degenerated from Domain IV to “retrenchment or
retirement” due to digitization, Japan’s Fujifilm, also a leader in the same industry
and the same environment, succeeded in making a strategic shift from Domain IV to
Domain I through “redeployment/recombination”. Although Kodak felt the threat
from the changes in the market due to digitization at an early stage, it adhered to
its existing (strong) OC in effort to maximize shareholder value and profits. The
company consistently adopted rigid strategies including taking measures to shore
up its stock price by spending sizable amounts of money in large share buybacks.
Moreover, it is presumed that the top management of the company at the time had
no plan for integrating existing advanced knowledge in response to the changes in
the environment, which in this case was digitization.
On the other hand, Fujifilm, using advanced photographic film technology
which it already had within the company, succeeded in developing and commercial-
izing special protective film technology for protecting liquid crystal (application of
film technology to liquid crystal display (LCD) television: redeployment). A further
example of the “redeployment/recombination” of existing technologies is Fujifilm’s
application of technology on collagen, used to reduce the drying of photographic
film, to develop new cosmetic products that joined the ranks of top-selling skin
products. Fujifilm is continuing its foray into the cosmetics industry and is achiev-
ing success at present. In recent years, Fujifilm has even become involved in the
development of pharmaceutical products and hopes to find a wonder drug that
will cure the Ebola virus, which has been a topic making headlines in recent years.
Thus, rather than maximizing shareholder value or profits like Kodak but at the
same time avoiding going into the red in efforts to survive, Fujifilm succeeded in RI
from Domain IV to Domain I to Domain II to Domain III (from the realization of
RI from this Domain I to Domain II. This was followed by new II in Domain III)
(Shift A in Figure 6.2) through the integration of existing advanced knowledge that
it owned and accumulated (in other words, strong DC).
In the case of such a Shift A in Figure 6.2, it can be assumed that in response
to gradually emerging threats, the company’s extreme crisis awareness and higher-
order learning as well as strategic collaboration through the formation of informal
networks with different industries (in other words, strategic non-routine behavior
of high quality) lead to strong DC demonstration and enhanced the possibility of
a transition to Domain I. This can also be considered a good example of a strate-
gic transformation in response to the “capability threats” described by Helfat and
Peteraf (2003).
On the other hand, as Winter (2000) mentioned, an organization facing a crisis
may be motivated to raise the level of its capabilities. When a capability undergoes
“renewal”, the exploration and development of new means may result in a new
stage of development. At times, companies also opt for the “redeployment” of capa-
bilities in different product markets. Unlike “replication”, which applies the same
product or service to different regional markets, redeployment targets different but
strongly related products or service markets. Furthermore, when a company trans-
fers a capability to respond to markets that are different from the current business
but have strong relevance, instead of “replication” or “redeployment”, the company
may “recombine” a capability (or capabilities) with another capability (or capabili-
ties) (Helfat and Peteraf, 2003). The success story of Fujifilm can be viewed as the
result of successful functioning of such “renewal, redeployment or recombination”

processes through the demonstration of strong DC.
This realization of Shift A by Fujifilm was achieved through the following organ-
izational process. To achieve its Second Foundation, it was essential for Fujifilm to
develop new technologies and products through its R&D. Therefore, management
was to invest aggressively in R&D while staff at the front line directed their efforts at
increasing productivity in R&D. During business in 2004, sales of silver halide film
fell dramatically. Moreover, there was also an across-the-board fall in profits from
core products such as printing film and X-ray film. The main problem was the struc-
ture of the R&D organization, which had been optimized for silver halide film prior
to 2003. Moreover, as a company, Fujifilm had very little experience and knowledge
regarding new business development. On the other hand, it had significant strengths
in technology and know-how, which it had developed over many decades through
its core businesses.
Second, it was understood that the contribution of R&D would be essential for
the company to achieve the objectives of the Second Foundation. Therefore, even
if it meant foregoing profits in the short term, the company was willing to invest in
R&D. At the same time, it was necessary to increase productivity in R&D to ful-
fill expectations. With this understanding, Fujifilm proceeded with organizational
reforms. In the period when silver halide was the core product, Fujifilm’s stance in
R&D was to sell the products it developed. This time around, however, product
development was to proceed according to a business strategy based on organizational
reforms in R&D.
In June 2003, the R&D organizational framework was entirely based on Fuji-
film’s photo business. Moreover, the axis of business was not explicit, there was over-
lap in areas of resources including development, and there were various problems.
At that time, the company changed the organizational structure by establishing the
R&D Management Headquarters and under it a Technology Strategy Division (cur-
rent Innovation and Strategy Planning Division) and an Intellectual Assets Division,
which is under the direct control of the president. It also established divisional labs
for the respective divisions and corporate labs to support the business divisions. The
functions of the Technology Strategy Division are to plan and promote company-
wide R&D plans by managing various strategic projects including the distribution
of resources, the promotion of industry-academic collaboration as well as activities
to promote research efficiency, and the creation of group synergies among group
companies, particularly with Fuji Xerox. The division is also in charge of managing
and coordinating the R&D business of the entire company (see Figure 6.3).
Aiming to restructure the R&D organization to one with clearly stated func-
tions and roles and to pursue development that directly linked to business, Fujifilm
introduced divisional labs and, as a new organizational concept, adopted a frame-
work for implementing activities from R&D to commercialization as one continu-
ous process. This kind of vertical integration of organizations from upstream to
downstream, that is, from R&D to commercialization (with divisional labs directly
linked to business divisions) was designed to efficiently pursue development directly
linked to business and to create “exploitation SC” through collaboration between
Figure 6.3 Organizational framework of Fujifilm R&D

Source: Prepared by the author from materials provided by Fujifilm
divisional labs to create synergies between business divisions (see Figure 6.4). Color
film, which represents Fujifilm’s core technology accumulated over decades, has a
total film thickness of 20 micrometers and is carefully coated with 16–20 coats in
such a way as to ensure against interfacial mixing between layers. Inside the film is
silver halide, which is surrounded by various organic materials that precisely adsorb
the halide, while various nano-dispersed organic materials surround these materi-
als. Thoroughly exploiting this photo technology, Fujifilm developed a commer-
cialization strategy for using this technology in various business areas, particularly in
exploitation SC centered on the respective business divisions.3 Such exploitation SC
not only improved and enhanced existing products but also demonstrated dynamic
capabilities through the orchestration of various cospecialized assets for new product
development.
Moreover, Fujifilm strengthened collaboration among organizations to reinforce
fundamental technologies and advanced research across different areas of specializa-
tion (directly linking corporate labs, technology centers, divisional labs and the R&D
Management Headquarters) and organizations directly connected with business
mentioned earlier (directly linking divisional labs and business divisions). Advanced
research at Fujifilm includes the three Frontier Core-Technology Laboratories, Syn-
thetic Organic Chemistry Laboratories, and Advanced Marking Research Laborato-
ries (called “corporate laboratories” at Fujifilm), which pursue fundamental research
in new fundamental technologies and new products and foster creative exploration
Figure 6.4
Realization of “intellectual fusion and innovation” through the formation of
multi-layered SC
Source: Prepared by the author from materials provided by Fujifilm
SC. These advanced research labs aim to create new value through “intellectual
fusion and innovation”. At Fujifilm, “intellectual fusion” refers to the convergence
of knowledge and thinking approaches of engineers in different fields, while “inno-
vation” refers to the creation of new disruptive innovation technology and new val-
ues. Exploration SC have an accurate understanding of the strengths and weaknesses
of their technology infrastructure and core technologies the company has at present
and make efforts to further build on its strengths in a creative manner through asset
orchestration processes with a view to strengthening fundamental technology to
thoroughly exploit photograph-related technologies (see Figure 6.4). Exploration
SC became important organizational infrastructure for creating dynamic capabilities
for asset orchestration.
Elemental technology labs previously located in various areas of Japan are now
centralized in three large research departments in the Advanced Research Laborato-
ries. These three research labs within the Advanced Research Laboratories comprise
a matrix-type organization and have a system whereby researchers come together in
particular laboratories according to individual research themes, where they deliber-
ately form autonomous exploration SC. When required, external partner companies
also participate in research projects. The slogan of the Advanced Research Labora-
tories is “Intellectual Fusion, Innovation and Value Creation”, and their engineers,
hailing from different cultures and different technologies, come together to create
innovation through the fusion of advanced technologies. Of critical importance in

their efforts are the engineers’ own promotion of a paradigm transformation.
When there is a need for the integration of technologies, “feasibility teams”
are formed to consider the possibilities, and when there is a strong likelihood that
new elemental technology can be achieved through the integration of technologies,
project teams are formed and proceed with an investigation of development. This
process will be discussed later. When the teams reach the stage of the actual product
development and manufacturing technology, an exploitation SC that integrates rel-
evant departments led by relevant divisional labs or business divisions is formed and
proceeds with the actual product development. External partner companies will also
participate in product development as required.
These third SC that organically link exploration and exploitation SC are synthe-
sis SC formed by corporate laboratories and divisional laboratories (which will be
discussed later), and these three SC achieve the creation of new convergence knowl-
edge through the demonstration of asset orchestration process based on dynamic
capabilities. Synthesis SC consist mainly of feasibility teams and project teams
formed by corporate laboratories (in some cases they include some divisional labs)
(see Figure 6.4). Ideas and technologies generated in the Frontier Core-Technology
Laboratories, the Synthetic Organic Chemistry Laboratories, and the Advanced
Marking Research Laboratories are thoroughly discussed and researched through
the establishment of feasibility teams that determine the potential of particular tech-
nologies and project teams for developing elemental technology. Moreover, to bring
research to the new product stage, technologies are transferred to R&D, manufac-
turing and commercialization in the divisional labs and business divisions.
At the same time, the Technology Strategy Division of the R&D Management
Headquarters oversees the entire company’s R&D and contributes significantly as a
coordinator in forming optimal teams (including feasibility and project teams) across
organizational divisions to resolve various technological issues. The R&D Manage-
ment Headquarters, as a cross-organizational synthesis SC, which includes the Intel-
lectual Assets Division, holds an important position in the optimization of the entire
company’s R&D and in the enhancement of its productivity.
In such exploration SC, exploitation SC and synthesis SC, members selected
from among researchers of the Fujifilm group make efforts to maximize the results
of activities through collaboration. In this way, the company creates various new
businesses and products through “intellectual fusion and innovation”.
There is a pervasive belief within the company that communication and col-
laboration based on shared R&D goals with specialists in different fields, who have
dispensed of any adherence to their own particular fields as researchers or developers,
will lead to success in development that capitalizes on synergistic effects. Dispensing
with adherence to specialist fields of technology is the first step in “intellectual fusion”
and “innovation”, and the strengthening of teamwork through the mutual utiliza-
tion and application of knowledge and innovation among researchers and engineers
in various different fields leads to the establishment of multi-layered SC as shown in
Figure 6.4. Fujifilm’s keywords – look through, think through, carry through, and
verify through – are also indicative of the company’s perceived need for aggressive
R&D, which sums up the essence of Fujifilm’s approach to business. The SC also
involve commitments at technology strategy meetings attended by top management.
In specific terms, SC play a vital role as Ba (Nonaka and Takeuchi, 1995; Kodama,
2005) not only for reducing the distance between management and the front line of
research and increasing the motivation of researchers but also for enabling manage-
ment to gain an accurate understanding of the status of R&D and to give specific
instructions based on timely decision-making. In addition, a further role of the SC
is to ensure that certain execution of action plans decided on at technology strategy
meetings leads to improvement in research efficiency and productivity.
In this way, exploration SC serve as organizational infrastructure for the smooth
execution of the “research-driven cycle” from basic research to applied research,
while exploitation SC serve as organizational infrastructure for the smooth execu-
tion of the “development-driven cycle” in bringing projects to the business stage
and product stage. Synthesis SC also form many teams linking the corporate labs
focusing on research with divisional labs focusing on development to prevent the
formation of boundaries between the respective labs. In other words, they smoothly
bridge what a number of academics describe as the “valley of death” (Branscomb
et al., 2001; Markham, 2002; Merrifield, 1995) between research and development
(as well as the commercialization process).
Furthermore, it is an established company rule that when a decision on the devel-
opment process of a new business product or particularly a large-scale investment
is to be made through a stage gate arrangement, it must be done through a process
of in-depth discussion from a business perspective. Stage gates are established at
certain intervals in the R&D process, which proceeds in a manner where the stage
gate decision-makers and stage gate umpires change according to the respective
decision-making levels. Although decisions at the initial idea level may be made at a
stage gate in a top-down manner, milestones are basically decided after a feasibility
investigation.
However, management deliberately refrains from controlling approximately
10–15% of research themes in corporate labs at this stage. This is particularly so for
long-term themes. The company generally allows for a generous amount of freedom
or “organizational slack” (Nohria and Gulati, 1996; Bourgeois, 1981) at the initial
stage, and becomes increasingly strict in its judgment as a product nears commer-
cialization. In other words, the company provides for a balance between control and
freedom by deliberately allowing for freedom in 10–15% of the research conducted
in corporate labs and allows for the corporate labs to take on research themes from
across the whole company that no business division would consider. This is because
there is an expectation that refraining from excessive control and striking a favorable
balance between management and freedom will lead to the ongoing creation of new
products and technologies, and the company’s own enduring development as a crea-
tor of new business. At the same time, the R&D Management Headquarters, which
is responsible for unifying relevant organizations, (matters relating to intellectual
property rights are the responsibility of the Intellectual Assets Division) has the role
of productively coordinating and managing stage gates and milestones and creating
synthesis SC that integrate creative exploration SCs and efficient exploitation SC.
A close examination of Fujifilm’s organizational framework and strategy from

the perspective of asset orchestration processes makes it clear that its SC triad model
functions successfully. To be specific, the creation of new convergence knowledge
is a key factor in exploration SC. Furthermore, to advance efforts in commer-
cialization, the synthesis SC of the feasibility teams and project teams activate the
exploitation SC for commercialization and enable the creation of new convergence
knowledge to realize new business. The existence of this SC triad model as an SC
multi-layered network is an important element in creating the dynamic capabilities.
(2) QUALCOMM Inc.
Research and development of wireless communication technology including CDMA

(code division multiple access), the development and sales of semiconductors and
software, and licensing constituted Qualcomm’s main business. The company does
not provide end products such as mobile telephone handsets but instead specializes
in R&D and widely provides the wireless industry with the results of its technical
developments in areas such as semiconductors, licenses, services, and applications
(specifically, semiconductors for mobile telephone handsets, system software, devel-
opment tools, and products for network development using the latest technology).
In fact, as a fabless company, Qualcomm holds a mobile telephone semiconductor
chip market share that is close to a global monopoly.
However, even after adoption of the TDMA standard, Qualcomm refused to give
up and persevered in promoting the superiority of CDMA outside the company. In
1988, it succeeded in an operational suitability test in San Diego. In 1991, Qual-
comm registered a patent for its output control technology, which was to become
an essential patent for 3G, and the following year, in 1992, registered a patent for
soft handoff technology. During this time, as a venture company and mainly an
R&D enterprise, Qualcomm worked to promote the formation of exploratory SC
outside the company and developed its experiment services through a process of trial
and error (Qualcomm demonstrates dynamic capabilities in Domain I and Domain
II). For example, in 1994, with the aim of creating a new market for CDMA, the
company decided to establish a joint venture with Sony Corporation of Japan and
enter handset manufacturing as a manufacturer on its own. Thus, Qualcomm was
operating in a highly uncertain business environment with a high rate of technologi-
cal innovation (equivalent to Domain II).
Subsequently, a major turning point in Qualcomm’s expansion was the worldwide
launch of the third-generation cell phone service. Qualcomm’s CDMA2000 was
developed mainly by Qualcomm as an evolution of cdmaOne (the Qualcomm-led
2G system) and also maintained compatibility with it. In Domain III and Domain IV,
Qualcomm promoted the improvement and enhancement of existing infrastructure
technology through the formation of internal and external partnership networks
for exploitation activities (exploitation SC) centered on existing organizations as an
incremental innovation system (IIS), and at the same time, toward the realization
of new 3.5G, 3.9G/4G, and 5G technologies, Qualcomm drove R&D activities in
Domain I and Domain II through the formation of internal and external partnership
networks for exploration activities (exploration SC) centered on a new development

project organization as a radical innovation system (RIS) (Shift B in Figure 6.2). At
the same time, DC, DC and OC, and OC were demonstrated in Domain I/II/III/
IV for both next-generation R&D and improvement and enhancement of existing
technologies.
In the area of new R&D in particular, the company is investing in the develop-
ment of new business in IoT, AI, and connected cars centered on semiconductor
business. As a company strategy for its own growth, Qualcomm is currently promot-
ing business by encouraging many more new entrants in diverse applications such
as high-function devices, IoT, AI, and connected cars, and continues to expand the
market. Therefore, within Qualcomm, triad SC (triad system) consisting of explo-
ration SC, exploitation SC and synthesis SC form mainly in a radical innovation
system (RIS) and incremental innovation system (IIS), and a balance is achieved
between the existing and new businesses through strategic partnerships (and some-
times corporate acquisitions) with core stakeholders around the world.
The main factors underlying the success and remarkable growth of Qualcomm
from startup to becoming a major company were (1) its focus on CDMA technology
at an early stage and its perseverance in R&D for practical application even when
it was considered impossible at the start, (2) its thorough strategy in protecting new
technologies it developed with patents, and (3) its ongoing aggressive commitment
to R&D investment in new business. In other words, aiming for self-sustaining,
autonomy, and sustainability, the company demonstrated strategic innovation capa-
bilities and achieved a strategic innovation loop in each domain on the capabilities
building map.
(3) TSMC
Taiwan Semiconductor Manufacturing Company (TSMC) was established in 1987

at Taiwan’s Hsinchu Science Park as a company specializing in manufacturing in
the semiconductor industry. Its aim from the outset was to operate as a dedicated
foundry. Later, however, it established a new platform and a new business model.
At present, TSMC is the largest foundry in the world and has an outstanding overall
track record in the semiconductor industry including IDMs. In the early days of
its establishment, TMSC received many orders from fabless companies in Silicon
Valley in the United States such as nVIDIA. With its highly customized services
and applications for unique specifications that cater to a wide range of customers
(designers and IDMs such as fabless companies and design houses), TSMC’s “plat-
form solution” is a platform that enables the manufacture of semiconductor products
to meet specific customer needs. In other words, TSMC’s platform solution is an
environment that facilitates the customer’s use of the foundry and improves several
functions and services.
In this way, TSMC developed a business model that took advantage of the low
cost of the foundry business and the advantages of specialization in the semicon-
ductor industry since its very founding, and despite not having state-of-the-art
process technology at the time, it also had no competitors in the world. These
advantages paved the way to a growth trajectory for the company and, at the same
time, expanded productivity through aggressive capital investment. Furthermore,
until about the year 2000, TSMC maintained its cost advantage over other compa-
nies, despite having somewhat inferior process technology in areas such as micropro-
cessing compared with the cutting-edge IDMs of developed countries. During this
period, as an emerging company, TSMC promoted the formation of exploitation SC
centered on existing organizations as incremental innovation system (IIS) within and
outside the company mainly utilizing (as well as improving and upgrading) existing
semiconductor production technology, and expanded its business (Demonstration of
dynamic capabilities and ordinary capabilities in Domain III and Domain IV).
In R&D projects involving next-generation semiconductor development, new
R&D project organizations play a leading role as radical innovation systems (RIS)
and demonstrate dynamic capabilities (DC) through SC and networked SC, which
are exploration SC with external partners, which are customers (e.g., fabless com-
panies such as Qualcomm, nVIDIA and Apple as well as semiconductor production
equipment manufacturers), in Domain I and Domain II, where the level of uncer-
tainty is high, and they promote new knowledge creation activities. This knowledge
creation process corresponds to Domain III and/or IV  Domain I  Domain II 
Domain III (demonstrating mainly DC) as shown in Shift B in Figure 6.2. Further-
more, synthesis SC led by TSMC’s leader teams take charge of resource distribution
at every stage from R&D to commercialization and merchandising, and they make
final decisions. In TSMC, the formation of triad SC (triad system) is the manage-
ment system that achieves a balance between exploitation activities of such existing
business (routine business, mainly semiconductor manufacturing) and exploration
activities in the form of new semiconductor R&D and virtual vertical integration.
(4) Xiaomi
Founded in 2010, Xiaomi has increased its market share in the Chinese smartphone
industry by leveraging the excellence of its own supply chains to introduce low-
cost, high-performance smartphones. In 2014, it took second place in the Chinese
smartphone market behind Apple. Then, in the first half of 2015, it surpassed Apple
to become No. 1. Eighty percent of the components in Xiaomi’s smartphones are
the same as those in the iPhone, and by making good use of its existing supply chain,
Xiaomi was able to manufacture smartphones inexpensively and quickly without
building a new supply chain. Thus, Xiaomi was able to sell a high-spec model in
the smartphone market at a surprisingly low price, enabling a product strategy that
surprised users – the first smartphone in China with a dual-core 1.5G CPU, 4-inch
display and an 8-megapixel camera.
The success of Xiaomi’s low-cost, high-spec strategy can be attributed to the
perfection of its supply chain for smartphone production in China. The supply chain
for Xiaomi’s smartphone production is mostly in China and other East Asian coun-
tries, including Japan. The short geographical distance between Xiaomi, which is
responsible for design, product planning, and software development, and the manu-
facturers responsible for parts procurement and final product assembly, has reduced
the development cycle for new products. Xiaomi’s smartphones consist of approxi-
mately 600 components. Through partnerships with Foxconn, Inventec, Gaotong,
MediaTek, nVIDIA, and others, the company has been able to quickly introduce
cutting-edge components and sell the highest-specification smartphones on the
market at a reasonable price.
However, to efficiently update OS-level software in-house, Xiaomi developed its
own operating system, MIUI, based on Android. At the same time, Xiaomi enabled
weekly updates of the OS and apps by listening to customers’ opinions and ideas
through its online forums. In developing its MIUI, Android-based operating system,
Xiaomi opened a MIUI forum on the Internet to encourage communication not
only between Xiaomi and its users but also among users. To enable its engineers to
capture as many user requests and ideas as possible, Xiaomi created a business system
that involves users in the product development process.
Xiaomi also utilized its own online store and social services to disseminate infor-
mation on the latest models on social networking sites even before their release
and adopted a complete pre-order sales method, whereby products are reserved on
the official website. In addition to the store on the official website, Xiaomi opened
stores on Alibaba and many other online shopping platforms to sell its products
online. Currently, 70% of Xiaomi’s smartphones are sold through Xiaomi’s official
website. This online-only sales channel, which integrates ICT-based sales data and
customer data updates, has played a major role in building trust with customers by
accumulating manufacturing and sales information and improving the accuracy of
demand forecasts.
Positioning of Xiaomi’s capabilities in the rapid growth of the company from
its founding in 2010 to 2015 can be judged to have been in Domain III, the fast-
changing and competitive (and less uncertain) market for smartphones. Xiaomi
demonstrated its dynamic capabilities (DC) by using competitive strategies with
Apple, Samsung, and other competitors to bring to market smartphones that meet
customer needs, with the goal of optimizing its own supply chain and increasing the
functionality of new products. As an incremental innovation system (IIS) in Xiaomi,
the existing organization took the lead in promoting the formation of “exploitation
SC” as an internal and external supply chain network and rolled out the expan-
sion of the smartphone market (demonstrating dynamic and ordinary capabilities in
Domain III).
Thus, Xiaomi was able to leverage mature Chinese supply chains to produce
cheaper, higher-spec handsets, enter existing markets, and achieve temporary effects
through the demonstration of DC. However, growth was negative in 2016, a turna-
round from the highest shipments in 2015. This was because the existing lead-
ing companies (e.g., Apple and Samsung) quickly implemented countermeasures,
while at the same time, emerging manufacturers that adopted strategies that mimic
Xiaomi’s surpassed Xiaomi’s products with cheaper, higher-specification handsets.
At the same time, several emerging manufacturers implemented strategies to
target rural, untapped markets in China that Xiaomi had not targeted with more
low-end products. Under pressure from these top and bottom markets, Xiaomi’s
market share began to plummet from the end of 2015, turning around from its
highest shipments in 2015 to negative growth in 2016. Among these, Huawei, a

well-established Chinese domestic brand, steadily increased its market share to take
first place, while both OPPO and vivo, in second and third place, respectively, were
younger startups than Xiaomi.
To overcome this situation, Xiaomi positioned itself as a mobile network com-
pany to maintain sustainable growth and aimed for an ecosystem strategy vertically
integrating software, hardware, and (Internet) services with the strategic goal of
profiting from the Internet business in the future and in the long run. Xiaomi has
steered the company toward forming an ecosystem based on its own MIUI operat-
ing system, which was developed based on Android.
Further expanding the quality and quantity of applications, Xiaomi’s MIUI app
store grew rapidly since its opening in 2012, surpassing 12 billion total downloads
in February 2015. The 30% commission received from application developers sup-
ports the revenue. In addition, Xiaomi’s Mi Cloud service can now be shared among
all Xiaomi devices, further strengthening Xiaomi’s ecosystem. In addition, Xiaomi
positioned smartphones as the main devices to be used as Xiaomi’s terminals and
increased the diversity of its terminals as part of its ecosystem promotion by offering
a wider and more varied lineup of wearable devices, TVs, tablets, IoT products, and
peripherals.
The Xiaomi ecosystem is based on a three-in-one integrated service strategy of
handset (hardware) and OS (software) and apps (services). As a radical innovation
system (RIS), Xiaomi’s new project teams took the lead in building and promoting
the business ecosystem and demonstrated dynamic capabilities (DC) to promote
new business activities through SC and networked SC as exploration SC with exter-
nal partners across different industries and business types. This ecosystem process
of strategic innovation corresponds to a shift between Domain III  Domain I 
Domain II  Domain III (Shift B in Figure 6.2).
The Synthesis SC, led by the leader teams (LT) in Xiaomi’s top and middle man-
agement, is responsible for a series of resource allocation and final decision-making
for Xiaomi’s business ecosystem strategy. Xiaomi has formed a triad SC (triad sys-
tem) as a management system to achieve both exploitation activities in existing busi-
nesses such as handset development and sales promotion and exploration activities
related to new business ecosystem strategies along with an integrated service strategy
that integrates the three elements of handsets (hardware), OS (software), and appli-
cations (services).
In 2018, Xiaomi’s gross profit breakdown was 46.3% for online services, 31.7%
for smartphones, and 20.3% for IoT devices and household goods business. Profits
earned by its Internet services business are greater than its stand-alone smartphone
profits. As an ecosystem operator in the IoT era, Xiaomi has expanded its product
and service portfolio and created new business areas.
(5) Huawei
Huawei is a privately owned, employee-owned company founded in Shenzhen,

China, in 1987 and is one of the world’s leading ICT solutions providers. Huawei’s
vision and mission is to bring the value of digitization to every person, home, and
organization to create an intelligent world where everything is connected. Lever-
aging the experience and expertise it has accumulated over the years in the tel-
ecommunications industry, Huawei is committed to fostering fertile ground where
everything is connected to create new value and where everyone can reap the ben-
efits of digitalization.
Huawei has made great progress in overseas markets as its R&D capabilities have
improved in recent years, and its global strategy is expanding more and more. Prod-
ucts developed by Huawei are used in many countries and regions around the world.
Huawei has so far established 22 regional divisions around the world containing
more than 100 branches. In addition, Huawei has established 16 research institutes
and is developing a global R&D strategy.
As a commercial business, Huawei is leading the 5G commercial process in response
to globalization and has established a 5G joint innovation center with European tel-
ecom operators to continue promoting 5G commercial and application innovation.
Huawei’s RuralStar series solutions have provided mobile Internet services to more
than 40 million people in remote areas in over 50 countries and regions. Huawei’s
corporate ICT solutions business supports the digital transformation of custom-
ers in various industries, building digital world infrastructure, and 228 companies
worldwide have chosen Huawei as their digital transformation partner. Meanwhile,
Huawei’s consumer handset business has maintained steady growth, shipping more
than 240 million smartphones and pursuing a consumer-centric product strategy
that includes PCs, tablets, smart wearable devices, and smart screens.
Following is an outline of Huawei’s development process. In Huawei’s early years,
from 1987 to 1995, the company’s mission was to survive in the highly competitive
telecommunications equipment industry. At the time of its founding, as a distribu-
tor, Huawei was financed by importing premises switching PBXs manufactured by
the Hong Kong company “Gongnian” into the local Chinese market. In 1988,
CEO Ren Zhengfei felt a sense of crisis and decided to shift the company’s strategy
from distributor sales to manufacturing PBX switching equipment and began inde-
pendent research and development of such equipment.
Subsequently, the company commercialized PBX switching equipment for hotels
and small and medium-sized businesses. At that time, most private companies in the
Chinese switching market had no experience in independent research and develop-
ment of digital switching equipment, and foreign companies dominated the Chinese
switching market. CEO Ren Zhengfei recognized the importance of telecommuni-
cations technology and invested all of the company’s capital in independent research
and development of digital switching equipment. At the end of 1993, commerciali-
zation of digital switching systems began, and the company expanded its sales to
the local market in China thanks to its cost competitiveness with other companies.
Huawei’s strategic goal in the subsequent period 1996–2004 was to expand its
market share from rural to urban areas. During this period, Huawei, as an emerging
company in the fast-changing digital switching market, promoted the improvement
of switching production technology (including improvements and refinements).
Huawei’s existing organization as an incremental innovation system (IIS) took the
lead in promoting the formation of exploitation SC as an external sales network

and drove the expansion of the digital switching equipment market in the Chinese
market (demonstration of dynamic and ordinary capabilities in Domain III).
In 1997, Huawei entered the telecommunications market in Hong Kong and
later in Russia, further promoting the global expansion of digital switching equip-
ment. Starting in 1998, Huawei focused its business strategy on Europe and the
United States, and subsequently established R&D centers in Sweden, the United
States and elsewhere. Behind this global strategy was the shift to a new business
model that responded to changes in the business environment (increasing market
uncertainty and the speed of environmental change) in the form of high-speed
Internet (including next-generation mobile communications) and digital technol-
ogy, and management reforms in the company’s R&D system and business manage-
ment system.
At the time, CEO Ren Zhengfei analyzed Huawei’s future development and
risks and presented the key points and significance of the company’s reforms in an
internal company lecture entitled “Huawei’s Winter”. Through radical management
reforms, Huawei successfully took up the challenge of changing its global strategy
and business model by expanding overseas. Then, in 2000, Huawei for the first time
achieved sales of 20 billion yuan and an operating profit of over 2.9 billion yuan,
ranking first in China’s Telecommunications Electrical Appliance Ranking 100 at
that time. In 2002, sales in foreign markets increased to US$552 million. Further-
more, in 2003, Huawei established a new handset business unit to further expand
the business product portfolio.
As a shift in business model, Huawei aimed to provide optimal solutions to cus-
tomers around the world as a telecommunications solution provider, rather than
simply selling telecommunications equipment. To this end, Huawei unveiled a new
logo in 2006 and clarified its mission, including customer orientation, R&D invest-
ment for innovation, and building win-win relationships. Nevertheless, to achieve
success in developed markets such as Europe and the United States, the company
shifted its strategy to a policy of cooperation rather than competition with rivals.
The company then formed a joint venture with Global Marine to provide end-
to-end submarine cable solutions. At the end of 2007, Huawei established part-
nerships with all top European telecom operators. In 2010, Huawei, which was
primarily a BtoB company, reformed the strategic stream of its handset business
to fit the needs of consumers with respect to its BtoC business and introduced a
brand concept for middle-class consumers. After reviewing the consumer business
(cell phones, semiconductor chips, etc.), terminal equipment business, and various
services for the Internet, a new business unit called the Consumer Business Group
was established from the previous divisional organization.
In its 2017 annual report, Huawei announced its mission to deliver the value of
digitization to every person, home, and organization to create an intelligent world
where everything is connected. Huawei was instrumental in creating a foundation
for integrating ICT infrastructure and intelligence, advancing customer orientation
and innovation as a bridge between the distributed digital world and a consistent
intelligent world. In 2017, Huawei defined its public cloud strategy. Huawei ranked
first in China’s public cloud market and in the world’s top five for the third consecu-
tive year. In 2019, the strategy was to enter the smart car solutions market to provide
network product solutions and cloud AI product services.
The goal of network product solutions is to build the best, most intelligent, and
most cost-effective connections in the world. The goal of cloud AI product services
is to create fertile ground for computing services and cloud services to build an
intelligent world where everything is connected. Huawei has been expanding into
strategic markets such as cloud, AI, and smart car solutions for the past decade. The
size of sales increased from $21.8 billion in 2009 to $122.972 billion in 2019.
Behind the success of Huawei’s global strategy and the creation of new business
models is the implementation of internal management innovation. As one of the
management reforms, Huawei introduced a research and development management
system called Integrated Product Development (IPD) under the guidance of IBM in
1998. IPD is a product development management process that IBM adopted world-
wide. Rather than the function-centered “product-out” development of conven-
tional product development, IPD focuses on delivering sellable products to customers
with a market-in theme, from product strategy planning to the project life cycle, with
the aim of understanding revenue and expenditure and maximizing profits.
Prior to the IPD reform, Huawei had a weak formal internal R&D plan and
established technology management system. For example, the lack of a standardized
process to guide the product development process led to technical problems in most
development projects. Problem-solving at that time depended on the competence
and personal experience of specific R&D personnel. In addition, there was lit-
tle close contact and communication between the marketing department and the
R&D team. Thus, meeting the needs of a growing number of customers placed a
heavy burden on the R&D department, which lacked an effective way to manage
customer needs and product lines. In 1997, in particular, Huawei faced this growing
disruption, with more than 1,000 product versions, and as a result, Huawei’s product
development and product management fell into an inefficient trap, prompting CEO
Ren Zhengfei to undertake a major management reform.
The essence of IPD is comprehensive management and joint development
between different departments, and IPD reforms led to the formation of a new
product development team (PDT). One PDT team handles one product. To form
a team, PDT team members are selected from each department, such as marketing,
finance, and R&D. As a result, product development changed from being the sole
responsibility of the R&D department to a collaborative process among all depart-
ments. Through IPD reform, the product development process was formed between
different departments and became an open process within the company. IPD reforms
enabled potential problems in the product development process to be quickly dis-
covered, identified, and resolved at the beginning of the product design process. The
essence of IPD is to consolidate the capabilities of various departments, reduce prod-
uct development failures due to lack of communication between different depart-
ments in the R&D process, and successfully bridge (match) R&D and market needs.
In most companies, product development is done by the R&D department, but in
IPD, most company departments need to be involved in the product R&D process,
and the entire R&D team needs to be responsible for the outcome of the product
(e.g., profit). Huawei formed a multi-layered cross-functional team (CFT) consisting
of different departments to drive the IPD process. Huawei’s top-level interdepart-
mental team is an investment review committee formed from R&D, procurement,
marketing, supply chain, manufacturing, legal, and finance. More than ten people
from various departments joined to form this committee. The IPD process deter-
mines the establishment and execution of R&D projects and effectively manages the
company’s product and technology development direction. The integrated portfolio
management team, an interdepartmental team that coexists with the investment
review committee (members come from different functional areas), decides whether
to approve each development project and reports back to the investment review
committee.
The business management team and the product development team consist of
about seven employees from different functional departments. The business man-
agement team is responsible for decision-making from development to the entire
product life cycle, while the product development team is responsible for develop-
ing a single version of the product. The management and product development
teams have independent accounting systems, and the performance of each member
involved is closely linked to the performance of the products for which they are
responsible. For technology development, there is an integrated technology man-
agement team, a technology management team, and a technology development
team. These technology development-related teams typically identify the technolo-
gies needed for future product development and determine the direction of devel-
opment from both a technology development and market-driven perspective. The
IPD interdepartmental team system ensures that each department participates in the
entire product development process and reduces the costs of repetitive communica-
tion between different departments.
Such in-house multilayered PDTs and various forms of CFTs correspond to the
strategic communities (SC) that bring about the dynamic capabilities (DC) men-
tioned in Chapters 4 and 5. In SC, the focus is strategic non-routine activities on
pragmatic boundaries to solve new issues and problems. Within this multi-layered
group of SC, the investment review committee and the integrated portfolio man-
agement team were the equivalent of the Synthesis SC centered on the leader teams
(LTs) responsible for a series of resource allocations and final decision-making from
R&D to the creation of business and commercialization. IPD interdepartmental
teams as radical innovation systems (RIS) formed exploration SC for exploration
activities, while at the same time, global sales and operations teams, including exist-
ing businesses, formed exploitation SC for exploitation activities as incremental
innovation systems (IIS). Thus, across Huawei’s businesses, a triad SC (triad sys-
tem) was formed as a management system to realize the combination of exploration
activities (new R&D) and exploitation activities (overall operations including exist-
ing businesses).
This IPD revolution was an important turning point in Huawei’s growth into
a world-class company. With the IPD system still in operation, Huawei’s revenue
increased from US$1 billion to US$122.9 billion and the number of employees
increased more than tenfold. In terms of product development, product develop-

ment cycles are continually shortened, product failure rates continue to decline, and
customer satisfaction has been increasing year after year.
Huawei’s success in product development is not only due to the perfection of the
IPD system itself. More importantly, in the process of IPD revolution, Huawei has
transformed its existing product development process of ordinary capabilities (OC)
(including, in effect, the dynamic capabilities of its adaptive engineers who have the
skills to solve some problems ad hoc or respond quickly to problems) to acquire and
demonstrate its own systematic dynamic capabilities (DC) as IPD.
As described earlier, to build a new business model and promote a global strategy,
Huawei promoted new strategic innovation by demonstrating dynamic capabilities
(DC) through SC and networked SC as exploration SC with external partners across
different industries, business sectors, and business types, led by cross-functional pro-
ject teams executing IPD. This process of strategic innovation corresponds to the
interdomain shift Domain III  Domain I  Domain II  Domain III (Shift B
in Figure 6.2).
(6) Zoom Video Communications
Nowadays, there is probably no one who does not know the name Zoom. Zoom
conferencing is a videoconferencing technology optimized for Internet commu-
nications, with features such as [a] video codec optimized for IP communications,
[b] software MCU functions, [c] improved security technology, and [d] improved
operability and functions (improved UI). Zoom is widely expanding to B2B,
B2B2C, B2C, and C2C worldwide, and is typically used for telework.
Zoom Video Communications’ (hereinafter referred to as “Zoom”) corporate
philosophy is delivering happiness at the core of everything it does, stating that
employees must be happy to satisfy customers. The company has a corporate cul-
ture where employees care for each other. Founder Eric Yuan believes that if one
can build relationships of trust with one’s customers, sales will follow. His thinking
may have been influenced by the many unhappy customers he encountered during
his past tenure at WebEx (where he emerged as a code developer and later rose to
become WebEx’s vice president of engineering).
Yuan founded SaaSbee in April 2011 in Delaware while working for Cisco Sys-
tems (which later acquired WebEx). Two months later, he left Cisco Systems, where
his annual salary was $400,000, to begin two years of product development in secret
with 40 engineers. Everything was developed from scratch. With cloud-based ser-
vices in mind, it took 18 months of development to achieve scalability.
At the time, the web conferencing market was already a competitive environ-
ment, with about 100 companies participating worldwide such as Microsoft, Cisco
Systems, and BlueJeans. It was also the time that Apple released FaceTime. In terms
of the business environment, value chains in the videoconferencing market were
already established, there was low market uncertainty, although the market and
technological innovation were changing rapidly. Companies focused on developing
new software technologies (including service improvements and enhancements) and
were demonstrating their own dynamic capabilities (DC) based on existing ordinary
capabilities (OC). At that time, Zoom’s capabilities were in “Domain III (DC and
OC)” on the capabilities building map.
Zoom used competitive strategies and demonstrated its unique dynamic capa-
bilities (DC) to bring web conferencing to market in response to customer needs,
with the goal of developing everything independently and without licensing from
other companies. At Zoom, the existing organization as an incremental innova-
tion system (IIS) from the start-up era took the lead in promoting the formation of
exploitation SC as an internal and external supply chain network and expanded the
web conferencing market (the demonstration of dynamic and ordinary capabilities
in Domain III).
In Yuan’s view, WebEx’s architecture was already outdated after 12 years of devel-
opment. In developing web conferencing (later Zoom) beyond WebEx, Yuan con-
sidered using Web Real-Time Communication (WebRTC) (a project launched to
realize real-time communication via an API in web browsers and mobile appli-
cations) as a base, but due to its functional limitations, Yuan was determined to
develop the product from scratch. Zoom demonstrated its own DC in the develop-
ment process in Domain III (DC and OC).
Aiming to develop software suitable for the smartphone and cloud era, the 40
engineers spent 18 months completing the beta version. In May 2012, the company
changed its name from SaaSbee to Zoom Video Communications. In August of
the same year, a beta version was released. This version achieved HD quality group
video chat with 15 people participating simultaneously. In November of the same
year, Zoom signed a contract with its first customer, Stanford University, and by
December the number of users reached 1,000.
In January 2013, the company announced the cloud-based Unified Meeting
Experience (UMX) Zoom 1.0. Up to 25 people could participate in HD video
conferencing. The free version allowed calls up to 40 minutes. In June of the same
year, the company released Zoom 2.0, a cloud video collaboration system. The
concept for this system was “affordable, unified, cross platform meeting experience
for everyone”. Additional features such as H.323 connectors were added to the
system to allow for integration with existing videoconferencing systems from other
companies.
In July of the same year, the company launched the Works with Zoom partner
program with the participation of 12 companies, including Aver Information and
Logitech (Logicool). It also achieved two million users (meeting participants), 5,500
meetings/day and 100 million meetings. In December of the same year, Zoom
2.5 was released, adding enhancements for iPhone/iPad, 100 participants/meeting,
25 gallery views, connection to H.323/SIP devices, passcodes, personal meeting
IDs, and other features. Then in FY2013, the company achieved 5,000 corporate
contracts.
From 2014, Zoom steered its development strategy toward a joint development
strategy with development partners aiming for an ecosystem strategy. In April of the
same year, the company introduced Zoom Presence (Zoom Rooms as of 2022) for
conference rooms, offering an all-in-one touch screen, monitor, Mac mini, camera,
and speakerphone. In June, ARRNet (Australia), an inter-school Internet service with

2,000 participating schools, adopted Zoom. ARRNet now has over 1 million users.
In July of the same year, the number of users (conference participants) reached
ten million. This represents an increase of eight million users in one year. In August
of the same year, Zoom 3.0 was released, adding group messaging, co-annotation
(simultaneous writing), and a new service, Zoom Webinar.
In December, five months after launching Zoom 3.0 and ahead of its com-
petitors, Zoom released Zoom 3.5, the first to support cloud recording (MP4) and
mobile screen sharing (iPad/iPhone app to Mac/PC). The ability to transfer files
through group messaging and other functions was also added.
Poly (formerly Polycom), Logitech, Sure, Yamaha, Yealink, Aver, DTEN, Jabra,
Lenovo, Personify and Revolve Robotics participated as hardware partners (technol-
ogy partners) in the Zoom-centric ecosystem. The aforementioned Zoom Rooms are
dedicated Zoom hardware terminals with built-in microphones, cameras, and speakers
that are used with the Zoom service and are intended for conference rooms and home
teleworkers. Currently, Zoom Rooms services are widespread around the globe.
Zoom entered a partnership with Polycom (offering bundled products). Polycom, a
long-established codec manufacturer, shifted its focus to selling webcams and speak-
erphones, and its business model has reached a major turning point in recent years.
In addition, the ecosystem’s Software (Applications & Services) Partners (Tech-
nology Partners) include Salesforce, Miro and Slack, as well as Google Workplace,
Calendar, Documents, Microsoft Teams (Schedule), Dropbox, Evernote, Zendesk
(for help desk), Qumu (video streaming), Otter.ai (voice AI, minutes, etc.) and oth-
ers. For example, with 1,500 applications registered, the Zoom App Marketplace
is providing convenient applications that can be used in conjunction with Zoom
meetings. Linking with other companies’ services such as Slack and Salesforce ena-
bles you to start a Zoom meeting from a Slack chat or from a Salesforce user’s screen
(customer data and other information). Apps range from summarizing the contents
of meetings (ToDo lists) to other applications. These are used to improve the quality
of Zoom meetings and reduce operational stress.
The apps are intended to improve the quality of Zoom meetings, but conversely,
API and SDK proposals have also been actively developed recently through the
execution of the Zoom Developer Program to integrate Zoom into users’ business
systems. In April 2021, Zoom launched a $100 million Zoom Apps Fund. The pur-
pose of Zoom Apps (Zoom integration apps) is to promote the growth of the Zoom
ecosystem, which consists of integrations with other companies’ services, developer
platforms, and compatible hardware. The fund invests in developer partners that
have developed profitable products and are new to the market, with an initial invest-
ment of $250,000 to $2.5 million in each portfolio company. There are also more
than 1,000 reseller and integrator partners worldwide.
In 2015, to accommodate the rapid user expansion associated with three con-
secutive years of triple-digit hyper growth, Zoom entered into a partnership with
Equinox, a data center, and contracted 13 data centers worldwide, reaching 450,000
subscribing businesses, 5,800 educational institutions, and 15 billion annual meet-
ing minutes. In 2017, the company released services and apps one after the other,
including Zoom for Telehealth, a cloud-based telehealth service, in February, Zoom

Connector for Polycom in May, and One Zoom One Tap Connector for Cisco
terminals in June. The company also partnered with Samsung Electronics Korea
to offer the Samsung Dex mobile dock, a mobile-to-desktop meeting experience.
In July 2020, the company released a hardware subscription, Zoom Hardware as a
Service (HaaS). The company also announced Zoom for Home for remote workers,
bringing the era of subscriptions not only to the cloud but also to hardware.
These hardware partners (technology partners), software service partners (appli-
cations and services) (technology partners), and reseller partners and integrator part-
ners form a business ecosystem around the Zoom service platform, which is the
backbone of Zoom’s rapid growth (see Figure 6.5).
Zoom is building and accelerating its business ecosystem, led by new project
teams as radical innovation systems (RIS) to demonstrate dynamic capabilities (DC)
through SC and networked SC as exploration SC with external technology partners
(hardware/software). At the same time, to expand operations, including existing
services, organizations such as sales departments form exploitation SC with external
reseller partners and integrator partners. This kind of ecosystem process of strategic
innovation corresponds to a shift between Domain III  Domain I  Domain
II  Domain III (Shift B in Figure 6.2). In Zoom’s business ecosystem strategy,
synthesis SC, led by leader teams (LT) consist of Zoom’s top management team,
is responsible for a series of resource allocation and final decision-making. Zoom
forms Triad SC (Triad System) as a management system to realize the combination
Figure 6.5 Zoom’s business ecosystem

of exploitation activities (global sales promotion) and exploration activities related to

new business ecosystem strategies.
6.2.3 Common findings from case studies
(1) Driving strategic innovation by combining exploration and exploitation

In the six high-tech companies in the aforementioned case studies, the organiza-
tional characteristics that generate strategic innovation include the coexistence of
existing organizations (main organizations), which are responsible for the expan-
sion of existing businesses, and cross-functional project organizations (new organi-
zations), which are responsible for the development of new technologies and the
realization of new business development. Common across the six companies, project
organizations mainly demonstrate DC and are dedicated to R&D, service planning
and new business development work, and form exploration SC that include external
partners as activities for exploration.
On the other hand, for related operations in the value chain (manufacturing,
sales, after-sales support, etc.) that realize business, the existing OC of internal line
organizations are used to form exploitation SC that include external partners as
activities for exploitation. Thus, as a characteristic of a company that creates strategic
innovation capabilities, which are the capabilities of an entire company integrating
DC and OC, there is background evidence of the existence of an identifiable organ-
izational structure (new organizations and main organizations) and the realization
of exploration processes centered on new organizations and exploitation processes
centered on main organizations by the identifiable organizational structure.
(2) The SC triad model to realize inter-domain shifts and the strategic innovation loop
Between the two types of organizations (new organizations as project organiza-
tions vs. main organizations as line organizations) and multi-layered SC networks
(project network exploration SC vs. line network exploitation SC), there is always
a contradictory conflict and tug-of-war between them (e.g., Schad et al., 2016).
The presence of such interaction between the organizational and main organiza-
tional elements is an impediment to synthesizing the knowledge and actions of
practitioners in each organization. However, a new perspective revealed in the case
studies is the existence of leader teams – synthesis SC – which facilitate this syn-
thesis. Although the organic structure of leadership teams differs from company to
company, the common denominator is that they consist of departmental heads (top
management, middle management, etc.) in a cross-functional fashion.
The leader teams play the role of improving R&D and new business development
performance by strengthening the characteristics of the cross-functional or inter-
corporate integration of the exploration and exploitation SC. An important element
in the dialectical realization of synthesis of knowledge and strategy among different
organizations is the formation of the SC triad model, which integrates exploration
SC, exploitation SC and synthesis SC. As mentioned in Section 6.2.1, the formation
of these SC triad models can be considered to bring about [1] management capabili-
ties to realize a spiral strategic innovation loop, [2] management capabilities within
and across domains (including shifts), and [3] capabilities to balance two different
archetypes through dialectical management, which are characteristics of strategic
innovation capabilities (SIC), company-wide capabilities that integrate DC and OC.
6.3 RIS and IIS characteristics in the strategic innovation system

Two systems, the radical innovation system (RIS) and the incremental innovation
system (IIS), are subsystems of SIC and the strategic innovation loop that sustain-
ably drive RI and II in the CM in Figure 6.1. First, it is necessary to identify the
individual subsystem elements that comprise the RIS and IIS that make up the SIS.
This study extracted and analyzed the elements of RIS and IIS subsystems necessary
for strategic innovation from a vast amount of interview data and publicly available
secondary data from Asian, European, and U.S. companies that have successfully (or
unsuccessfully) implemented strategic innovation by demonstrating DC (and OC).
This research study process also includes the six high-tech firms described in the
aforementioned case studies.
First, as empirical observations, first-order concepts related to RIS and IIS ele-
ments were derived. From these first-order concepts, the core management elements
necessary for subsystems common to RIS and IIS that constitute SIS were identified
and categorized, and second-order themes as theoretical observations were derived.
After analyzing and discussing the second-order themes, strong interrelationships
and fitness/reinforcement relationships among the identified and categorized vari-
ous subsystem elements were found.
Finally, from these second-order themes, three main aggregate theoretical con-
cepts ((1) Identifiable organization structure (new organizations and main organi-
zations), (2) Exploration process centered on new organizations and exploitation
process centered on main organizations, and (3) Interaction between new organiza-
tions and main organizations) were identified as the core frame elements of RIS and
IIS subsystems in the corporate system as an SIS.
In addition, a necessary condition for successful corporate strategic innovation
is the establishment of a business ecosystem, and dynamic congruence between the
environment (market, technology, ecosystems) and the corporate system. This is
because DC dynamically create new markets and transform existing markets while
the market (ecosystem) leads to the transformation of industries and companies.
For example, an “environment creation strategy” (Kodama, 2009) promotes a shift
between Domain III and/or Domain IV  Domain I  Domain II for explora-
tion activities, while an “environment adaptive strategy” (Kodama, 2009) promotes
exploitation activities in Domain III or Domain IV. As an element that facilitates the
construction of business ecosystems, it is important for companies (organizations) as
stakeholders to achieve appropriate and dynamic “congruence” through interaction
with the environment as the ecosystem (see Figure 6.6).
Following is a description of the subsystem elements of both these contrasting
systems (RIS and IIS).
Figure 6.6 The strategic innovation system
6.3.1 Identifiable organization structure (new organization and main organization)
An “identifiable organizational structure” means the specific team, project, depart-

ment, or other group within a company that is responsible for realizing RI, while an
existing organization is generally responsible for II. According to systems theory, all
systems or subsystems must be identifiable according to boundaries (sometimes open
or closed) and distinct functions in a large network consisting of a series of systems
in which they are operating (Capra, 1996). In fact, according to Jelinek and Schoon-
hoven (1993) as well as Kodama (2007a), institutionalized organizations responsible
for RI actually exist in many innovative companies. Even at companies like the six
hi-tech companies in the aforementioned case studies, and Apple (Kodama, 2011),
Sony (Kodama, 2007c), and Nintendo (Kodama, 2011), specialized organizations
responsible for radical innovation exist.
In previous studies, it was argued that projects specializing in RI had to be physi-
cally and culturally independent (Benner and Tushman, 2003; Hill and Rothaer-
mel, 2003; Kanter, 1985). However, although organizational systems with internally
consistent elements are important in the development of DC, it is also advantageous
to incorporate the activities of projects specializing in RI into the main organiza-
tion (existing organization) where robust interaction can take place. In fact, this is a
requirement of the open system (Felix, 2003) and, in reality, internal ventures such
as the development of Sony’s game business (Kodama, 2007c), NTT DOCOMO’s
i-mode (Kodama, 2003), and the six hi-tech companies in the aforementioned case
studies, were allowed to use the assets and resources of the organization (Greene
et al., 1999; Penrose, 1959; Wernerfelt, 1984). Theoretically, this is a competitive

advantage for large companies, which is absent from startup companies.
With respect to the “essential skills and capability development” which is closely
related to the management context of “organizations, technologies, operations”,
when the DC required in Domains I and II are based on “transformational experi-
ence” (King and Tucci, 2002), routines for this do not exist anywhere in the company.
Therefore, management’s objective is to shift the company (organization) to an active
state of metabolism, where new situational learning is needed every time a new organ-
ization (new project) responsible for RI is established (Eisenhardt and Martin, 2000).
Alternatively, it is necessary to bring in talented people from outside the company,
as in the case of Apple’s iPod development (Kodama, 2017) and NTT DOCOMO’s
i-mode development (Kodama, 2002). Because risks, uncertainty, and novelty are of
an extremely significant scale in Domains I and II, it is not possible to procedur-
ize knowledge. Such an exploration process requires practitioners with a wide range
of skills to demonstrate flexibility in response to various situations such as pursu-
ing, changing directions, stalling, or rising of projects. On the other hand, the skills
required in exploitation processes of Domains III and IV are the ability to correctly
execute a series of activities that are routinized to reduce the need to make choices.
6.3.2 Exploration processes lead by new organizations, and exploitation processes

lead by main organizations
Let us now look at “exploration and exploitation”, which is closely related to the
business context of new organization and main organization. To build DC that
are effective in environments of great uncertainty such as Domains I and II in the
Capability Building Map of Figure 6.1, situation-specific knowledge that did not
previously exist in the company is necessary (Eisenhardt and Martin, 2000). This
knowledge is accumulated when project members engage in experimental activities,
rapid learning, assessments, and change in direction (Lynn et al., 1996).
In particular, the leaders (managers/administrators) of the RI project portfolio,
who are responsible for exploration processes, must meet the challenge of devising
an appropriate diversification strategy that is consistent with new capabilities and
business fields believed to be important for the company’s future SI. Moreover, when
the strategy consists of high-risk projects involving RI, leaders in particular need to
adopt a new dimension of measurement and protection as guidelines for the man-
agement of the portfolios. In addition to the RIS triggering strategic metabolism
through the experience of transformation, the senior management team, taking into
consideration the experimental nature of the role of the RIS, must adopt a mag-
nanimous attitude and apply different restrictions and rewards than those for business
units in main organizations in regard to RI. Since it is generally considered that com-
mercial success of exploration processes targeting RI does not occur frequently, both
activity-based indicators and performance-based indicators are considered necessary.
Meanwhile, in an environment with low uncertainty such as Domains III and IV,
where the emphasis is on process-oriented management, it is important to stabilize
routines and improve efficiency in a short period of time. At the same time, it is
necessary to strictly manage the formulation and execution of a rational, analytical

strategy plan in the exploitation processes. In addition, the leaders who control explo-
ration and exploitation processes must also make appropriate decisions on the alloca-
tion of resources to RI high in risk. Meanwhile, in exploitation processes (II) targeting
II in the main organization, it is necessary to strictly manage the formulation and exe-
cution of rational analytical strategy plans and focus on performance-based indicators.
However, there is an internal bias toward certainty and predictable results (Benner
and Tushman, 2003). When emphasis is placed on process management (routines
that can be systematized), exploitative innovation takes precedence over exploratory
innovation (Benner and Tushman, 2003). In other words, as described in the case
studies of the six high-tech firms mentioned earlier, corporate systems must skillfully
complement exploration and exploitation processes in response to uncertainty and
other environmental changes (Kodama, 2003, 2004).
6.3.3 Interaction between the new organization and the main organization
As for “interaction between the new organization and the main organization”, the
infrastructure in a new organization is certainly essential, but there has been no
clear indication in research to date regarding the extent to which the new organiza-
tion should be separated from the external influences of the main organization and
the external environment. Benner and Tushman (2003) argue that an RIS requires
close ties among internal elements, and loose ties to the main organization. On the
issue of the importance of interaction between the new organization and the main
organization, however, Dougherty (1995) states that interaction between core com-
petencies and core incompetence is necessary for companies to enhance their own
transformation capabilities. In addition, Danneels (2002), who validated the recipro-
cal interactions between product innovation and corporate competencies, indicated
not only that DC has an impact on RI but also that the involvement required in RI
initiatives also creates new DC.
However, if we consider a rationalist approach (Teece et al., 1997; Zollo and Win-
ter, 2002) for developing work routines through customary practices, accumulation,
and systematization separately, I previously mentioned the concept of “boundaries
vision” as a mechanism by which new capabilities (knowledge) are incorporated
into an organization (Kodama, 2011, 2014; Kodama and Shibata, 2016). In addition,
based on case studies of the six high-tech companies mentioned earlier, I have also
indicated the potential of companies to acquire new capabilities (knowledge) while
exploiting and expanding their current capabilities (knowledge). The acquisition of
boundaries vision triggers a shift from Domain III and/or Domain IV to Domain
I on the capabilities building map in Figure 6.1. According to Cohen and Levinthal
(1990), the ability to assess and use external knowledge is largely determined by
the level of relevant knowledge previously cultivated. Therefore, it is important for
practitioners to increase diversity by demonstrating “boundaries vision”.
Furthermore, the interaction between the new organization and the main organ-
ization is decisively important, and the interaction of the new organization (which
is incorporated into the organization) with the main organization is managed by
both organizations, and this arrangement is believed to be beneficial in planning the

timing of the company’s strategic shift from the main business to the new business
(Heller, 1999; Leifer et al., 2000; Sharma, 2000; Kodama, 2003, 2011; Kodama and
Shibata, 2014).
In addition to listing the three elements described earlier, to prove that RIS and
IIS respectively are elements constituting one system, the following four system
requirements must be satisfied (Von Bertalanffy, 1968):
(1) The system is identifiable, and elements of the system are independent. More
over, if any one of the elements of the system changes, it has impact on the other
elements.
(2) The elements must be combined in such a way that the whole which is created
is greater than the sum of the parts.
(3) To achieve a living, open system, a system must have mechanisms for interacting
with the larger environment, which requires self-adjusting and homeostasis.
(4) An RIS and IIS must fulfill unique roles within a larger system.
Each of the above four elements is independent and interacts closely with other
elements and congruence between the respective elements is required. Furthermore,
the RIS and IIS, which are higher-level systems are also independent. At the same
time, they mutually influence each other, and the existence of congruence (consist-
ency) is also important. To realize the SIS through SIC, all the above three elements
and the RIS and IIS which comprise the SIS are necessary and sufficient conditions.
If any one of the elements is missing, sustainable SI cannot be achieved.
Furthermore, the proposition that “the whole is larger than the total of the parts”
in (2) above refers to the way in which a company integrates the RIS and IIS, which
are subsystems, to create the SIS which is a (larger) overall system. This aspect is
explained in Section 6.4 A strategic innovation system (SIS) as a complex adaptive
system (CAS) and Section 6.5 Systems hierarchy and the triad system.
6.4 SIS as a Complex Adaptive System (CAS) and autopoiesis

SIS, as a corporate system, corresponds to a total system that integrates RIS (explor-
atory processes) and IIS (exploitative processes) (i.e., an SIS or corporate system that
ensures the sustainable growth of a company). Such an SIS is an enterprise system
that guarantees sustainable growth and has the characteristics of a complex adaptive
system (CAS) and autopoiesis (see Figure 6.6).
Von Bertalanffy (1968) advocated a concept of flow equilibrium where many
complex systems aim for disequilibrium rather than equilibrium. A strategic inno-
vation system (SIS), which is a system integrated with a radical innovation system
(RIS) and incremental innovation system (IIS) as shown in Figure 6.6, can be con-
sidered as an entity that aims for such imbalance in large corporate systems. Flow
equilibrium is a management system characterized by a constantly moving equilib-
rium. With constant positive or negative feedback, the system is oriented in a rapidly
changing and highly unpredictable environment.
Prior research has shown that to generate creative, innovative, and continu-
ously changeable behavior, there is a need for a system that operates in a state away
from equilibrium, in other words, a complex adaptive system (CAS) (Stacey, 1995).
However, the key to realizing a flow equilibrium management system in the RIS
is the existence of an IIS with management elements paradoxical to the RIS. In
other words, creative abrasion and productive friction between the RIS and IIS
will achieve a system of flow equilibrium. Furthermore, management models that
accommodate this constantly changing CAS system will be elements necessary for
the SIS. With such a system, sustainable execution of SI is managed, and the SIS will
fulfill its role through positive and negative feedback.
On the other hand, a sustainable system is self-regulating and shows characteris-
tics of “autopoiesis” (self-creation). An open system constantly attempts to regener-
ate itself and to survive by continuously changing its own elements and structure
(Bausch, 2002). Certain systems adapt themselves to the environment through single-
loop learning. Homeostasis is a self-regulating function that allows living organisms,
which are open systems, to maintain themselves in dynamic equilibrium and to vary
their variables within the range of a certain tolerance. It is through double-loop
learning, however, that a system doubts its own (strategy) goal. When the system
diverges from its proper state, change is initiated, and the effectiveness of the system is
enhanced. When predefined criteria are not met, the system attempts to adapt to the
desired state as quickly as possible. This can be interpreted that the shift from Domain
III and/or Domain IV to Domain I through renewal, redeployment, or recombina-
tion based on the demonstration of strong DC.
Furthermore, the interaction between an SIS as an open system and the environ-
ment is important. Open systems theory points to a system with semi-permeable
boundaries that avoid disorder through a continuous intake of fluent energy and
substances to stay alive (Von Bertalanffy, 1968, 1972). Such a system requires interac-
tion with a larger system into which it can be incorporated. It also requires learning
through self-governance, networking, interaction, and feedback loops. The open
system shows movement towards order rather than disorder, because it self-regulates
in line with the environment in which it is located (Capra, 1996; Felix, 2003; von
Bertalanffy, 1968). This book will demonstrate that an open system SIS (as well as
RIS and IIS, which are its subsystems), through interaction with the environment,
will execute dynamic strategy formation processes of “environment adaptive strat-
egy” and “environment creation strategy” for sustainable growth (Kodama, 2009,
2015) (see Figure 6.6).
6.4.1 A Strategic Innovation System (SIS) as a Complex Adaptive System (CAS)
To realize sustainable strategic innovation, the existence of strategic innovation capa-

bilities (SIC), which cause diverse paradoxical elements of disparate things and phe-
nomena such as exploration and exploitation to bond, integrate and combine either
continuously or discontinuously creates capabilities for guiding order and chaos in
radical innovation to a special equilibrium through dynamic processes. Furthermore,
SIC demonstrates the capability of “emergence” which creates “something from
nothing” (e.g., Apple created a series of innovative products and services such as the
iPod, iPhone, iPad, iTunes music store, AppStore, and iCloud, while Fujifilm cre-
ated new businesses through synergy effects in technologies based on the integration
of technologies).
“Emergence” in complex systems theory is a concept whereby important pat-
terns appear completely autonomously within a complex system consisting of many
elements that interact with each other and refers to the emergence of certain pat-
terns including unexpected results, organization, and structuring (Bausch, 2002).
Emergence is also unrelenting action in a complex system that attempts to form
certain patterns through self-organization (Waldrop, 1992). As in the cases of Fuji-
film, Qualcomm, TSMC, Xiaomi, Huawei, Zoom Video Communications, the
process of “emergent thinking and actions” of practitioners integrates heterogeneous
knowledge to achieve new value creation. Viewed from such a perspective, an SIS
that creates SIC is closely related to a complex adaptive system (CAS).
A CAS is a cohesive body formed from numerous elements where each of the
respective elements constantly engages in interactive behavior and, as a result, when
viewed as a whole, demonstrates certain unique behaviors greater than the sum of
the activity of the individual parts (equivalent to the previously mentioned proposi-
tion that the sum is greater than the parts). Moreover, a CAS refers to all phenomena
from physics to entire societies, with a large number of parts that strongly interact
with each other (Waldrop, 1992). Concepts such as chaos, nonlinearity, the edge of
chaos, self-organization, interaction, and emergence are developed in a CAS.
Axelrod and Cohen (1999) view the issue in terms of how people should behave
in a world where the future is unpredictable as they mutually adapt in the context
of a CAS. In addition, they develop the discussion on how entire systems (in other
words, organizations) are always in a state of flux due to the mutual interaction of
participants who join the group. Waldrop (1992) indicates that CAS refer to all
things, from basic substances to entire societies, which have many elements that
strongly interact with each other, and that they have the power to steer order and
chaos to a particular equilibrium. From the perspective of another interpretation, a
CAS is a cohesive body (which has a large number of diverse, heterogeneous ele-
ments) and, as a result of the constant interaction of the individual elements with
other elements, it can be said that when viewed as a whole, a CAS demonstrates
certain unique behaviors that are greater than the sum of the activity of the parts.
The complex adaptive systems of living things, and so on, evolve as they move
toward the “edge of chaos”, which refers to the boundary between order and dis-
order, stability and confusion, and they adapt to the environment near the edge of
chaos. According to Kauffman (1995), in regard to the edge of chaos, all CAS in the
biosphere, from single cells to economic systems, evolve by moving toward a natural
state at the boundary between order and chaos or toward a major point of compro-
mise between things with structure and things that are serendipitous. In many cases
where living things are concerned, this can be interpreted as the evolution of living
things that occurs as they move toward a state where a balance is maintained between
chaos and order. The “edge of chaos” means that critical state between order and the
absence of order, and this term is used in a metaphorical sense (Gell-Mann, 1994).
In other words, in excessively ordered frozen systems, complex actions are not
possible. On the other hand, in systems that are too chaotic, controls do not work. In
that regard, the system existing at the edge of chaos is said to display complex actions
and to be capable of constructing a model that adapts rapidly to the environment.
Just as those animals that have evolved by moving toward the edge of chaos have
a strong ability to adapt to the environment, it can perhaps be said that leadership
based on the thinking and behavior of a “pliant organization” and practitioners with
autonomy, flexibility, and creativity are an organization that readily generates corpo-
rate and product innovation such as Fujifilm, Qualcomm, TSMC, Xiaomi, Huawei,
and Zoom Video Communications mentioned earlier.
As in the example cases, companies, organizations, and individuals that practice
“improvisation” find an equilibrium at the edge of chaos. In complexity theory
terms, “improvisation” is a “dissipative equilibrium”, an unstable edge between two
attractors (i.e., structure and chaos) that tend to pull the system away from the edge
of chaos toward the rigidity of too much structure or the confusion of too little
structure. However, it is important for the system to remain at the edge of chaos,
because all systems are capable of self-organizing at the edge of chaos, and adopt-
ing active, complex adaptive behavior. In other words, when systems (individu-
als, organizations, companies, economies, etc.) maintain a balance between a loose
structure and a rigid structure (in other words, “the edge of chaos”), they are able to
self-organize and adopt consistent, complex adaptive behavior. If there were more
structure, then these systems would be too rigid to move. If there were less structure,
then they would fly chaotically apart.
The CAS as corporate systems (SIS) at Fujifilm, Qualcomm, TSMC, Xiaomi,
Huawei, and Zoom Video Communications evolved through the demonstration of
SIC as they moved toward the edge of chaos, which refers to the boundary between
order and confusion and between stability and chaos, and they adapted to the envi-
ronment near the rim of the edge of chaos. Companies such as these make it possible
to achieve coexistence (without bias) of complex organizational behaviors as RI
(existence of chaotic elements under a certain order: a semi-structured system) and
II (existence of strong ordered elements: a structured system) (e.g., Kodama, 2003).
Furthermore, if they remain at the edge of chaos, the breadth of options available
to them will broaden, and they will be able to gain insight into correct strategic
options. The demonstration of SIC synthesizes diverse paradoxes and achieves tar-
geted sustainable SI via the most excellent methods. SIS that creates SIC promotes a
balance between “creativity and efficiency” in people and organizations as CAS and
also acts as a trigger for achieving SI.
6.4.2 A Strategic Innovation System (SIS) as autopoiesis
An open system is a self-regulating, self-organizing system which attempts to regen-

erate itself and to survive by constantly changing its elements through “autopoie-
sis” (Maturana and Varela, 1987). As Felix (2003) points out, certain systems learn
through “single-loop feedback”. Any change that occurs may either strengthen the
long-term survival of the system or render survival impossible. Questions regarding
system goals arise due to double-loop learning (e.g., Argyris, 1978). If the system
deviates from its proper state, a change is initiated and the system attempts to adapt
to an environment (actively or passively) or create an environment of a desired state
as quickly as possible as shown in Figure 6.6 (Kodama, 2010, 2015). This includes
a leap forward (or discontinuity) in the state of the system depending on the degree
of change in the environment.
On the other hand, Von Bertalanffy (1968) presented a concept of flow equi-
librium where many complex systems aimed for disequilibrium rather than equi-
librium. For example, the shift from Domains III and/or IV to Domain I on the
Capabilities Map marks a shift in the corporate system toward a disequilibrium for
creating new innovation, and among corporate systems of large corporations, it can
be considered as an entity aiming for such disequilibrium. Characterizing the man-
agement system of flow equilibrium is a constantly moving equilibrium. Constant
positive or negative feedback determines the direction of the strategy of the cor-
porate system in a rapidly changing and highly unpredictable environment (a shift
between domains on the capabilities building map).
According to systems theory, corporate systems as open systems are self-regulating
and self-organizing systems. Furthermore, an open system attempts to regener-
ate itself and to survive by constantly changing its elements through “autopoiesis”
(Maturana and Varela, 1987). In such recursive processes, a feedback loop is formed
for renewal/self-renewal of business ecosystems, and companies like Fujifilm, Qual-
comm, TSMC, Xiaomi, Huawei, and Zoom Video Communications mentioned
earlier demonstrate SIC as they attempt to renew their capabilities and redesign their
strategy-making processes for implementing new radical innovation by shifting from
Domain III and/or domain IV to Domain I to Domain II.
“Autopoiesis” (Maturana and Varela, 1987) consists of self-maintaining charac-
teristics from the cellular level, self-reference in the neural system, and cognitive
functions as an organism. In other words, on one level it characterizes life through
cumulative metabolism, and this controls the biological system. At the same time,
neural and immune systems have the ability to self-adjust the state of all their own
elements. Furthermore, the living body interacts with others as an independent
system through recognition. In other words, the basic concept of “autopoiesis” is
as follows. In regard to the nervous system as a living system, the basic of life is
not explained by the elements or the composite body, its integrity, or the mor-
phological. Rather, autopoiesis is the self-continuation of an entity’s own actions
on its own and the formation of the entity’s own being through the continuation
of the actions.
Niklas Luhmann tried to use autopoiesis, which emerged as a theoretical model
of living organisms, to shed light on social systems, and adopted autopoiesis into the
structure of his own social systems theory (Luhmann,1990, 1995a, 1995b). Accord-
ing to Luhmann, a social system is an autopoietic system that continuously generates
communication from communication, and communication is the ultimate element
that cannot be broken down further in the social system, and it is there that various
events are treated as problems. Communication is an element that lasts for only a
short time. Communication disappears the moment it appears and must be replaced
by corresponding subsequent communication. Therefore, constant, uninterrupted

reproduction of new communication creates the sustainability of the social system.
From the viewpoint of autopoiesis and Luhmann’s social system, one of the
characteristics of a corporate system for generating sustainable strategic innovation
(SIS) is also a recursive process as noted earlier. Such a recursive process is just the
transformation of a corporate system in equilibrium for the creation of new radi-
cal innovation. In “autopoiesis”, instantaneous “events” (e.g., communication and
organizational activities such as collaboration in corporate activities) are elements of
the system. For the system to exist, elements must be constantly produced. Through
element formation and element chains, system boundaries are established (i.e., each
domain on the Capabilities Map corresponds to particular capabilities elements),
and the elements of each domain are configured on the basis of that system. Recur-
sive shifts between the domains on a capabilities building map such as this is just
“autopoiesis”.
At Fujifilm, Qualcomm, TSMC, Xiaomi, Huawei, and Zoom Video Communi-
cations mentioned earlier, a feedback loop of capabilities was formed at the respec-
tive companies for their own renewal or self-renewal, and new radical innovation
was realized through the act of integrating diverse knowledge assets (or knowledge
transformation) for the shifts from Domain III and/or Domain IV to Domain I to
Domain II. This is “autopoiesis”. The strategic innovation loop through strategic
innovation capabilities itself can also be called “autopoiesis”. The very act of dem-
onstrating strategic innovation capabilities through such a dynamic process can be
said to be “autopoiesis”.
6.5 System hierarchy and the triad system model

Simon (2019) argued that systems can be approximately broken down into sub-
systems with stronger interaction among internal elements based on the degree of
strength between the elements within the system and that those respective subsys-
tems could also be broken down into subsystems with stronger interaction among
internal elements based on the degree of strength of the interaction. Therefore, the
SIS discussed thus far can be approximately broken down into RIS and IIS, which
are subsystems with strong interaction among internal elements. Furthermore, RIS
and IIS can be broken down into the three subsystems mentioned earlier.
However, the hierarchy of the systems based on their approximate degradability is
static at the time-space level, and dynamic elements are lacking. In other words, it is
not possible to explain dynamic SI (and SIC), which are corporate systems that con-
tinuously generate SI only in a system hierarchy based on approximate degradability.
A dynamic SIS achieves RI and II while absorbing, integrating, and reconstructing
diverse knowledge inside and outside the corporate system through dynamic inter-
action with the environment as an open system.
I propose a new, higher dynamic system that mutually links the respective ele-
ments of (1) an identifiable organizational structure, (3) interaction between the new
organization and the main organization, and drives (2) exploration and exploitation
processes. This higher system is positioned higher than the RIS and SIS and has the
function of generating SIS (see Figure 6.7). Such a higher system is constructed and
reconstructed in a dynamic time-space in response to environmental changes, and
influences the RIS and IIS, which are lower systems, while the SIS which is its own
higher system.
In reality, as mentioned earlier in the case studies of the six high-tech compa-
nies, exploration SC, exploitation SC, and synthesis SC are dynamically generated
and reconstructed over time in the corporate activity process, giving rise to Triad
SC systems (“triad systems”). Nakajima (2004) points out the diachronic hierarchy
existence in dynamically evolving life forms. Such triad systems are systems posi-
tioned in a diachronic hierarchy.
6.5.1 Triad system that integrates RIS and IIS
Based on multiple previous case studies of the author and collaborators, a char-
acteristic of organizations that create SIC as strategic innovation systems (SIS) is
the synthesis of the existing line organizations (traditional organizations) respon-
sible for exploitation as the development of existing business and flexible “project
organizations” (e.g., Kodama, 2007c) responsible for exploration as the realization
of technological development and new business development (see Figure 6.7). The
project organization, operating within and outside the organization, demonstrates
mainly DC and exclusively takes charge of R&D, service planning and new business
Figure 6.7 Position and characteristics of a triad system

development operations, and demonstrates existing OC which the line organization

in the corporation has for other related operations.
In an uncertain environment, the project organization inspires and creates new
knowledge based on creativity and imagination for RI, develops new technologies,
and generates concepts for new business models (new products, new services, new
business frameworks, etc.) through trial and error. This triggers a shift from Domain
III and/or Domain IV to Domain I on the capabilities building map in Figure 6.1.
There, the project organization forms multiple multi-layered strategic communi-
ties (SC) (e.g., Kodama, 2004, 2005, 2007a, 2007b, 2009) with strategic business
partners outside the company based on the formation of Ba (Kodama, 2005), and
they mainly promote RI through the practice of emergent strategy and entrepreneur
strategy by bringing in and integrating (converging) internal and external knowl-
edge in a high-risk environment.
Individual projects within the project organization assume autonomous, decen-
tralized behavior as a networked organization (Kodama, 2003). However, business
activities are constantly monitored by the leaders of the organization, and the direc-
tion and goals of the project as a whole project organization are regulated. In this
kind of project organization, through the demonstration of collaborative DC (called
“collaborative dynamic capabilities”) (Kodama, 2018b) with partners outside the
corporation, concepts, and prototypes for new products and new services are gener-
ated in succession and are commercialized (i.e., there is a shift from Domain I to II
to III) after several incubations. The project organization inspires new knowledge
through the formation of “project networks (exploration SC)” with different indus-
tries for RI and implements strategies that lead to the creation of new knowledge
in the form of new markets that had not previously existed before (Kodama and
Shibata, 2016).
However, business processes for launching, promoting, and expanding these
new products and new services in the market efficiently and in a timely manner
are important. The line organization, as the core organization, is responsible for
these business processes. The line organization introduces new products and ser-
vices whose marketability has been confirmed by the project organization through
the processes of concept-making, marketing, element and application development,
prototype development, incubation and commercialization (Domain I to Domain II
to Domain III) in Domain III in a timely manner and promotes the penetration and
establishment of new markets in a spiral-like manner.
Underpinned by knowledge assets accumulated for many years, the line organi-
zation, as a bureaucratic organization, promotes II through reform and improvement
practices based on the formation of “line networks (exploitation SC)”, which are
multi-layered SC networks, with group companies and strategic partner companies
including cooperating companies. The line organization adopts deliberate, orches-
trated, and systematic strategic planning based on strategic discipline, but through
the demonstration of collaborative OC (called “collaborative ordinary capabilities”)
with outside partners (Kodama, 2018b), daily routine activities for improving the
efficiency of business processes of existing business and further incremental reforms
and improvement of these processes take place on a daily basis in Domains III and
IV. Such practices in a line network require thorough productivity and efficiency.
Furthermore, these practices promptly, efficiently, and with certainty introduce into
the market, promote the penetration of and expand the results of innovative new
product and service concepts created by the project organization. This is also a dem-
onstration of the linkage between “exploration SC” and “exploitation SC” (signify-
ing a shift from exploration to exploitation).
These two disparate organizations, that is, the “project organization” versus the
“line organization” and their multi-layered SC networks, in other words, the “pro-
ject network” (exploration SC) versus the “line network” (exploitation SC) are
roughly divided into an organization with practices for creativity and autonomy
and an organization with practices for efficiency and control, and a tug-of-war of
paradoxes constantly arises due to conflicts between these organizations with contra-
dictory elements (e.g., Schad et al., 2016). Such elements are factors obstructing the
synthesis of knowledge of practitioners in the respective organizations.
This is because, as explained in the three subsystems ((1) an identifiable organi-
zational structure, (2) exploration and exploitation processes, and (3) interaction
between new organizations and main organizations), the main organization, the
line organization, and the new organization, the project organization, have many
different points, including essential skills and capacity development, management
and decision-making mechanisms at the management level, and appropriate perfor-
mance metrics.
However, creative abrasion (Leonard-Barton, 1995) and productive friction
(Hagel and Brown, 2005) through “dialectical dialogue” (Kodama, 2004) enable the
sublation of contradictions. Promoting this synthesis are the “leader teams” which are
the “synthesis SC” (see Figure 6.6). A leader team consists of executives (president,
executive officers, division managers), senior managers (e.g., department managers,
general managers charged with various responsibilities), managers (e.g., managers,
section heads), and staff of each management level (top management level, middle
management level, staff level, mixed management teams, informal cross-functional
teams and task forces, etc. of the project organization and the line organization).
For example, at NTT DOCOMO, through various leader teams formed from
leaders of each organization and each business area including R&D, marketing, ser-
vice planning development, sales, technologies, equipment, after support and main-
tenance services, etc., discussions take place between the project organization and
the line organization regarding emergent strategies and entrepreneur strategies as
well as services to accommodate these strategies, and decisions are made on the strat-
egies, tactics, mechanisms, and resources to be mobilized and their timing. Through
these leader teams, leaders engage in thorough dialectical dialogue and creative dia-
logue to select strategies and tactics that might truly have the potential to develop
into radical innovation, and they put these into actual practice through holistic
leadership (Kodama, 2017). Huawei’s investment review committee and integrated
portfolio management team described in the case studies serve as such leader teams.
Leader teams play a role in further strengthening the characteristics of cross-
functional or inter-company integration, which exploration SC and exploitation SC
possess, and in improving the performance of R&D and new business development.
To that end, each leader within a leader team is required to have elements of holistic
leadership.
The synergy of holistic leadership through collaboration among leaders at each
management level including the president and senior management promotes dia-
lectical dialogue as well as a precise planned strategy for carefully selected emergent
and entrepreneur strategies and realizes the synthesis of knowledge and strategies
through the construction of multi-layered SC networks. Such multi-layered SC net-
works form “triad systems” of exploration SC, exploitation SC, and synthesis SC
(see Figure 6.7).
6.5.2 Ba triad model
The existence of such a triad model of multi-layered SC networks is rooted in the

existence of a “Ba triad model”, which will be discussed next. Nonaka et al. (2014)
point to the existence of a “Ba triad model” in excellent companies and organiza-
tions based on case studies of Toyota, Fujifilm, and Apple. For example, the case of
the new product development of Toyota’s Prius required the dynamic synthesis of
exploration and exploitation. In this case, exploration was RI requiring the con-
vergence of diverse technologies, and II was exploitation to improve and refine
the new product continually. To do this, various project teams and existing line
organizations of Toyota formed vertical and horizontal multi-layered Ba networks
within and outside the organizations to simultaneously pursue knowledge creation
and exploitation.
A point worth noting in such cases is the Ba promoting exploration activities
(called “exploration Ba”) for the creation of knowledge for RI is charged with the
processes of sharing tacit knowledge and creating explicit knowledge. On the other
hand, Ba promoting exploitation activities (called “exploitation Ba”) for achieving
commercialization and the efficiency in knowledge through ongoing refinements
and improvements is charged with the processes for unifying explicit knowledge and
internalizing it through the experience of individuals. In other words, exploration
Ba have a strong tendency to be rooted in tacit knowledge while exploitation Ba
have a strong tendency to be rooted in explicit knowledge. However, tacit knowl-
edge and explicit knowledge are contiguous, and both are synthesized in a spiral-like
manner through practical knowledge phronesis, which is a third form of knowledge
(SECI process). What promotes this spiral-like process and at the same time achieves
knowledge creation and accumulation is the “synthesis Ba”.
On the other hand, Teece (2014) mentions that DC actually reinforce “phronetic
leadership” (Nonaka and Toyama, 2007) but, conversely, the element that becomes
the source of “holistic leadership”, which simultaneously manages different strat-
egy and organization characteristics for the simultaneous pursuit of exploration and
exploitation is the existence of “phronesis (practical wisdom)” (Kodama, 2017) (see
Figure 6.8).
Furthermore, there exists a “Ba triad model” that mutually links synthesis Ba
that achieve the dynamic synthesis of exploration Ba and exploitation Ba. Such a Ba
triad model creates an SC triad model, which consists of multi-layered SC networks
Figure 6.8 Relationship of a Ba triad and a triad system

Source: Created by the author, citing Nonaka et al. (2014)
with characteristics of Ba. Therefore, a triad system based on a Ba triad model also
becomes a framework to achieve SI (see Figure 6.8).
At the same time, this SC triad system resembles an ambidextrous organization as
described by Tushman and O’Reilley (Tushman and O’Reilly, 1997; O’Reilly and
Tushman, 2004) and provides a new viewpoint. Tushman and O’Reilley argue that
an ambidextrous organization should clearly establish strategic goals in both the new
business development organization and existing business development organization
and restrict interaction between these organizations at a practical level as much as
possible. They also argue that senior managers should control both organizations.
On the other hand, in the triad system model, synthesis SC centered on leader
teams promote close interaction and collaboration between exploration SC consist-
ing of project networks aimed at pursuing new R&D and creating new business
development, and exploitation SC consisting of line networks in pursuit of ongoing
improvement and refinement of commercialized products and services. Practitioners
at each management level (top management, middle management and staff) facili-
tate the shift between domains and combine exploration and exploitation through
a triad system model. This viewpoint makes a new contribution to the theoretical
framework of the ambidextrous organization.
The leader teams play a role in creating strategic innovation capabilities (SIC) as
a corporate system by synthesizing knowledge in the project networks and line net-
works of the organization. To demonstrate SIC, it is important for leader teams to
balance strategic methods that are creative and at the same time systematic, methods
which, at a glance, are contradictory, and to synthesize these. For the leader team,
building a triad system that will balance the innovation processes of II and RI is the
key to achieving success in this task.
To realize the SIS as a complex adaptive system (CAS) as mentioned in Sec-
tion 6.3, the key point is the presence of a triad system that will allow for various
contradictions arising between the RIS and IIS and will create SIC as a corporate
system. Furthermore, the presence of such a triad system also leads to a proposition
where “the whole is larger than the sum of parts”.
6.6 Conclusion and future research issues

This chapter identifies the subsystems that comprise the strategic innovation system
(SIS), a corporate system for sustainable strategic innovation in companies, and the
interactions among its subsystems. As a corporate system that guarantees sustain-
able growth of companies, an SIS has the characteristics of a complex adaptive
system (CAS) and autopoiesis. This chapter clarified that to realize SIS as CAS and
autopoiesis, a triad system is important to reconcile the various contradictions that
arise between radical innovation systems (RIS) and incremental innovation systems
(IIS), which are subsystems of an SIS, and to create strategic innovation capabilities
(SIC) as a corporate system.
Many large corporations are not always successful at demonstrating SIC and
achieving sustainable SI. One reason for the difficulty in achieving SI is the lack
of understanding even at the practical level that the processes of RI and II as well
as DC and SIC are complex systems comprised of independent elements. There-
fore, from an academic research perspective, an approach for deepening a company’s
understanding of methods for systematically incorporating SIC internally, that is the
concept of holistic strategic management, is essential. Therefore, analyzing complex
SI through a systems theory lens is of enormous importance to the researcher.
Notes
1 It is clear that the resource-based view expands not only to the organizational assets but
also to the organizational capabilities (Henderson and Cockburn, 1994). “Resources” re-
fers to tangible or intangible assets or inputs into production that an organization possesses,
controls, or accesses semi-permanently. On the other hand, “organizational capabilities”
means the ability of an organization to perform a coordinated set of tasks utilizing its own
resources to achieve a specific final outcome (Helfat and Peteraf, 2003).
2 Operational capabilities are capabilities that enable a company to make a living in the pre-
sent (Winter, 2003). With its operational capabilities, a company can continue to work to
provide existing products and services to the same customer group, using more or less the
same technologies on the same scale. In the sense that these capabilities maintain the status
quo, they are also referred to as “ordinary” capabilities.
3 For example, TAC film, which is used as a support medium in the area of photography,
and PET film are currently being used in various fields such as functional film, protective
film for LCDs, and transparent electroconductive film. Furthermore, emulsifying nano
dispersion technology is applied to technologies for the nano dispersion in water of mate-
rials used in cosmetics that do not dissolve in water.
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7 The asset orchestration process based
on the boundaries-based view (BBV)
and the attention-based view (ABV) –
A longitudinal study of the mobile
communications industry
7.1 Exploring the core elements of dynamic capabilities – from

the boundaries-based view (BBV) and the attention-based
view (ABV)
Based on evolutionary and behavioral traditions in strategy research, capabilities are
considered to be routines, which are stable patterns of collective behavior learned in
the course of business operations by companies (Helfat and Peteraf, 2009; Nelson
and Winter, 1982; Zollo and Winter, 2002). Routines are structured hierarchically.
Higher-level routines are dynamic capabilities that enable organizational modifica-
tion of ordinary capabilities, which are lower-level routines (Helfat and Winter,
2011; Winter, 2003; Zollo and Winter, 2002). The high-level routines here are
often informal processes (Kodama, 2018), as discussed later.
The asset orchestration function (Teece, 2007), a core of dynamic capabilities as
high-level routines, is reinforced by the organizational processes of (1) coordination/
integration, (2) learning, and (3) reconfiguration (Teece et al., 1997). Coordination
and integration routines link different types of knowledge in an entrepreneurial
manner for the purpose of developing new products, for example. Learning is an
outcome of practice and experimentation and enables more efficient task perfor-
mance. Reconfiguration or transforming is associated with recombining or modify-
ing existing knowledge. Asset orchestration through dynamic capabilities is more of
a creation, difficult to imitate, and generally impossible to buy (Teece, 2014). Teece
(2014) describes three main clusters of dynamic capabilities (subsystems: sensing,
seizing, transforming), and points out that asset orchestration is the most relevant
supporter of seizing and transforming.
This chapter explores the mechanisms by which asset orchestration, a core ele-
ment of dynamic capabilities, is created and how dynamic capabilities can change
existing ordinary capabilities (and even existing dynamic capabilities), and drive the
asset orchestration process. This chapter presents the process of generating dynamic
capabilities that realize corporate strategy (including product strategy) from an inte-
grated framework of the boundaries-based view (BBV) and attention-based view
(ABV). In addition, the chapter discusses and analyzes a longitudinal study of the
mobile communication industry in Japan from an integrated framework of the
boundaries-based view (BBV) and attention-based view (ABV).
DOI: 10.4324/9781003305057-7
150 Asset orchestration based on BBV and ABV
7.2 Asset orchestration by forming strategic communities

through pragmatic boundaries synchronization –
boundaries-based view (BBV)
Business practitioners recognize a wide range of organizational boundaries in their
daily business activities. Carlile (2004) characterized knowledge on boundaries in
three ways, as difference, dependency, and novelty (Carlile and Rebentisch, 2003),
and asserted that the correlating characteristics of these three kinds of knowledge
can be expressed as an image of boundaries as vectors between two or more actors.
Generally, the characteristics of these boundaries consist of three layers (Shan-
non and Weaver, 1949; Jantsch, 1980; Carlile, 2002, 2004) (see Figure 7.1). In the
first layer, syntactic or information-processing boundaries exist on which informa-
tion and knowledge is transferred exactly between actors. Specifically, this entails
routines as predetermined business processes or commercializing products through
established development and production methods. On syntactic boundaries within
corporations, the objectives are efficient production and business processes in which
importance is placed on procedures and internally determined rules that follow busi-
ness and management manuals, etc.
On the boundaries in the second layer (semantic and interpretive boundaries),
actors engage in activities to generate new meanings, and interpret (translate) new
Figure 7.1 Strategy realization and interaction between dynamic capabilities (DC) and ordi-
nary capabilities (OC)
(Notes) Created by the author, citing Schulze and Brusoni (2022), Ocasio and Joseph (2018), Kodama
(2018), and Carlile (2004).
Asset orchestration based on BBV and ABV 151
knowledge. Specifically, this entails activities along these semantic boundaries to

incrementally continue to upgrade and improve existing business processes, or
development and production methods. On semantic boundaries within companies,
importance is also placed on rules and company procedures of the syntactic bounda-
ries, but these boundaries are also used to promote best company practice, business
improvements and upgrades such as TQM and chains of organizational learning.
The formation of “communities of practice (CoP)” (Wenger, 1998) within organi-
zations on such semantic boundaries and the aforementioned syntactic boundaries
promote learning activities.
In the third layer of pragmatic and political boundaries, actors deal with new
issues and objectives that have never existed, and work through conflict and friction
among themselves, and even political power in their activities to transform existing
knowledge. On pragmatic boundaries, various issues and challenges arise, and for
actors, the challenge is to resolve these issues and create new assets. This requires
more practical creative abrasion (Leonard-Barton, 1992), productive friction (Hagel
and Brown, 2005), and negotiating practice (Brown and Duguid, 2001) for the
actors on the boundaries. These boundaries correspond to the specific achieve-
ment of completely new and unheard-of business concepts (new product and ser-
vice developments to achieve new business models, new technical architecture or
component developments, and new development and production methods). New
knowledge, which is the source of innovation, is generated by actors from the for-
mation of “Strategic Communities (SC)” with such pragmatic boundary charac-
teristics (Kodama, 2007a). SC with pragmatic boundary characteristics formed by
actors are sources of innovation, which as a result also leads to dynamic capabilities
(and collaborative dynamic capabilities among companies: C-DC (Kodama, 2018))
of self-organizing entities (companies) to bring about sustainable competitiveness.
However, the boundaries in these three layers are interdependent, and their char-
acteristics change dramatically with changes in the environment (customer needs,
competition, etc.) and the thoughts and interests of actors (syntactic boundary
 semantic boundary  pragmatic boundary  syntactic boundary  seman-
tic boundary ). In achieving innovation or corporate reform in particular, the
boundaries among actors shift toward the pragmatic (syntactic boundary  seman-
tic boundary  pragmatic boundary) when there are strong changes in circum-
stances or movements in the intentions of actors.
The vector of the syntactic boundary  semantic boundary  pragmatic bound-
ary shift begins with the existing knowledge of deference and dependency among
actors, and as novelty increases, the level of deference and dependency expands,
and hence the amount of effort required to manage this increasing complexity and
boundaries also grows. Existing knowledge of related deference and dependency
have positive effects on the practical use of common knowledge (or mutual knowl-
edge) (Cramton, 2001) and have advantages for knowledge path dependency (Car-
lile, 2004). However, on pragmatic boundaries in particular, there are many cases
where the common knowledge of the past cannot express the novelty being cur-
rently faced, (Carlile and Rebentisch, 2003), and as novelty increases, knowledge
path dependency conversely has negative effects (Hargadon and Sutton, 1997).
In Figure 7.1, there are clearly defined lines between the types of boundaries;
however, it is not easy for involved actors (main player and partners) to consciously
(or unconsciously) distinguish where one line finishes and another starts in their
actual practice. As well as that, the purpose of the hierarchical Figure 7.1 is to express
that actors’ abilities on even more complex boundaries (e.g., pragmatic boundaries)
with expanding complexity (expanding novelty) require abilities on their subordi-
nate boundaries (e.g., semantic and syntactic boundaries). For example, on prag-
matic boundaries, this means the existence of common language and common
meaning is necessary to transform knowledge effectively.
Carlile (2004) states that multiple iterations are required between the three types
of boundaries. It’s impossible to achieve results in one go on pragmatic bounda-
ries. In other words, actors must engage in repeated processes of mutual sharing of
knowledge, evaluation, forming of new agreements, and making changes where
required. Thus, as actors engage in these repetition stages, it becomes easier to
(skillfully) recognize important deference and dependency on boundaries, and reach
integrated understanding and methods with more suitable common language, com-
mon meanings, and advantages and disadvantages of the problems and issues being
faced. This ability to engage in repetition gives actors the ability to transform the
characteristics of path-dependent knowledge.
Problematic scenarios often found in corporations occur due to the use of path-
dependent knowledge (or common knowledge) by administrators in positions of
power that constrains new knowledge of other managers expressing the novelty that
they are facing. Such mismatches on boundaries result from managers with power
putting themselves in even more powerful positions to demonstrate the unique
knowledge of the fields in which they are involved. For example, often these cases
entail only actors creating conditions only for practical processes, boundaries transfer,
and syntactic processes, despite the fact that conditions for pragmatic and semantic
boundaries are essentially necessary. These scenarios include, for example, disrup-
tive innovation (Christensen, 1997), in which exists the most dangerous strategic
condition, and one which actors fail to notice. As actors fail to recognize and resolve
disruptive innovation, the novelty of it reaches criticality with the passing of time.
Expanding the communications theories of Shannon and Weaver (1949) to
organizational theories, Carlile’s (2004) 3T (Transfer  Translate  Transform)
model was reported as an analytical framework in case studies of product innovation
or corporate reform, etc. done in the past. For example, existing research reports the
Matsushita Electronics (Panasonic) corporate reform model (Kodama, 2007d), new
product development between corporations (Kodama, 2007e), knowledge sharing
processes between customers and suppliers in product development (Le Dain and
Merminod, 2014), and project management among stakeholders (Van Offenbeek
and Vos, 2016). As an organizational framework for promoting service development
between companies and the building of ecosystems, this chapter uses Carlile’s (2004)
3T model, analyzes capabilities on diverse knowledge boundaries between stake-
holders, and presents the new concept of boundary synchronization.
One of the main characteristics of the dynamic capabilities proposed in this chap-
ter is that boundaries within or between organizations (or between practitioners
from a micro perspective) change according to the characteristics of business and

environmental conditions, and the form and characteristics of informal organizations
change accordingly. As a new perspective, on pragmatic boundaries, practitioners
demonstrate the dynamic capability characteristics of “sensing (identification, devel-
opment, co-development, and assessment of technological opportunities in relation-
ship to customer needs)” and “seizing (mobilization of resources to address needs
and opportunities, and to capture value from doing so)”, and intentionally form
informal organizations (informal networks) called “strategic communities (SC)”
(Kodama, 2005). Through such SC-driven strategic non-routine activities, prac-
titioners proactively demonstrate their dynamic capabilities (DC) centered on the
asset orchestration process through seizing and transformation (reconfiguration and
continued renewal) (see Figure 7.1).
However, on semantic and syntactic boundaries, formal organizations defined
mainly by top management of companies and those in charge of organizations, as
well as “communities of practice (CoP)” (Wenger, 1998) formed consciously (or
unconsciously) by practitioners, proactively exert their ordinary capabilities (OC) to
maintain and strengthen routine activities. While CoP are informal organizations,
their purpose is mainly to reinforce routines through best practices.
Accordingly, dependent on the building abilities or characteristics of the SC that
practitioners intentionally form, DC are not processes that lead to infinite regres-
sion towards higher-order capabilities mainly based on routines, as argued by Col-
lis (1994). Additionally, it’s possible to clearly distinguish DC and OC from the
dynamic differences in the characteristics of organizational boundaries involving
informal strategic non-routines and formal routines.
From the above perspectives, new knowledge born on the various organizational
boundaries that exist within and outside companies is a wellspring of organizational
capabilities (Leonard-Barton, 1995). The source of innovation is orchestration of
new assets arising on various pragmatic boundaries within and outside companies
that include customers and partners (in other words, synchronizing (converging)
pragmatic boundaries inside and outside of companies and orchestrating distributed
assets), which in turn leads to dynamic capabilities (DC) that generate sustainable
competitiveness. This requires synchronization (convergence) of activities among
actors on pragmatic boundaries.
7.3 Asset orchestration process by forming strategic

communities among actors
As the concept discussing SC characteristics, network theories (e.g., Motter, 2004;
Watts, 2003; Barabási, 2002) present the new perspective, which is a mechanism
to dynamically integrate (orchestrate) knowledge (assets) dispersed both inside and
outside of companies. According to research done to date, networks linking people,
groups, and organizations are important platforms for facilitating information and
knowledge-based activities, in that the formation of organizations and networks has
a major impact on the dissemination of knowledge and information (e.g., Owen-
Smith and Powell, 2004; Lin and Kulatilaka, 2006). It’s essential that companies form
networks to acquire sustainable dynamic capabilities (e.g., Kodama, 2007d), and

dynamically reconfigure these networks to respond to changes in circumstances and
strategic activities (e.g., Kodama, 2006).
Network theories of nodes (e.g., individuals, groups of people, organizations of
groups), network ties or several network topologies (e.g., small world structures,
scale-free structures) provide important knowledge and insight into practitioner
behavior that transcends companies and the relationships between practitioners. As
well as that, the thoughts and actions surrounding the formation of human networks
by practitioners are the management drivers (efficiency, creativity, resources, val-
ues, dialectics) (Kodama, 2009b), and are important triggers for executing the asset
orchestration process.
Network formations are generally classed as centralized or decentralized (Albert
and Barabási, 2000; Ahuja and Carley, 1999). Centralized networks are best adopted
for vertical interaction and efficient execution, and routine information and knowl-
edge flows (e.g., information and knowledge sent from central nodes to peripheral
nodes) (e.g., Albert and Barabási, 2000; Tushman, 1979). In contrast, decentralized
networks are generally applied in uncertain conditions or when there are new chal-
lenges to be directly faced (e.g., smaller hubs) (e.g., Watts, 2003).
Tight clustering and autonomy of workgroups is crucial to decentralized network
formations. This structural design enhances information and knowledge exchange
and interaction at the work group level and can effectively facilitate mutual coor-
dination and adjustments among peripheral local nodes (Tushman, 1979). Further-
more, such local cluster coordination and collaboration reduces the information
processing load assigned to the central node, as peripheral nodes do not need to
communicate directly with the central authority whenever a decision-making situ-
ation arises.
A “small-world network”, in which a high degree of local clustering and only a
small number of links between any two nodes exist, was found to enhance mutual
dependence among cluster nodes and facilitate communications and coordination
and collaboration among actors, especially when tight collaboration is necessary for
connecting value chains in-between the organization (e.g., Newman, 2004). The
availability of such short paths for “bridging” nodes enhances coordination and col-
laboration of the network, particularly when interacting in-between organizations
(e.g., Watts, 2003; Baum et al., 2004). Moreover, such network properties are effec-
tive when creating new ideas and innovation in complex and heterogeneous organi-
zations (e.g., Braha and Bar-Yam, 2004). Moreover, small world networks provide
organizations with robust network formations that can deal with sudden environ-
mental changes such as concentrated information traffic, excessive overloads, bot-
tlenecks or unexpected accidents, or environmental destruction (Newman, 2004;
Shah, 2000).
Furthermore, strategic communities (SC), different from the concept of a com-
munity of practice (CoP) (e.g., Wenger, 1998), is a form of cross-functionality
by practitioners between different organizations and companies. An SC itself is a
“small-world structure” (see Figure 10.2). Viewed from the perspective of social net-
work theory, SC can be considered as clusters or cliques where people, the smallest
nodes, come together (e.g., Roethlisberger and Dickson, 1939; Roethlisberger,

1977). While cliques are collectives of closely linked practitioners who interchange
and share information, knowledge, and context, in SC, information is not simply
exchanged among actor groups, but rather in collectives (teams and projects), and
new contexts and knowledge are generated dynamically in response to environmen-
tal changes.
The many specialized practitioners in an SC are a group of people that achieve
innovation by discovering and solving problems on the pragmatic boundaries they
face, and executing creative strategies, and are formed as the aforementioned “small-
world networks”. As discussed previously, the demonstration of DC requires syn-
chronization (convergence) of the pragmatic boundaries between stakeholders. In
other words, synchronization of pragmatic boundaries among stakeholders brings
about synchronization of the DC of the players and hence brings about dynamic
capabilities (see Figure 7.2).
Small-world networks are characterized by short connections between nodes (the
smallest node is a person) and local clustering. For example, as nodes, the short
path between practitioners belonging to dissimilar organizations enables access to
practitioners within the company, belonging to other companies, and customers.
Furthermore, each node in a small world network is embedded in the local clus-
ter. Hence, local clustering has the potential to foster reliable accessibility (White
and Houseman, 2002). A small-world network can be formed either by randomly
Figure 7.2 Asset orchestration by forming strategic communities between actors

rewiring a portion of an existing regular network or by attaching each new node to

a “neighborhood” that already exists (Watts and Strogatz, 1998).
Furthermore, these are examples of two-mode networks (bipartite networks) and
affiliation networks (e.g., Wasserman and Faust, 1994; Faust, 1997; Watts, 2003) in
social network theories, as shown in Figure 7.2 (Kodama, 2005, 2009a). I place par-
ticular focus on dynamically changing SC and network SC, whose network forms
have been called “group interlocked networks” by Watts, 2003. Watts (2003) said
actors have a relationship with a particular context, whereas in the real world of
business, actors (practitioners) form groups subjectively in particular contexts, in
which they incorporate other actors (practitioners) at the same time (in other words
linking actors together). Accordingly, as a group, the SC changes dynamically in
response to context, and at the same time as the networked form, networked SC are
dynamically formed and changed.
Practitioners dynamically reconfigure SC as part of their daily activities, and mul-
tiple practitioners participate in multiple SC to share contexts, knowledge (assets)
and information, and practitioners who also participate in other SC transfer con-
texts, knowledge (assets) and information and share and transform it with those
practitioners. Through this process, networked SC are formed as the aforemen-
tioned group interlock networks. SC can be seen as nodes and hubs in the frame-
work of this group-interlocked network. Practitioners who belong to hub or node
SC inside or outside of companies create networks among the SC (or link them
together) by dynamically bridging multiple and different SC. In this way, multiple
SC are integrated as networks, and new contexts and knowledge (assets) are orches-
trated. To develop new products or configure new business processes, practitioners
consciously network multiple SC between various organizations through pragmatic
boundaries synchronization both inside and outside of companies to make deep
connections between the SC inside and outside of their companies. This mechanism
is the essence of the asset orchestration process (see Figure 7.2).
7.4 The attention-based view (ABV) – attentional control

(engagement) and problem-solving to achieve synchronized
pragmatic boundaries
As mentioned earlier, the core element of dynamic capabilities is the orchestration
of new assets arising on various pragmatic boundaries inside and outside of compa-
nies (in other words, synchronization of pragmatic boundaries inside and outside of
companies to orchestrate assets) to become a source of innovation. Various issues and
challenges arise on pragmatic boundaries, and actors need to take up the challenge
of resolving these issues and creating new assets. In such cases, it is important to
bring about synchronization (convergence) of thoughts and activities among actors
on pragmatic boundaries.
To maintain thinking and activities among actors on pragmatic boundaries in
novel and uncertain environments, individual actors are forced to pay attention to
and show willpower toward the challenges and problems they face. This is because
actors’ existing knowledge and experience cannot be easily applied on pragmatic
boundaries. As Schulze and Brusoni (2022) mention, keeping actors’ attention

focused on corporate and organizational change for long periods of time is stressful
for both individuals (e.g., Laureiro-Martinez, 2014) and organizations (e.g., Ocasio,
1997, 2011).
According to Ocasio (1997), the attention process is a structural cognitive
process – processes of selecting answers or resolution of issues such as problems and
challenges on which an organization should focus. Attentional Control (Engage-
ment) promotes the creation of new meaning in response to specific stimuli (e.g.,
strategic goals), such as problem-solving or planning, and the intentional and sus-
tained allocation of cognitive resources to facilitate decision-making (Ocasio, 2011).
In such processes, corporate (organizational) actors can focus their time, energy,
and efforts toward solving problems that correspond to strategic goals and driving
organizational processes toward achieving those goals ([A] in Figure 7.1).
Attentional engagement is based on two distinct but connected and comple-
mentary processes: executive attention and attentional vigilance (or sustained atten-
tion) (Ocasio, 2011). Executive attention enables a person to switch attention from
one stimulus to another, whereas attentional vigilance enables a person to remain
attentive to something over a longer period. Without either of these two forces,
effective decision-making in an organization is impossible (Ocasio, 2011). Execu-
tive attention processes enable organizational actors to switch their attention from
operational tasks with ordinary capabilities to adaptive tasks with dynamic capabili-
ties. The attentional vigilance process is thought to help actors keep their attention
focused on processes of change for extended periods of time while exercising their
ordinary capabilities on a daily basis (Schulze and Brusoni, 2022).
Building on these observations of Ocasio (2011), Schulze and Brusoni (2022)
point out that this process may explain what firms can achieve by maintaining atten-
tional vigilance and why some firms are better than others at switching gears in
response to environmental changes at various speeds through behavioral changes
enabled by executive attention (see Figure 7.1). In other words, attentional control
(engagement) as a control mechanism can be interpreted as a management tech-
nique (tool) that enables companies (organizations) and even actors to direct atten-
tion over long periods (Ocasio and Wohlgezogen, 2010).
Schulze and Brusoni (2022) utilized the attention-based view (ABV) of firms
for the purpose of exploring how dynamic capabilities change ordinary capabilities
(Ocasio, 1997). Their study is significant because there is little explanation in the
past literature on how dynamic capabilities modify ordinary capabilities. The model
presented by Schulze and Brusoni (2022) showed by induction from an empiri-
cal example that the structured interaction of two elements, attention control and
problem-solving, enables dynamic capabilities to reconfigure resources and thus
change ordinary capabilities.
The problem-solving process of framing problems and solving problems in Fig-
ure 7.1 involves accurately describing the problem, setting the direction for recon-
figuring and reorganizing assets (resources) with the goal of finding a meaningful
solution. Such a process would affect existing ordinary capabilities (and even existing
dynamic capabilities). The work of Schulze and Brusoni (2022) contributes to our
understanding of the micro-processes by which dynamic capabilities modify ordi-

nary capabilities.
Based on the findings of Schulze and Brusoni (2022), I propose a new theoretical
process model that combines the attention-based view (ABV) of attention control
and problem-solving with the boundaries-based view (BBV) described earlier to
realize synchronization (convergence) on pragmatic boundaries (Figure 7.3 shows
the relationship between the main elements of the BBV and the ABV). In this
theoretical model, the structured interaction between the two elements of atten-
tion control and problem-solving proposed by Schulze and Brusoni (2022) shifts
the characteristics of boundaries between actors (semantic boundaries  pragmatic
boundaries) and synchronizes (converges) actors toward pragmatic boundaries.
As mentioned earlier, in environments with synthetic boundaries (an informa-
tion processing model) and semantic boundaries (an organizational learning model),
there is no need for significant conversion of previously accumulated knowledge
(or assets), such as the appropriation and utilization of existing knowledge or its
improvement and refinement. Therefore, companies (organizations) should per-
form normal routines, which are ordinary capabilities. However, faced with uncer-
tainty and novelty in the business environment, companies (organizations) need
to synchronize (converge) the characteristics of boundaries between actors into
pragmatic boundaries, and actors need to work on solving current issues and prob-
lems. This organizational process generates actors’ dynamic capabilities and triggers
Figure 7.3 The attention-based view and boundaries-based view in dynamic capabilities (DC)
transformation (restructure, reorganize, etc.) of knowledge (or assets) that are exist-
ing ordinary capabilities (as well as existing dynamic capabilities) (see Figure 7.3).
The structured interaction of the two elements, attention control and problem-
solving, facilitates the thinking and action processes of actors synchronizes (con-
verges) on pragmatic boundaries and drives new dynamic capabilities within
(intra-organizational) and across (inter-organizational) companies. In particular,
structured interaction between attention control and problem-solving tasks syn-
chronizes (converges) the boundaries faced by actors and promotes the generation,
sharing, and utilization of common knowledge (common lexicon, meaning, and
interests) among actors. This promotes communication and collaboration among
actors on pragmatic boundaries and transforms their individual existing knowledge
(expertise) (see Figure 7.3). Figure 7.3 outlines the relevance and connectivity of the
boundaries-based view (BBV) and attention-based view (ABV) concepts.
Attentional control processes, which are executive attention processes and atten-
tion vigilance processes, induce the semantic boundaries  pragmatic bounda-
ries shift. Furthermore, the problem-solving process synchronizes the actors onto
pragmatic boundaries, enabling them to switch their attention from operational
tasks with ordinary capabilities to adaptive tasks with dynamic capabilities ([B] in
Figure 7.1). This results in changes to existing ordinary capabilities (or even exist-
ing dynamic capabilities), triggers new dynamic capabilities ([C] in Figure 7.1),
and drives and controls the organizational process to generate new DC ([D] in
Figure 7.1). Through the exertion of DC (sensing, seizing, transforming), these
adaptive tasks form the aforementioned strategic communities (S)) and reconfigure
and restructure assets (resources). In other words, strategic communities (and even
networked strategic communities) are formed within (and between) companies,
while the asset orchestration function drives the reconfiguration and restructuring
of assets (resources) ([E] in Figure 7.1). Over time, as the strategy is implemented,
the performance of the organizational processes created by new DC is monitored
within companies (organizations), and at the same time, feedback for the construc-
tion of new strategies is implemented ([F] in Figure 7.1).
Carlile (2004, p. 566) states, “A dynamic capability can be thought of as a col-
lection of different combinations of capacities and abilities that can be used to share
and assess knowledge across the various types of boundaries”. However, as described
by the conceptual diagram in Figure 7.2, the reconstruction of assets generated from
a bundle of strategic communities, which are pragmatic boundaries, is also called as
the asset orchestration process through dynamic capabilities (and even collaborative
dynamic capabilities (Kodama, 2018)) (see Figure 7.3).
In the case study of agile development presented by Schulze and Brusoni (2022),
the structured interaction of the two elements, attention control and problem-solving,
significantly transformed organizational structure and the roles and responsibilities of
actors. Specifically, in the transformation of organizational structures, teams changed
from large project teams to small, multidisciplinary, agile teams with the ability to
self-organize. Furthermore, the roles and responsibilities of actors changed from
project managers to product managers, agile masters, and team members with partial
leadership roles. In other words, actors acquired a broad range of skill sets, including
leadership. In decision-making, decisions regarding organization and work assign-

ments changed from a centralized to a decentralized system. These multidisciplinary
teams corresponded to the aforementioned strategic communities (SC) and played
autonomous decentralized roles by demonstrating dynamic capabilities.
As described later, the structured interaction of the two elements of attention
control and problem-solving, and the organizational process of synchronization
(convergence) to pragmatic boundaries between the actors, is the trigger to gener-
ate new dynamic capabilities in Domain I from the capabilities in Domain III and/
or Domain IV in the strategic innovation system in Figure 5.2 in Chapter 5 (Shift
A and Shift B in Figure 7.5, which generate and drive new DC in Domain I) (see
Figure 7.1).
7.5 The attention-based view (ABV) – attentional control

(engagement) and strategic action for achieving
synchronized pragmatic boundaries
The case study of agile development presented by Schulze and Brusoni (2022) ana-
lyzes the process by which dynamic capabilities are generated from the structured
interaction of two elements, attention control and problem-solving, in the product
development process of an R&D organization. I discuss these attention-based view
(ABV) and boundaries-based view (BBV) concepts from the perspective of corpo-
rate strategy (including product strategy).
Ocasio (1997) points out that successful strategic performance requires the sus-
tained focusing of attention and effort associated with controlled attentional process-
ing. Accurate planning and execution (including speed of execution) of strategic
actions in a company requires that individual and team decision-makers focus their
energy, effort, and attention on a limited number of issues and tasks. For firms to
succeed in strategic performance, actors need to focus sustained attention and effort
for controlled attentional processing (Ocasio and Joseph, 2018).
In defining strategy as a pattern of attention, from the attention-based view (ABV)
perspective, it is not the original idea, plan, or intention that generates strategy, but
a “strategic agenda” that has and focuses on a pattern characterized by the consist-
ency that eventually emerges (Ocasio and Joseph, 2018). The firm’s strategic agenda
prioritizes a specific set of action options that will shape the choice of markets and
customer segments and promotes the development and realization of the target busi-
ness model (the key elements that make up value chains and business ecosystems –
the range of product and service offerings; the firm’s value propositions; firm pricing
and cost structure; the development, acquisition, and deployment of assets and capa-
bilities; the development of alliances and partnerships and responsiveness to com-
petitors). The scope of a company’s strategic agenda is inherently broad, complex,
dynamic, and continuously evolving. Resulting strategies reflect not only the con-
figuration of previous strategic choices, but also a consistent strategic agenda for the
ongoing development and refinement of new strategies (Ocasio and Joseph, 2018).
In the trial-and-error processes (strategic actions) of framing and solving stra-
tegic agenda to realize a business model, the element of coherence is particularly
important within companies (organizations). This coherence is achieved primarily

through the integration of attention (Ocasio and Joseph, 2018) through company
communication channels (Joseph and Ocasio, 2012) and communication that occur
among organizational members within those channels (Ocasio et al., 2018). Coher-
ence across an organization’s channels avoids ambiguity regarding the interpretation
of strategic opportunities and threats and increases the likelihood of providing mem-
bers of the organization (actors) with a consistent understanding of what a business
solution should look like to solve a business challenge or problem. Companies can
then focus and give sustained attention to value creation to realize superior strategies.
This requires structured interaction between the two elements, attentional control
and strategic action, and organizational processes for synchronization (convergence)
to pragmatic boundaries among actors ([B in Figure 7.1] (see Figures 7.1 and 7.3).
The organizational process of strategic action, which consists of framing and
solving strategic agenda, requires interactive, trial-and-error processes between
actors on pragmatic boundaries. This process of framing and solving strategic agenda
corresponds to the framing problems and solving problems presented by Schulze and
Brusoni (2022). The interaction of attentional control and strategic action (framing
and solving strategic agenda) and strategic action (implementing strategic agenda)
affects both internal and external assets and leads to the transformation of existing
ordinary and even existing dynamic capabilities ([C] in Figure 7.1).
This then leads to driving and controlling organizational processes to gener-
ate new DC ([D] in Figure 7.1) (see Figures 7.1 and 7.3). Through the exertion
of DC (sensing, seizing, transforming), these adaptive strategic activities form the
aforementioned strategic communities (SC) and reconfigure and restructure assets
(resources). In other words, strategic communities (and networked strategic com-
munities) are formed within (and between) companies, while the asset orchestration
function reconfigures and restructures assets (resources) ([E] in Figure 7.1). Over
time, as the strategy is implemented, the performance of the organizational pro-
cesses created by new DC is monitored, and at the same time, feedback for the
construction of new strategies is implemented within companies (organizations) ([F]
in Figure 7.1).
Schulze and Brusoni (2022) mention that although the difference between fram-
ing problems and solving problems is not a particularly new subject in the past litera-
ture, it is problem-solving that has traditionally received more attention in practice
and in education. They also point out that humans tend to immediately go straight
to the solution phase. The reason for this is that actors tend to adopt pre-defined
solutions, those that seem closer to their areas of expertise.
This tendency arises because, from the boundaries-based view (BBV) perspec-
tive, even though they are actually facing pragmatic boundaries, actors are likely to
interpret them as syntactic and semantic boundaries and act in a way that appropri-
ates or leverages existing knowledge. On pragmatic boundaries, actors should make
efforts among themselves to frame problems based on actual root causes and then
develop countermeasures.
Ocasio and Joseph (2018) compare Apple and Motorola’s new product develop-
ment from the perspective of capabilities that should garner attention over time.
Despite starting from similar strategic ideas about smartphones, the performance
levels achieved by the two companies have been very different. In other words, the
presentation of a clear mechanism by which these strategic action processes – the
transformation and framing of ideas into concrete, successful strategic agendas, and
then solutions – are made possible by dynamic capabilities.
In a good strategy, a company uses also its identity, which allows it to focus on
a strategic agenda and continuously direct attention toward driving organizational
processes that correspond to its strategic goals ([A] in Figure 7.1) (Ocasio and Joseph,
2018). Identity brings commonality in the focus of attention among members of an
organization, which is an important determinant of a company’s attention perspec-
tive (Ocasio, 2011). Such identity has the effect of synchronizing (converging) the
characteristics of the boundaries between actors (their thoughts and actions) into
pragmatic boundaries. At the same time, identity is the source of a firm’s unique
capabilities, embodied in its institutional commitments and repeated patterns of
decision-making (see Figure 7.3).
Although Apple and Motorola shared a common identity as leading high-tech
product companies, the identities of the two firms were, in many other respects,
quite different. Apple’s strong organizational identity was based on designing and
developing superior products with the goal of changing the world. Focus on digi-
tal design, obsession with improving the customer experience, and delighting and
surprising customers as well as meeting their expectations are Apple’s organizational
identities. On the other hand, Motorola, which focused on superior products but
had a more traditional organizational identity as an engineering company, did not
share the same organizational identity as Apple (Ocasio and Joseph, 2018).
A company’s identity shapes and reflects its product concept, range of product
offerings, differentiation from other companies with similar product offerings, and
competitive rules. Thus, as shown in Figure 7.1, companies can use identity to
focus their strategic agenda and the actors in the company can focus their atten-
tion continuously on the realization of a good strategy that determines the business
model. In other words, the structured interaction of the two elements, attentional
control and strategic action (framing and solving strategic agenda), facilitates the
thinking and action processes of actors synchronized (converged) on pragmatic
boundaries and modifies existing ordinary capabilities (or existing dynamic capa-
bilities) to drive new dynamic capabilities within (intra-organizational) and across
(inter-organizational) companies (see Figure 7.3).
Meanwhile, as noted earlier, successful strategic performance requires actors to
sustain their focus of attention and effort related to controlled attentional processing
for the realization of the core business model of the strategy. To achieve controlled
attentional processing in a sustainable manner, it is important for actors to demon-
strate focused and decentralized management and leadership. The success of Apple
in commercializing the iPhone smartphone was due to the coexistence of not only
rigid centralized networks but also flexible distributed networks that deviated from
hierarchical networks as the structure of Apple’s internal organizational network.
This type of network structure created a small-world network (Watts and Strogatz,
1998) that has the characteristics of a strategic community (SC), as described earlier.
Kodama (2017, 2019) refers to an organizational structure like Apple’s as a network

collaboration organization.
In Apple’s rigid centralized networks of official organizations, discipline, rules,
and processes are always emphasized, and the centralized leadership of the late Steve
Jobs (now Tim Cook) and senior executives has full control of the most trivial issues
and action items (and sometimes the essential strategic agenda) upstream to down-
stream in the business process. Meanwhile, at Apple, the executive team (ET) led by
the late Steve Jobs (now Tim Cook) draws up a comprehensive strategy and narrows
down a strategic agenda. Then, distributed networks will function to mobilize the
best of Apple’s internal and external assets to solve strategic agendas and build new
business models. In other words, Apple’s executive team (ET) exercises autonomous
and creative distributed leadership, rewiring (or short cutting) the human network
to acquire new knowledge and build the aforementioned strategic communities
(SC) (and networked SC) (Kodama, 2017, 2019).
Apple’s network thinking, which uses or coexists with centralized networks by
such centralized leadership and distributed networks by distributed leadership, or
“holistic leadership” (Kodama, 2017, 2019), is implemented at each of Apple’s man-
agement levels (top management, middle management, and staff). By incorporating
holistic leadership into the process of strategic action, SC and networked SC are
established to mobilize all of Apple’s internal and external assets (asset orchestration)
for the development of new products that have never existed before.
More generally, holistic leadership induces actors to think and act in ways that
respond to organizational adaptability to changes in the environment (uncertainty
and speed of change). The continuous realization of the framing and implementa-
tion of the strategic agenda is achieved through concentration and decentralization
management by holistic leadership through controlled attentional processing, as the
driving force of organizational processes to handle strategic goals ([A] in Figure 7.1)
(see Chapter 8 for more details).
7.6 A longitudinal study of the mobile communication industry

in Japan
7.6.1 The i-mode innovation by NTT DOCOMO – the mobile internet

revolution
Japanese mobile telecommunications carrier NTT DOCOMO (DOCOMO here-

inafter) led the world in the development and popularization of Internet and mul-
timedia services with mobile communications. The i-mode innovation that was
launched in Japan in February of 1999, enabled data communications with mobile
telephones, expand the potential for using the Internet with mobile telephones, and
had a big advance in mobile telephone usability. Technology that enabled Internet
access from mobile telephones such as the DOCOMO i-mode have transformed
mobile telephones from just simply being portable telephones to being information
terminals. Around the year 2000, Japan was at least 2–3 years ahead of the West
regarding the use of mobile Internet. An American journalist even pointed out that
the mobile Internet Services that Japan was so enthusiastic about had the potential
to lead the world.
Behind the i-mode development was the 1992 formation of DOCOMO (it was
split off from the NTT mobile communications division), and it was predicted that
the 1999 market would be 10% of the Japanese population, or 12 million mobile
phones units, which was said to be quite a bullish forecast at the time (made by the
first DOCOMO CEO Koji Oboshi). However, in actual fact, the speed of populari-
zation was much faster than that predicted, and Oboshi’s forecast was reached three
years early in 1996. Seeing such a rapid take-up, Oboshi was convinced that the
market would become saturated in the not-too-distant future and began to feel the
need to create a new market outside the voice communications field. Thus, Oboshi,
who had the ideas that the mobile computing field had the right potential, and that
text and data communications should be expanded from business uses to ordinary
people, poured his efforts into creating and enhancing non-voice communications
services in the public market under the rubric of “from volume to value”.
By January 97, Enoki, who was working as General Manager of the Corporate
Sales and Marketing Department at the time (later General Manager of the Gateway
Business Department) was ordered by Oboshi to develop a non-voice mobile phone
communications service for the ordinary user. Oboshi also ordered Enoki to form a
new organization from personnel scouted from outside the company and recruited
in-house and gave Enoki full authority to start up the new service (in terms of both
personnel and capital). Thus, the formation of the new organization began with the
guidance of top management.
Oboshi said the following about selecting people to carry out this new business.
I knew there was much more reliance on the capabilities of individuals rather
than organizations in bringing about this new field from having conversations
directly with many staff in the past. In other words, the most important thing
was who to get to conceive, plan and develop the new product – Many new
and novel ideas are born in the brains of individuals. Then, nurturing, pro-
cessing and refining such ideas so that they speak to the market is up to the
capabilities of organizations.
(Oboshi, 2000)
Thus, Enoki brought together an originally 10-member team with remarkable

abilities from both inside and outside of the company to start the project and then
inaugurated a new 70-person organization in August 1997 (the Gateway Business
Department, GBD hereinafter). Then, with Enoki at the helm, GBD undertook the
development of the new i-mode service.
The success of i-mode has been reported in several examples of existing research
(e.g., Kodama, 2002, 2009a). The activity of the organization configured from dis-
similar personnel from both inside and outside of the company played a major role
in the success of i-mode. This new organization was named The Gateway Busi-
ness Department (GBD) and was organized as a set of mostly mid-career staff head
hunted externally – there were not very many staff from NTT in it. Although
DOCOMO had inherited the NTT corporate culture, this new organization had
members that brought a new organizational culture dissimilar to the DOCOMO
corporate culture. GBD received strong support from the then president, Oboshi,
and was also separated both physically and geographically from the DOCOMO
headquarters at the time.
In the process of developing i-mode, this new organization, GBD, had many
interactions with staff also involved in existing organizations at DOCOMO (depart-
ments from R&D, network design and facilities, through to sales and system design,
etc.). However, heading this organization, Enoki had to field in-house opposition
and suspicions and get the understanding and consent of the entire company. For
example, the following episode occurred (Matsunaga, 2000). At one time, in a
meeting of executives, there was opposition to the i-mode idea, because the small
mobile phone LCD screen was supposedly too small to see properly. In response,
Enoki said the following: “The mobile phone we are developing is not targeted at
people like those sitting at this table. It is aimed at your children”. There was also
opposition heard by staff within GBD, but Enoki stood up to it and managed a
variety of friction.
One of the factors of the success of the i-mode development was the effect of
positive interactions of the capabilities of GBD and those of existing organizations
(capabilities abrasion, friction) (Kodama, 2018). Driving creative abrasion and pro-
ductive friction, the new i-mode innovation was brought about by combining and
prioritizing (coordinating with tradeoffs) the positive collision and opposing ele-
ments of staff with their different viewpoints, knowledge, capabilities, and strategic
objectives. As a result of these processes, a diversity of friction was transformed into
cooperation. This required understanding and sharing of strategic objectives (over-
all and partial) between GBD and existing organizations, clarified decision-making
processes and open in-house discussions.
The element of coherence mentioned in Section 7.5 on the attention-based
view (ABB), was important in converting these various internal frictions into col-
laborative actions. This coherence could be achieved by integration of attention
(Ocasio and Joseph, 2018) through communication channels within DOCOMO
(between GBD and existing organizations) (Joseph and Ocasio, 2012) and com-
munication occurring among organizational members within the channels (Ocasio
et al., 2018). For DOCOMO, the coherence among all channels of an organization
avoided ambiguity in the interpretation of strategic opportunities (from volume to
value) and threats (saturation of the voice communications market) in the mobile
telephone industry and raised the probability of providing organizational members
(actors) with a consistent understanding of business issues and strategic goals, and
what business solutions to problems should look like.
DOCOMO was then able to focus and sustain attention on creating value in
the form of a new business model to realize a superior strategy. This organizational
process enabled a structured interaction between the two elements of attention con-
trol and strategic action and synchronization (convergence) of pragmatic boundaries
among organizational members within DOCOMO (between GBD and existing
organizations, including top management) (see Figures 7.1 and 7.3). Then, within
DOCOMO, trial-and-error processes (strategic actions) toward framing and solving

strategic agenda were executed to realize the i-mode business model.
Organizational behavior based on the attention-based view (ABV) and boundaries-
based view (BBV) transforms existing capabilities (dynamic and ordinary capabilities
in Domain III), forms multi-layered strategic communities (SC) inside and outside
companies, including various partner companies, and realizes asset orchestration as
an element of dynamic capabilities (DC). This behavior was a major key factor in
the realization of i-mode. In the realization of i-mode, the cospecialization mecha-
nism, which uses creative and productive friction to improve both DOCOMO’s
capabilities and those of its partners (strengthening strengths and reinforcing weak-
nesses), was important to build a shared sense of purpose (vision) and trust, motivate
and uplift partners, and establish win-win relationships (see Box-1).
Kodama (2018) and Figure 2.7 in Chapter 2 of this book discuss the four domains
of the capabilities building map from the framework of Capabilities Lifecycles by
Helfat and Peteraf (2003). The positioning of the domains and their relationships are
discussed from the perspective of the dynamic view of capabilities (see Figure 7.6).
The capabilities required by a company (organization) change dynamically as it
adapts to changes in the environment (uncertainty and speed) and shifts between
domains. Spiral feedback loops form through each selection event at the macro level
in the shifts between the domains in Figure 7.6.
At the time, a new strategy was born out of a deadlock in strategy to gain market
share with competitors in Domain III in DOCOMO’s i-mode strategy. At that time,
Domain III required not only the ordinary capabilities accumulated in the past, but
also the element of dynamic capabilities to respond to the need to develop new
handsets and services with diverse functions in the non-voice communication mar-
ket, to handle the speed of environmental change and customer needs. For DOC-
OMO, however, the development of technology in the non-voice communications
market, where market uncertainties are extremely high, was a new challenge. This
required new dynamic capabilities that were different from the dynamic capabilities
for the voice communications market. In other words, the i-mode business model
was born through a major transformation by restructuring assets (knowledge or
resources) (see Box-2: Asset restructuring and transformation) The i-mode strategy
corresponded to Domain III  Domain I (Shift B in Figures 7.6 and 7.10).
DOCOMO found capability opportunities in the war of attrition with competi-
tors in the rapidly changing environment of the cell phone market and succeeded
in pursuing the new radical innovation called i-mode. DOCOMO created new
dynamic capabilities in contrast to the existing dynamic and ordinary capabilities in
Domain III. DOCOMO’s capabilities shifted, evolved, and developed into Domain
I. There are many examples of such a shift to Domain III  Domain I (Shift B in
Figures 7.6 and 7.10), including the case studies in Chapter 6 (see Box-3).
However, even though i-mode had been successful in Japan, the response to the
Google and Apple iPhone and Android smartphones was sluggish – these products
hit Japanese mobile telephone manufacturers hard. At the time, nobody was able
to predict such a dynamically changing environment (even me, having worked as a
project leader at DOCOMO).
Box-1 A new business model through asset orchestration
(1) Formation of a new organization directed by top

management
To cultivate a market for this new service, Oboshi led the team that would
build a new organization for planning new services. In January 1997, Enoki,
who was serving as Corporate Business Director at the time (currently sen-
ior vice president and senior manager of the Gateway Business Department),
was appointed by Oboshi to develop non-voice communication services over
mobile phones targeting general users. Oboshi then assigned Enoki to the task
of building a new organization by means of recruiting human resources within
or outside the company and empowered him (with personnel and financial
management) to start up the new service.
With diverse and talented human resources recruited from both inside and
outside the company, Enoki started a new project (responsible for Gateway
Business) staffed by some 10 persons, a unit that by August 1997 had evolved
into the Gateway Business Department (GBD) staffed by 70 employees. GBD
was then at work developing a new service dubbed “i-mode”.
(2) GBD’s strategic agenda and specific actions to realize

i-mode services
Positive feedback of the elements through which content providers (CP)
would continuously provide useful content to end-users of i-mode-compliant
mobile phones was urgently needed for the business model that was planned
for successful i-mode service. This model was designed to expand the number
of end users as well as enhance the content provided by CP.
One of the tasks aimed at implementing this business model was to develop
easy-to-use i-mode-compliant mobile phones and to develop the network
system (i-mode servers and other hardware) that would deliver the content.
The second task was a software-based effort to obtain CP with content that
would attract end users.
To solve these two hardware and software tasks and implement the new
service, Enoki felt that it was essential to integrate the knowledge and com-
petence based on the new concepts and viewpoints of the diverse human
resources at GBD, to take advantage of years of experience with existing
organizations within DOCOMO other than GBD, to incorporate the intel-
lectual assets inherent in the CP which were outside customers of DOCOMO,
as well as to tap the intellectual assets inherent in the terminal manufacturers
and platform vendors which were outside partners of DOCOMO. The inte-
grated knowledge and competence would thus become important elements
capable of building a new business model for i-mode service.
Therefore, Enoki actively formed strategic communities (SC) with GBD

and other traditional organizations within the company, as well as with its cus-
tomer, CP. GBD overcame the two aforementioned challenges by combining
the new knowledge and competence generated from the formation of these
SC groups, creating a business model for i-mode services in which positive
feedback was possible.
(3) Formation of SC with traditional organizations

Coordination among the traditional organizations and the development and
technical departments was required to develop i-mode-compliant mobile
phones and network systems. At the outset, there was a conflict arising out of
differences of concept or opinions between GBD and other departments, or
there were some objections to the service voiced from within DOCOMO. To
overcome various conflicts arising between the GBD and traditional organiza-
tions, Enoki led the team at the forefront of coordination and consensus building
through persistent dialogue and collaboration with the departments concerned.
He strove to leverage such conflicts as a catalyst for constructive and produc-
tive dialogue and discussions (Robbins, 1974). The strong motivation of profes-
sionals assembled at the GBD staking their pride on the success of the i-mode
service and the innovative leadership of Enoki to orchestrate the operation of
GBD members were the motivating forces leading the traditional organizations.
Enoki exhibited strong leadership in promoting the i-mode service and
was successful in obtaining the understanding and agreement of the top lead-
ers of the traditional organizations. He then launched the Mobile Gateway
Service Introduction Promotion Committee within DOCOMO. The com-
mittee consists of the top leaders of all departments in the traditional organi-
zations, including the president and Enoki. The committee was to become
a forum for dialogue and decision-making aimed at sharing information and
knowledge at the top management level that would eventually result in the
launch of the i-mode service and promote this business.
On the other hand, each of the project leaders at GBD led by Enoki started
seven working groups (Network Server WG, Mobile Phone WG, Facilities
Building WG, Facilities Maintenance WG, System/Sales WG, Content WG,
and Application WG) in the form of task forces consisting of GBD middle
management and traditional organizations. These work groups identified and
discussed problems and tasks aimed at the launch of the i-mode service. In
addition, the task force specializing in i-mode mobile terminal development
and system development convened once a week under the name, Gateway
Service Specifications Review Committee, where the service specifications
and technical specifications were determined in order to implement the
i-mode service. To promote dialogue or collaboration within the organiza-
tion at the GBD, all members of the committee met regularly for the purpose
of sharing information and knowledge with all GBD members and also shar-
ing value systems and awareness among all members aiming to promote the
i-mode service.
As such, Enoki formed the company strategic communities (see SC-a in
Figure 7.4) at the top and middle management levels and actively promoted
knowledge management within this SC. In the SC, the coordination of the
value system at each management level (Kodama, 2001) was promoted for
the major mission of business expansion aimed at DOCOMO’s new business,
and a new asset (knowledge) (Kodama, 2002) called the i-mode service was
created. In other words, integration of attention promoted synchronization
(convergence) to pragmatic boundaries within and between organizations
within DOCOMO.
(4) Formation of SC with customers (CP)

A major task of the GBD Content Planning Project was how to find and
establish ties with CP that could provide useful content. The strategy elabo-
rated by Content Planning Project Leaders was to establish win-win relation-
ships between DOCOMO and the CP.
An important factor in the establishment of win-win relationships was the
idea that the CP and DOCOMO would think and behave in a manner of
equal partnership, sharing the risks and profits, instead of DOCOMO simply
purchasing content from certain CP or charging CP with tenant fees when
providing a lineup of i-mode content. As a solution, DOCOMO encouraged
CP to create their own content and provided them with the platform used in
establishing a “content service charge collection agency system” to allow users
to earn profits from providing their own services.
Content Planning Project Leaders explained the concept of a win-win
relationship to many CP personnel and successfully obtained their under-
standing and aroused sympathy for the concept. As a result, the value systems
of both DOCOMO and the CP were unified, and an SC aiming to start a
new business was formed (see SC-b in Figure 7.4). In this SC, based on the
shared question, “what kind of content will truly delight end users and make
them pay for content services?”, discussions were held in terms of breaking
news, accuracy, continuity, and end-user satisfaction with the content, and
attractive content was created to keep end-users engaged.
GBD’s content planning project helped many CPs understand and sympa-
thize with the concept of the i-mode business model, and successively gained
influential CPs (mobile banking, credit cards, airlines, hotels, news, newspa-
pers, magazines, and many others). By the time i-mode service was launched
(February 1999), 67 CPs had been acquired.
Enoki endeavored to form an internal corporate SC and an SC with
customers (CP) until the startup of the i-mode service, and he promoted
Figure 7.4 The i-mode Business Model by Asset Orchestration

Source: Created by the author, citing, Kodama (2002)
knowledge management in each SC. By organically combining these two SC,

the new community asset (knowledge) known as “business model construc-
tion” was created as a route to implementing the i-mode service.
(5) GBD’s business strategy and organization after the

launch of i-mode service (from February 1999)
Enoki felt that a number of measures had to be implemented so that end users
could enjoy the advantage of fully subscribing to i-mode to trigger an explo-
sive growth of the i-mode service.
The first measure was the “portal strategy” for developing new, useful con-
tent for the i-mode service. The second measure was the “terminal strategy”
to develop new i-mode mobile phone terminals including add-on features.
The third measure was the “platform strategy” to break ground for i-mode
users using platforms with devices other than mobile terminals. Furthermore,
these three business strategies were interactive with each other, thus capable
of triggering a major synergy depending on the strategy concerned. In order
to promote these business strategies, an important task was to proceed with
the strategic alliance with many outside partners to yield practicable results.
After the startup of the i-mode service in February 1999, the GBD formed
the SC in succession through strategic alliances with outside partners in order
to acquire end users at an early stage of the project. The first step was to form
a “portal SC” (see SC-b in Figure 7.4) to act as the core of the portal strategy
and enhance the details of the i-mode portal operated by DOCOMO through
which diverse risks and interests could be shared with CP while enhancing the
value of the content so as to provide new values for the end user. In addition,
an advertisement delivery service was promoted on the i-mode portal, and a
top-tier financial service was also implemented at the birth of the net-based
banking business. This strategy was recognized as an important positioning of
services prior to the launch of i-mode sales.
The second step was to form a “technical SC” (see SC-c in Figure 7.4)
linked with terminal manufacturers which would become the core of the
terminal strategy. This strategy was intended to trigger new demand for end
user terminals and to motivate users to replace their terminals by periodically
adding new features to i-mode mobile phones. For CP, the development of
new mobile phones (such as JAVA-compliant phones) opened the possibility
that content could be developed under new applications with the advantage
of attracting new end users. DOCOMO could also enjoy an increase in new
revenue from increased communications traffic due to a greater penetration of
mobile phones equipped with new features.
The third step was to form a “platform community” (see SC-d in
Figure 7.4) to serve as the core of the platform strategy in order to expand the
scope of i-mode availability. Combining i-mode mobile phones with game
machines, car navigation systems, and other platforms would further expand
i-mode availability.
Thanks to the time pacing strategy (Eisenhardt and Brown, 1998) which
continuously put forward three strategies on an individual organization basis,
the GBD continued to acquire new end users and CP as customers in quick
succession. Figure 7.5 shows the practicable measures arranged in time series
about these three business strategies proposed by the GBD. In March 2001,
the GBD reached the target of acquiring 25 million subscribers (end users) in
just two and a half years following the launch of the service.
Each project team at the GBD worked to promote strategic tie-ups with
outside partners and continued to proceed with their business through prompt
decision-making and expeditious activities as though they were small venture
businesses. On the other hand, each project team leader continued to embody
new concepts, strategies, and tactics adopted by the strategic concept and the
innovative leadership of Enoki, the top leader of the GBD. At the same time,
new strategies and tactics born out of the close tie-up with each project leader
were also implemented. Meanwhile, Enoki and all GBD members shared a
vision and value system for the main mission of promoting i-mode services.
Year 1999 2000

3 strategies
Portal • Pay contents charge/ • Established advertising
strategy data warehouse for business “D2
personalization/ Communications” (June)
Guidance features (Promote i-mode advertising
(February) business)
• Character delivery • Established JapaNet Bank
service started (June) (September)
• Regional-based menu (Internet-based banking)
list for nine districts • Established i-mode contents
(September) consulting business
“DoCoMo.Com” (October)
• Started banner advertising
(October)
Terminal • Technical alliance with • i-mode terminal from

strategy Sun Microsystems NOKIA (April)
(March) • i-mode/PHS dual mode
• Web server/e-mail- i-mode terminal (June)
To be evolving and developed

compliant i-mode • English-version i-mode
terminal (501i) terminal trial (June)
(February) • JAVA-compliant i-mode
• Announced JAVA- terminal (503i) (February 01)
compliant i-mode
terminal prototype
(June)
• Expanded i-mode
mailing function (July)
• Ring melody
download-compliant
i-mode terminal
(502i) (December)
Platform • Started experiment • Invested in “PlayStation.com.

strategy on car navigation Japan” (April) (working with
coordination i-mode and game machine)
(February) • Technical alliance with Sony
• Jointly developed Computer Entertainment
i-mode-compliant (SCEI) (August)
group ware • Strategic alliance with AOL
product with US (September)
Buma Technology • Tie-up with KPN Mobile
(February) on mobile Internet business
(September)
• Established “i Convenience”
with Lawson, Matsushita,
and Mitsubishi (October)
(promoted networking
between i-mode and street
sites)
Figure 7.5 Main activities in three main GBD business strategies

Although the GBD had, as a whole, strong emergent factors on a strate-

gic basis, the deliberate strategic factors of each project leader and the tight-
coupling factors linking each project leader led by Enoki eventually allowed
the i-mode business model to be combined with practical businesses in a
deliberate and feasible manner.
Furthermore, after the launch of i-mode services, Enoki organically inte-
grated the four SC groups in Figure 7.4 (asset orchestration in each SC group)
to maximize the synergy effects of the three business strategies to expand
the penetration of i-mode services. Cospecialization mechanisms to improve
both the company’s own capabilities and those of its partners (to strengthen
strengths and reinforce weaknesses) were realized through the asset orchestra-
tion process.
The organization of GBD necessary for deploying novel and complex
strategies was a complex and environmentally adaptive system with two dis-
tinctive characteristics: the tight-coupling organizational factor strictly coor-
dinated between Enoki, the top leader, and each project leader; and the
loose-coupling organizational factor having both flexibility and autonomy
reflected on each project.
Box-2 Asset restructuring and transformation
Evidence of asset (resource) reconfiguration, reorganization, and trans-

formation was abundantly observed in this case study (due to my tenure at
DOCOMO, working side by side with the GBD organization). DOCOMO
developed its existing ordinary capabilities and revolutionized its assets to
break out of the war of attrition with competitors in the fast-changing envi-
ronment of the cell phone market. Since the business model of cell phone ser-
vices for the traditional voice communications market and the business model
for the non-voice communications market were completely different, a major
rethinking of the service concept and the development of a strategic agenda
to realize the new business model were necessary. To this end, all DOCOMO
employees involved in the development of i-mode services learned, accumu-
lated, and developed new ideas and new skills and know-how to realize them
in a concrete way.
The conventional organizational structure for the voice communications
market demonstrated ordinary capabilities through normal functional organi-
zations and inter-organizational collaboration. However, to build new assets,
GBD, a cross-functional team (CFT) consisting of dissimilar members from
inside and outside the company (multidisciplinary and bringing in differ-
ent organizational cultures from outside the company) was organized at the
time of i-mode development. This relationship between GBD and existing
organizations (traditional organizations) was not an innovation development

through the building of the well-known organizational model of the “Ambi-
dextrous organization” (Tushman and O’Reilly, 1997; O’Reilly and Tush-
man, 2004). Put differently, dense interaction between GBD and traditional
organizations created new assets to solve the strategic agenda. The seven
taskforce-like working groups consisting of middle management classes from
GBD and traditional organizations were good examples.
Furthermore, the types of external stakeholders (business cooperation part-
ners) and relationships necessary to realize cell phone services for the traditional
voice communications market had changed significantly. In the traditional voice
communications market, business cooperation partners have been communica-
tions equipment manufacturers, such as cell phone equipment manufacturers,
and companies related to equipment construction and sales promotion. In con-
trast, the i-mode development required collaboration with business partners
across a variety of different industries, business sectors, and business types to
solve the issues of the three strategic agendas of a portal strategy, a technical
strategy, and a platform strategy. To realize a new business model, we reor-
ganized, restructured, and transformed (i.e., asset orchestration) the assets of
many business partners. Thus, DOCOMO established new dynamic capabili-
ties while making significant changes to its existing business processes and asset
infrastructure for the traditional voice communications market.
Box-3 Examples of interdomain shifts (Shift A and Shift B

in Figure 7.6)
The most striking strategy transformation in the world is Apple’s radical

innovation from its PC business to the music distribution business. Apple
successfully developed a new business by moving away from the traditional
Mac development approach (in-house development) and orchestrating supe-
rior internal and external intangible assets. This was also the result of a fully
functioning renewal, redeployment, and recombination processes through
dynamic capabilities (Kodama, 2018).
Also, Nintendo’s new game console concepts, such as the Wii and DS,
were targeted at a completely different customer segment from Sony’s PlaySta-
tion, which was mainstream at the time (customers who were not interested
in games, such as the elderly and housewives). Nintendo redeployed its cus-
tomer target and demonstrated dynamic capabilities through the Domain III
 Domain I shift (Shift B in Figures 7.6 and 7.10), giving birth to the radical
innovation of a new game console. Shift B in Figure 7.6 is a strategy to tar-
get untapped markets and technologies, including the case of Apple’s radical
Figure 7.6 Capabilities lifecycles on the capabilities building map

Source: Created by the author, citing (Kodama, 2018)
innovation from the PC business to the music distribution business, and has
similarities with the “blue ocean strategy” (Chan Kim and Mauborgne, 2004).
For example, as discussed in Box-1, Kodak of the United States was a
company that took the path of retrenchment and retirement from Domain IV
because of digitalization, whereas Fujifilm of Japan successfully and strategi-
cally shifted from Domain IV to Domain I with redeployment/recombination
(Shift A in Figure 7.6). Kodak, on the other hand, from its early days, sensed
the threat posed by the changing marketplace of digitalization, but consist-
ently adopted a rigid strategy of seeking to maximize shareholder value and
profits by adhering to its existing ordinary capabilities (OC), purchasing large
amounts of its own stock with its ample funds to take stock price measures,
etc. Furthermore, top management at Kodak at the time had no idea about
orchestrating the company’s high-level intangible assets to respond to the
changing environment of digitalization.
In the case of Shift A in Figure 7.6, an in-house extreme sense of urgency,
higher-order learning, and strategic collaboration through the formation of
informal networks with other industries (i.e., high-quality, strategic, non-
routine actions) in response to a gradually approaching threat transforms the
existing ordinary capabilities (OC) and enhanced the possibility of transi-
tioning to Domain I through the demonstration of dynamic capabilities
(DC). Fujifilm’s strategic leadership of top management and organizational
processes, which responded to the extreme sense of crisis within the company,
realized a structured interaction between the two elements of attention con-
trol and strategic action, and a synchronization (convergence) among organi-
zational members toward pragmatic boundaries (see Figure 7.1 and 7.3). This
is also a good example of strategy transformation through capability threats, as
described by Helfat and Peteraf (2003).
7.6.2 NTT DOCOMO’s mobile multimedia challenge – third-generation mobile

phone services
The first-generation analog mobile phones were introduced in Japan in 1979 as car
phones, while the first digital, second-generation mobile phones were commercial-
ized in 1993. After that, with the abolishment of security deposits, the introduction
of systems for buying mobile phones, falling rates, and so forth saw the number of
mobile phone subscribers surpass that of fixed-line users in March 2000. In this
way, the mobile phone market, centered on voice communications, quickly grew.
However, because there are limits to the population to which the services can be
spread, DOCOMO did not just stop at strengthening its main conventional services,
its voice communications, but also embarked on the basic “from volume to value”
strategy for a second wave of growth enabled by expanding its traffic from voice to
non-voice communications. The i-mode service discussed earlier was the first step
toward converging the Internet with mobile telephones, and by November 2003
had 40 million subscribers, adding a huge contribution to the opening up of the
mobile multimedia market.
DOCOMO’s sales enjoyed a 12-fold increase in the nine years from its beginning
at JPY 4.6 trillion, and then reached 5.2 trillion in 2001, its tenth year, based on
March 2002 calculations. The stock market capitalization of the company reached
JPY 20 trillion enabling it to become the largest company in Japan. Including
DOCOMO, mobile telecommunications carriers in Japan created a JPY 7 trillion
market and succeeded in creating 800,000 new while engaging in fierce competi-
tion with each other.
On 30 May 2001, DOCOMO led the world with a test service of a third-
generation mobile telephone service (FOMA) based on the W-CDMA system.
DOCOMO positioned FOMA to play a central role as a strategic product that
would radically expand the mobile multimedia market internationally by making
the most of its characteristic high speed and large capacity data transfer capabilities.
As well as that, and even richer range of mobile multimedia services became avail-
able with businesses provided by FOMA such as high-speed i-mode, TV phoning,
video distribution, international roaming and mobile commerce, and various other
services in the consumer domain. With FOMA, DOCOMO achieved business
developments targeting not only users demanding high-speed data communications
and high functionality, but also ordinary consumers, by improving user convenience
by adding higher value to mobile communications services. FOMA embodied the
“from volume to value” strategy and is a service that played a role in achieving the
mobile multimedia, ubiquitous services, and globalization of the future.
(1) The dynamic capability challenge through my actual experiences in the field
NTT East was formed with the split of NTT in June 2000, and I transferred to
DOCOMO in December of the same year. I was put in an organization involved
with planning multimedia services called the Mobile Multimedia Division (MM
division) and was charged with supervising a planning and development project for
a mobile video service as a project leader. The aforementioned i-mode development
Gateway Business Department (GBD) was also in the MM division, although the
department I was in was not GBD. Most of the organizational members of GBD
were mid-career personnel head hunted from outside the department – not many
of them were from NTT.
In contrast, staff outside GBD in the MM division were mostly from NTT.
Hence, the MM division consisted of staff who had the NTT organizational culture
embedded in them, and mid-career staff in GBD who had a different culture. Natu-
rally, clashes of these different cultures were unavoidable. Moreover, because GBD
had succeeded with the new i-mode service, its members also had a lot of sway and
political power in the company. Under this company environment, having been
posted to DOCOMO from NTT East in December of 2000, I had to execute his
mission to plan and develop a new service, while at the same time, I had to experi-
ence internal strife with GBD on a regular basis.
In planning and development work as a project leader, I also uncovered and expe-
rienced a number of competency traps (e.g., Martins and Kambil, 1999) and core
rigidities (Leonard-Barton, 1995) caused by the success of i-mode. For example,
the number of subscribers grew with the mobile phone with built-in camera jointly
developed by Sharp and J-PHONE, a competing mobile communications carrier at
the time. At the same time, Sharp had also approached DOCOMO with a proposal
for a mobile phone with a built-in camera. However, at the time, DOCOMO was
enjoying the height of market expansion for its i-mode mobile telephones, whose
sales were rising day by day. As a priority service strategy at the time, DOCOMO’s
main theme was expanding the popularization of i-mode and thought that adding a
camera to a mobile phone would raise its price, making it less attractive. Moreover,
DOCOMO predicted that users would mostly save photographs shot with the cam-
era in the phone rather than send them using DOCOMO’s packet communications
lines. Hence, as a communications carrier, DOCOMO could see no advantage if
images taken with these phones were not sent, because there would be no contribu-
tion to packet communications revenues. Accordingly, DOCOMO did not warm
to Sharp’s proposal.
Sharp aimed for a potential partnership with DOCOMO in the development
of the mobile phone with built-in camera, but unfortunately, this was not achieved
at the time. DOCOMO also pointed out this reasoning at the time. Certainly, it
became clear that after the spread of camera phones, there was a strong tendency for
users to save the photographs they took for their own enjoyment without attaching
them to e-mail and sending them. Nevertheless, after that, if a mobile phone did not
have the camera accessory, it would no longer sell.
At the time, the following episode occurred in an in-house meeting that
I attended. This was a meeting of the sales directors from all around the country at
headquarters to discuss problems and issues. Speaking with a sense of business crisis,
one of these sales directors made the comment that J-PHONE’s camera phone sub-
scriptions were on the rise in the Hiroshima area, and that DOCOMO should also
sell phones with built-in cameras. In response, one of the i-mode supervising execu-
tives asserted that camera phones were only a temporary fashion, and their growth
would one day settle down – this assertion could also be said to be a trap caused by
the successful experience of i-mode (competency traps and core rigidities).
Thus, lagging behind J-PHONE and au (KDDI), DOCOMO began sell-
ing camera phones through a collaboration with Sharp in June 2002. The i-mode
organization (i-mode division) was not involved in the commercial development of
DOCOMO’s camera phones. Being carried out by the sales department at head-
quarters, this was an extremely unusual event for the company, one outside its nor-
mal business up to that time. The sense of crisis coming from the front line around
the country was received by the sales department at headquarters, causing it to act
with a sense of urgency.
There were other similar examples. Around 2001, there were discussions in the
company about including GPS functions with mobile telephones. However, the
“i-area” simple mapping service for mobile phones was included as an i-mode appli-
cation, and those in the company with the political power and sway asserted that
the i-area function was sufficient and that there was no need to incur extra costs by
including GPS. Of course, in hindsight, it goes without saying that these GPS and
camera functions have been providing enormous value to consumers using mobile
and smart phones.
In this way, it can be said that the “sensing” functions of dynamic capabilities to
intuit or instinctively see through to the markets of the future can be dulled by the
competency traps and core rigidities that arise from the experience of success. As
discussed later, such an excessive inclination towards great successful experiences
caused unproductive paranoia in the organizational leaders – they were strongly con-
strained by their experience of success, having initially achieved a radical innovation,
but unable to move on to further innovations, which leads to the new proposition
that having had success with radical innovation, these leaders have made the effort to
transform it into simple incremental innovation with their own path dependencies.
In contrast, the multimedia service development organization (actually consist-
ing of three departments) in the MM to which I belonged experienced something
largely opposite to that of GBD above (see Figure 7.7). Initially, many project
leaders, including me, were taken up to plan and develop new (subsequent) ser-
vices different from i-mode, and there were a few 10s of these projects. One of
these was the mobile video link project, for which I served as project leader, and
for which the mission was to plan and develop a new service to enable the use
of video with the 3G mobile telephones slated for commercialization two years
later. Apart from this project, there were also a number of other projects that had
Figure 7.7 The growing i-mode organizational power
been instigated, such as ITS/location information, broadcast and communica-

tions, music distribution, mobile EC and C2C services, etc. (see Figure 7.8).
One of the major factors of conflict between GBD and the multimedia service
development organizations was the compatibility of new service plans with i-mode
(e.g., cannibalization). In particular, in the strategic domain (in which GBD had
in-house hegemony) with its focus on B2C/C2C services such as i-mode (in other
words, content, applications, and services for consumers), if the troop to which
I belonged (an organization related to multi-media service development) brought in
a B2C/C2C plan, some friction or conflicts would arise, which is the case in many
companies in the processes of planning and proposals for new business. These kinds
of conflict and friction arise in all projects, including in the ones in which I was
involved.
As shown in Figure 7.7, reflecting the successful performance of the i-mode,
between July 2001 and July 2004 when GBD boasted top status as a star department
in the company as the independent “i-mode Business Division”. During that time,
the conflict and friction between the i-mode Business Division and the MM Busi-
ness Division grew greater. This led to MM Business Division being forced to aim
most of the new services it had planned and developed as B2B rather than B2C/
C2C. There was increased pressure and control from i-mode Business Division for
control over service strategies.
In my project, two service planning and development projects were underway
simultaneously. One of these was a live video delivery service (Kodama, 2003),
which had to be started up as a service initially restricted to B2B or navigation sites
Figure 7.8 MM division new service development systems
other than the i-menu (also called free sites at the time), because it would handle
consumer-oriented content (the i-mode team was very opposed to the idea). I was
greatly dissatisfied with the inability of DOCOMO as a company to take advantage
of the i-menu site, which is consumer-oriented content.
Another new service planning and development project of ours was a multi-
point videophone service for cell phones1 (Kodama et al., 2003; Ohira et al., 2003a;
Kodama, 2007d), which could be provided on a B2C/C2C basis without opposition
from the i-mode team because it was a communication service rather than a content
service for consumers.
Having to accept many constraints within the company, we proceeded with
development in the direct face of a variety of friction and discord. In this envi-
ronment, not only I, the project leader, but also many of my subordinates had to
promote non-routine strategic operations that we had never experienced before,
and we had to demonstrate dynamic capabilities that were different from the regular
ordinary capabilities we had accumulated up to that point (see Box-4).
Focusing on creating value in the form of a new business model to realize the
world’s first live video streaming service (V-live) for cell phones (Kodama, 2003;
Ohira et al., 2003b), commercialization approval2 by several internal councils (multi-
layered entities such as divisional, company-wide, and management level) enabled
sustained interest and attention from relevant organizations within the company
to our project team. Through this organizational process, structured interaction
between the two elements of attention control and strategic action and synchroni-
zation (convergence) of organizational members onto pragmatic boundaries were
realized within DOCOMO (between our project team and existing organizations,
including top management) (see Figures 7.1 and 7.9). Then, within DOCOMO, to
realize the V-live business model, a trial-and-error process (strategic action) toward
framing strategic agenda and solving strategic agenda was implemented in each
department, led by our project team.
Our project team then went through the Domain I  Domain II process in the
Capabilities Building Map described in Figure 5.1 in Chapter 5, and accumulated
efforts to demonstrate dynamic capabilities. To demonstrate dynamic capabilities,
project team members learned from the i-mode development team, which was the
first to successfully launch a content service. This was none other than the asset
orchestration process – the integration of intangible assets through the formation
of multi-layered strategic communities (SC) involving customers and their needs,
DOCOMO group companies and its external partners (see Figure 7.9).
Figure 7.9 Asset orchestration – learning from the i-mode development

Box-4 Transformation of existing ordinary capabilities

(OC) – findings from my action research
I arrived at DOCOMO’s MM Division (Multimedia Services Develop-

ment Organizations) with six project subordinates from my NTT days (see
Figure 7.7). My subordinates, including me, had technical skills in product
planning and development of videoconferencing systems for fixed-line com-
munication and sales and marketing skills, but none of us had any skills in
planning and development of new video communication services for third-
generation cell phones. Therefore, at that time, I and project members only
had ordinary capabilities to deal with video communication technology and
market development. I assumed that my project was positioned in Domain
IV of the capabilities building map in Figure 7.5 at the time of my arrival.
In other words, at the beginning, my project team did not have a concrete
service concept for third-generation cell phones, and when I arrived at DOC-
OMO, most of the project members, including me, could not experience the
uncertainty of the environment and the speed of change.
However, I was entrusted by the head of the MM Division (Nakamura)
with the entire business process from planning to execution of the service. In
the absence of third-generation cell phones (at the time, second-generation
cell phone service was widespread worldwide), the project members had no
choice but to study the technical specifications of a prototype (experimental
device) developed by DOCOMO’s research laboratory and in-house docu-
ments describing the technical characteristics of third-generation networks.
After several months of daily learning and trial-and-error efforts, including
an understanding of global trends, the concept of a new service conceived
by our project team emerged. The concept was to view live video on your
cell phone anytime, anywhere. Today, viewing live video on smartphones is
a common practice, but at the time, “photo-mail” (still images) was the tech-
nological limit at best.
However, it was necessary to realize a new service business model by per-
forming the functions of sensing with an eye on potential future markets,
seizing, such as concrete conception of new technological architecture for
products and services and coordination with external partner companies,
including customers, as well as the function of transforming, which is restruc-
turing of resources (assets) through integration of internal and external assets
(orchestration). Thus, over time, the degree of uncertainty of the future mar-
ket (third-generation cell phones) as the environment our project team faced,
increased dramatically (while the speed of change in the environment, such as
responding to competitors, was not fast because it was an unknown market).
After trial-and-error processes (strategic action) toward framing and solving
strategic agenda, the world’s first live video streaming service (V-live) for cell
phones was realized through radical innovation (Shift A in Figure 7.5) from
Domain IV to Domain I  Domain II  Domain III (commercialization).
(2) Capabilities abrasion/friction – unproductive paranoia
From the perspective of dynamic capabilities, taking an objective view of the vari-
ous events I experienced at the time, the stronger the capabilities of organizations in
the company that had clout and political power (including their dynamic elements),
the greater negative interactions (the effects of capabilities abrasion and friction)
between the respective capabilities of other organizations (including their dynamic
elements). Depending on how the interactions between the organizations are per-
ceived, in terms of common interests (Kodama, 2007c), they can have both negative
and positive effects. The biggest factor regarding the degree of interaction, whether
they be positive or negative, is conflicts arising from self-interest or stakeholder rela-
tionships, which are dependent on the excellence of capabilities and political power
of individual organizations in a company (or in an industry) (see Figure 7.10).
Factors that originate in the self-interests and stakeholder relationships between
different organizations ignite intentional political action in and between organiza-
tions (e.g., Ferris et al., 1989), and entail the wielding of power to control the
advantageous resources of an organization (Bacharach and Lawler, 1980). This, of
course, means conflict is unavoidable. In all kinds of organizations, conflict is a natu-
ral and inevitable consequence and should have both positive and negative effects on
capabilities congruence within a company (Kodama, 2018). To have positive effects
with capabilities congruence, it is necessary to promote productive conflict between
organizations, which is also a factor that will raise the quality of decision-making
in companies, stimulate organizational creativity and innovation, and drive dynamic
capabilities.
Figure 7.10 Capabilities abrasion and friction hindering capabilities congruence

Of particular concern is the existence of organizations that have had the experi-
ence of a major success in a company (in-house organizations that have forcefulness
or clout). To drive business, these sorts of organizations consistently take strong
actions above and beyond what is necessary to defend their strategic business ter-
ritory and show wariness and so forth toward any trivial problems or issues related
to their own territory. Then, in cases in which the business context from other
organizations infringes on the current (exploitation) business of the organization
as well as its exploration for the future (boundary business, partial cross over or
cannibalization), means overreacting to thoroughly eliminate the business of other
organizations. If these kinds of exclusive organizational actions cause unproductive
friction and conflict to arise between organizations, there is a good chance that the
capabilities congruence of the entire company will be negatively impacted.
The greater the experience of success (performance) that an organization has,
the greater the more prone the organization (and its leaders) will be to actions that
bring about unproductive conflict and friction. I call these sorts of organizations
“unproductive paranoid organizations”, but there are few cases of leaders in these
organizations that have the converse elements of “productive paranoia” described
in existing research (Collins and Hansen, 2011). Productive paranoia entails leaders
always thinking about the worst-case scenario for their company or organization, and
engaging in thinking and action to raise safety margins by not neglecting to be pre-
pared, fostering emergency measures, and creating mechanisms to mitigate attacks.
Former Intel CEO Grove, who said “only the paranoid survive”, also asserted
that since there will sooner or later be changes that overturn the foundations of busi-
ness in an industry, it’s necessary to distinguish the “strategic inflection points” and
engage in strategy transformation (Grove, 1996). As a company that was impacted
by attacks from Japanese companies in 1985, Intel withdrew completely from the
semiconductor memory business, which had been its identity, and successfully
surmounted that strategic inflexion point by shifting its business resources over to
microprocessors. The way the company was steered at this inflexion point deter-
mined its future. Handling unforeseeable strategic inflexion points necessarily entails
taking actions when there is no data at hand, solely by relying on one’s intuition
and judgment. In conventional methods and theories, attempting to overcome these
issues can lead to the innovator’s dilemma (Christensen, 1997). Accordingly, manag-
ers and leaders must make use of the sensing function of their dynamic capabilities,
polish their intuition, and distinguish a range of signals from the noise, so that only
their useful paranoia will remain. Such productive paranoia has positive effects on
the capabilities congruence of a company. In contrast, leaders in unproductive para-
noid organizations are prone to legitimacy through rational self-dilution or defen-
siveness of their interests. Such unproductive paranoia elements can drag down the
capabilities congruence of an entire company.
In the DOCOMO case, to circumvent such negative interactions, in July 2004
the MM Business Division and the i-mode Business Division were merged to
become the “P&S Business Division”, with Enoki, who had been in charge of the
i-mode development, serving as Executive General Manager (see Figure 7.7). One
might question the nature of the top management and governance at the time, as
it was the role of those at the top to prevent conflict and contradiction between
organizations such as these. Although I author can only discuss my own personal
opinion, it is his interpretation that top management at the time fully knew that fric-
tion between similar business proposals (or cannibalization of existing services) from
the projects in GBD (later the i-mode Business division) and MM Business Divi-
sion could not be avoided, and to invigorate the company, maintained the stance
of allowing organizational slack (Nohria and Gulati, 1996; Bourgeois, 1981) in the
company as much as possible.
However, too much organizational slack can be also a cause of confusion in the
development workplace. Also, MM Business Division was an organization that has
the support of Tachikawa who succeeded Oboshi, the first CEO of the company.
Tachikawa also gave the impression that he wanted to create new performance tar-
gets that were different from the i-mode (also an achievement of the previous CEO,
Oboshi). In contrast to DOCOMO, Apple’s Jobs’ pursuit of simplicity through pro-
ductive paranoia in its in-house organizational structures, and its product and service
systems, had positive effects on the capabilities congruence of the company as a
whole (Kodama, 2018).
7.6.3 Core rigidities that spread through Japan (and the world) with conventional
mobile phones
As discussed, although though i-mode had been successful in Japan, the Japanese
response to the Apple iPhone and Google Android smartphones was sluggish, and
these products hit Japanese mobile telephone manufacturers hard. These environ-
mental changes were also unpredicted. After the release of the iPhone in 2007,
Tadashi Onodera, CEO of KDDI (au), which was the no. 2 carrier in the Japanese
market in September 2008, said the attraction of smartphones, including the iPhone,
was inferior to the 10-key mobile telephone, as follows:
Even looking at the total sales for smartphones, the attractiveness of these ter-
minals is low. Mobile phones (conventional mobile phones devices) are still
genuinely easier to use. Even for input, the 10-key input is a given for Japa-
nese mobile users. Based on the assumption that Japanese language conversion
is much easier on a 10-key device than the current smartphones, I thought
iPhone might be a temporary boom, but questionable whether the general pub-
lic would find these terminals attractive. I assumed this is what would happen.
But the world moved in a different direction. Clearly, the smartphone market grew
after the release of the iPhone, even in Japan. Hence, the management team made
a massive strategic mistake. In contrast, Japanese no. 3 SoftBank Mobile’s CEO
Masayoshi Son adopted to a different strategy to that of KDDI or DOCOMO.
Here, Son’s used his unique sensing abilities, one of the elements of dynamic
capabilities, to buy the goodwill of the then Vodafone Japan to become a mobile
communications carrier for the future. And then, he quickly got the rights from Jobs
to sell iPhone exclusively in Japan. The company’s current position as one of Japan’s,
and indeed the world’s leading carriers, is due to the above exchange with Apple.
Son’s own entrepreneurial leadership is a necessary element of dynamic capabilities
and is the kind of CEO leadership required to make important strategic decisions
about the future of a company, just like that of Jobs. In this way, Son and Jobs are
both equipped with the dynamic capabilities leadership needed to take action by
themselves on matters too important to be left up to their subordinates.
Furthermore, another indication of the Japanese mobile telephone industry’s fail-
ure to keep pace with smartphones at the time was its product and service strate-
gies involved in the development and sales of the personal digital assistant (PDA)
for businesses. In March of 2002, DOCOMO began offering its “infogate” portal
site service for PDAs (mobile information terminals). DOCOMO positioned it as
“i-menu” navigation PDA version of i-mode to provide information the company
selected for mobile telephones. This was an offering of ASP services such as news
and other information, and groupware for businesses (my project team also com-
mercialized a PDA video distribution service as one of these infogate services).
The infogate service represented a shift from Domain III to Domain I for the
development of new services for existing i-mode services (Shift B in Figures 7.6 and
7.10). Although DOCOMO successfully developed and commercialized the infogate
service, it terminated the service in June 2005, ending a series of services for PDAs.
This infogate project was organizationally separated from the i-mode project.
Looking back on those days, it was difficult to say that the strategic vision and
agenda, such as
What should the future of cell phone services and business models be? What
should be the future of mobile computing and the creation of new customer
experiences? What will emerge following i-mode? What should the new
mobile handsets be like instead of the current feature phones?
were sufficiently shared on the development side within DOCOMO. As a result,

integration of attention through internal communication channels and communica-
tion that occurs among organizational members within those channels was not as
fully achieved as it was during the aforementioned i-mode development.
This lack of integration of attention significantly reduced the potential to provide
organizational members at the time with a coherent understanding of how to inter-
pret strategic opportunities and threats, and how business solutions to solve business
challenges and problems should look, for DOCOMO, and for the Japanese cell
phone industry going forward. As a result, the lack of structured interaction between
the two elements, attention control and strategic action, prevented synchroniza-
tion (convergence) to pragmatic boundaries among organizational members within
DOCOMO.
As a result, DOCOMO’s infogate strategy could not evolve and develop through
Domain III  Domain I (Shift B in Figures 7.6 and 7.10)  Domain II (and 
Domain III). This case of DOCOMO’s infogate is partly similar to the aforemen-
tioned comparative analysis by Ocasio and Joseph (2018) of Apple and Motorola’s
new product development (smartphones), in which Motorola’s main organization
at the time was fragmented (DOCOMO’s main organization was similarly frag-
mented), which resulted in very different performance levels achieved by the two
companies, even though they started with similar strategic ideas for smartphones.
Again, as mentioned earlier, DOCOMO put an end to the range of services for
PDAs called the infogate service. This was due to slow growth of the PDA market
in Japan. Even though some 220,000 infogate subscribers remained, DOCOMO
thought that the service could be supplemented to some degree by i-mode, and so
shut it down. If the developers at that time had worked on a concrete development
plan based on future predictions that PDAs of the time would evolve and become
the smartphones of today (like Apple’s iPhone), the strategic position of the Japanese
cell phone industry in the global market may have been different from what it is
today. In other words, it is assumed that dynamic capabilities (especially the sensing
element) were lacking not only in DOCOMO but also in the major players in the
Japanese cell phone industry at that time.
Meanwhile, the more the i-mode Japanese cell phone device evolved and
achieved success in the market, the more it fell into the success trap, which can be
interpreted as hindering the demonstration of new dynamic capabilities. This means
that while i-mode mobile phone technologies and services became core capabilities
of the Japanese mobile phone industry, it was badly managed core capabilities that
paradoxically also became core rigidities. In other words, the company’s strength was
also its weakness (Leonard-Barton, 1995). The i-mode core capabilities deteriorated
into core rigidities, which instead of producing new knowledge like core capabilities
should, they interfered with the flow of knowledge.
Although already clarified, the Japanese mobile phone industry, which had too
heavily leaned toward the business models of the older mobile telephones (includ-
ing i-mode), was unable to later respond to the smartphone business models like
the iPhone. In a different interpretation, the whole Japanese mobile phone industry
at the time (mobile telecommunications carriers and mobile phone manufacturers)
became infused with unproductive paranoia, which entailed insistence on legiti-
macy through rational self-dilution and self-defense for the sake of profit. This had
the effect of lowering capabilities congruence right across the industry, which has
consequently been unable to properly demonstrate the sensing functions of dynamic
capabilities to respond to the smartphone market.
7.7 Conclusion
This chapter has explored the mechanisms by which asset orchestration, a core ele-
ment of dynamic capabilities, is created and how dynamic capabilities can change
existing ordinary capabilities (and existing dynamic capabilities), and drive the asset
orchestration process. The theory proposed in this chapter is an integrated model
of the “boundaries-based view (BBV)” and the “attention-based view (ABV)” of an
organization (company).
This chapter presented a new theoretical process model to realize synchroniza-
tion (convergence) on pragmatic boundaries by combining the attention-based view
(ABV) of attention control and problem-solving with the boundaries-based view
(BBV). In this model, the structured interaction between the two elements of atten-
tion control and problem-solving shifts the characteristics of boundaries between
actors (semantic boundaries  pragmatic boundaries) and synchronizes (converges)
actors toward pragmatic boundaries.
Faced with uncertainty and novelty in the business environment, companies

(organizations) need to synchronize (converge) the characteristics of boundaries
among actors into pragmatic boundaries, and actors need to work on solving cur-
rent issues and problems. This organizational process generates actors’ dynamic capa-
bilities and triggers transformation (orchestration) (restructuring, reorganization,
etc.) of knowledge (assets) that are existing ordinary capabilities (as well as existing
dynamic capabilities). This chapter has shown that an integrated framework of the
boundaries-based view (BBV) and attention-based view (ABV) is a key manage-
ment element that generates dynamic capabilities (in particular, asset orchestration)
of companies (or organizations) and determines the execution performance of cor-
porate strategies (including product strategies).
Notes
1 This service received a 2003 R&D 100 Award in the United States as the platform for the
M-Stage Visualnet Service. The R&D 100 Award is a traditional and prestigious award
sponsored by R&D World Magazine in the United States that recognizes the 100 best
products and technologies developed by world-class research institutions and companies
and put into practical use over the past year.
2 There were a number of new projects that were weeded out in the many internal meetings
entities that were involved in making commercialization decisions. This was equivalent to the
project facing the valley of death (Branscomb et al., 2001; Markham, 2002; Merrifield, 1995).
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8 Implications, conclusion, and
future research issues
8.1 New implications
Chapter 6 referred to the need to form triad systems as elements for the generation of
dynamic capabilities (DC) and strategic innovation capabilities (SIC), and the forma-
tion of strategic innovation systems (SIS). Chapter 7 also showed that it is the struc-
tured interaction of the two elements of attention control and problem-solving or
strategic action that generates dynamic capabilities in the attention-based view (ABV).
In particular, in the attention-based view (ABV), successful strategic performance by
exercising DC to realize the core business model of a strategy requires sustained focus
of attention and effort by actors related to controlled attentional processing. From
Chapters 6 and 7, holistic leadership (see Figures 6.7 and 7.1) of a company (or organ-
ization) is necessary as a common finding in forming triad systems and generating
DC. In other words, holistic leadership is important leadership that should be dem-
onstrated by practitioners of companies (or organizations) that produce DC and SIC.
Another common finding is that strategic innovation capabilities (SIC), the inte-
gration of DC and ordinary capabilities (OC), facilitate the dynamic construction
and innovation of corporate boundaries by facilitating a dynamic asset orchestra-
tion process (or knowledge integration process) of internal and external knowledge
in companies (see Figure 5.5). On the other hand, Chapter 7 showed that, from
the boundaries-based view (BBV), the core elements of DC that orchestrate new
assets that arise from various pragmatic boundaries, are the source of innovation (see
Figure 7.1). Chapters 5, 6, and 7 showed the existence of the asset orchestration pro-
cess or knowledge integration process as organizational processes in companies (or
organizations), as a common finding in promoting innovation through DC and SIC.
In other words, the asset orchestration process or knowledge integration process
can be regarded as important organizational actions to be taken by practitioners in
companies (or organizations) that produce DC and SIC. These implications and
future research issues are discussed later.
8.2 Holistic leadership of companies (organizations) that

produce DC and SIC
In the 21st century, organizational adaptability to respond to changes in the envi-
ronment (or to create new environments) to achieve business innovation is a top
DOI: 10.4324/9781003305057-8
Conclusion and future research issues 193
priority for many companies (e.g., Burke et al., 2006; Hooijberg et al., 1997; Parry,
1999; Rosing et al., 2011; Uhl-Bien and Marion, 2009).
Organizational adaptability is the ability to react quickly to new business oppor-
tunities, adapt to volatile market conditions, and drive self-change (Birkinshaw and
Gibson, 2004). Organizational adaptability requires both an organic (distributed)
organizational structure for exploration toward innovation and a rigid (centralized)
organizational structure for exploitation toward expansion of existing business (e.g.,
Duncan, 1976; Thompson, 1967; Kodama, 2003). In other words, organizational
adaptability for the simultaneous pursuit of exploration and exploitation is impor-
tant. Such organizational adaptability is none other than the strategic innovation
capabilities (SIC) presented in this book.
Business innovation means not only the development of conventional new prod-
ucts and services but also the realization of new knowledge creation (Nonaka and
Takeuchi, 1995; Nonaka et al., 2014) that realizes new business models and new
business rules. Knowledge creation through innovative leadership to realize new
business innovation therefore becomes especially important for practitioners (e.g.,
von Krogh et al., 2012).
However, it is not enough to simply recognize the importance of knowledge (or
assets). Practitioners must always ask how to create, share, and utilize knowledge in
their practical activities, and how to strategically approach such knowledge creation
for business innovation in their organizations and corporate activities as a whole. In
other words, emphasis needs to be placed not only on the knowledge itself as the
resultant product, but also on the way knowledge is strategically created, that is,
mechanisms (processes). Thus, the most important management issue is what kind
of leadership the practitioners will acquire and demonstrate to continuously cre-
ate valuable, high-quality knowledge inside and outside companies and strategically
generate new business innovations.
One firm that at present has been attracting attention for having the most out-
standing innovation management in the world is Apple in the United States. The
late Steve Jobs once commented on the management system that created business
innovation at that company by saying, “The system is that there is no system” (Bur-
rows, 2004). What he was saying was “That doesn’t mean we don’t have process.
Apple is a very disciplined company, and we have great processes. But that’s not what
it’s about. Process makes you more efficient”.
But innovation comes from people meeting up in the hallways or calling each
other at 10:30 at night with a new idea, or because they realized something that
shoots holes in how we’ve been thinking about a problem. It’s ad hoc meetings
of six people called by someone who thinks he has figured out the coolest new
thing ever and who wants to know what other people think of his idea.
Steve Jobs said that it was from this kind of interaction that business innovation was
born.
In other words, the realization of true business innovation comes from a balance
between efficiency and creativity. Decision-making, strict discipline, and routine
194 Conclusion and future research issues
within the formal organizations of a company create efficient business processes as

strategic management processes. On the other hand, creativity in the form of ideas
for realizing business innovation develops mainly from interaction among people in
informal organizations, in other words, informal human networks. Essentially, crea-
tivity has its roots in dynamic, diverse practices among people based on discontinu-
ous trial and error that deviates from efficient processes.
However, business innovation cannot be realized through informal network prac-
tices among staff alone. This is because to realize creativity in terms of specific ideas
and concepts, such as the establishment of a superior supply chain, for example, stra-
tegic management (process management) for realizing an efficient business model
is also necessary. Therefore, one question leader practitioners face is how to man-
age the “tug of war between efficiency and creativity” that is constantly occurring
within and outside organizations. A further question that must be considered is what
kind of leadership is required for practitioners to execute such management.
Of particular importance is the viewpoint of “micro-leadership processes and
dynamism” that practitioners demonstrate in the company as well as the dynamic,
innovative leadership concepts and practices the practitioners, as micro-entities,
execute intentionally (or unintentionally) according to circumstances not only in
formal organizations but also in informal organizations to strategically generate
new business innovation. My research revealed that the leadership demonstrated
by practitioners in the area where the previously mentioned “tug of war between
efficiency and creativity” takes place is a critical factor in producing high-quality
business innovation.
In other words, in these areas where the tug of war between efficiency and
creativity occurs, leadership of practitioners (practitioners in top and middle man-
agement, and lower staff levels) that uses organizational adaptability, or strategic
innovation capabilities (SIC), to combine these elements while skillfully maintain-
ing the balance between them is crucial for achieving business innovation. In other
words, the pursuit of efficiency requires concentration with control in an organiza-
tion, while the pursuit of creativity requires decentralization with autonomy in an
organization.
As mentioned in Chapter 7, for successful strategic performance, from an
attention-based view (ABV) perspective, actors need to sustainably focus their atten-
tion and efforts related to controlled attentional processing to realize the core busi-
ness model of a strategy. This suggests that actors’ management and leadership with
concentration and decentralization is important to sustain controlled attentional
processing.
In Apple’s rigid centralized networks of official organizations (strategic commu-
nities for exploitation activities – exploitation SC), discipline, rules, and processes
are always emphasized, and the centralized leadership regulated by the late Steve
Jobs (now Tim Cook) and senior executives enables full control of the most trivial
issues and action items (and sometimes the essential strategic agenda) upstream to
downstream in the business process.
Meanwhile, at Apple, the executive team (ET) led by the late Steve Jobs (now
Tim Cook) draws up a comprehensive strategy and narrows down a strategic agenda.
Apple then rewires (or short cuts) its human networks to mobilize and acquire new
and better internal and external assets to solve strategic agenda and build new busi-
ness models, and creates strategic communities (SC) (and networked SC) as distrib-
uted networks (strategic communities for exploration activities – exploration SC).
Furthermore, Apple’s executive team (ET) plays the role of the leader team (LT)
referred to in Chapter 6, and simultaneously exercises autonomous and creative dis-
tributed leadership and organizationally controlled centralized leadership, forming
synthesis SC and dynamically constructing an SC triad system.
Apple’s holistic leadership through its organizational adaptability to use or coexist
with centralized networks by such centralized leadership and distributed networks
by distributed leadership (Kodama, 2017, 2019) creates DC and SIC in the company
(or its organizations). Holistic leadership is implemented through each of Apple’s
management levels (top and middle management, and staff), and integrated into stra-
tegic action processes to develop and realize new products that have never existed.
Holistic leadership has fractality as a complex adaptive system. Holistic leader-
ship is a leadership style in which practitioners (in the three management layers of
top and middle management, and staff) dynamically use or combine centralized,
dialectic, and distributed leadership in three practice layers (the formal organiza-
tional layer, the psychological boundary layer (adaptive space), and the informal
organizational layer) according to the situation, and balance contradictions such as
the tug of war between efficiency and creativity, and, as organizational adaptability,
demonstrate DC as well as SIC (Kodama, 2017, 2019).
The centralized leadership forms exploitation SC for exploitation activities,
while distributed leadership forms exploration SC for exploration activities. These
two types of SC (exploitation SC and exploration SC) are integrated by synthesis SC
and triad SC formed by the leader team’s dialectical leadership. Triad SC integrate
the radical innovation system (RIS) and the incremental innovation system (IIS)
mentioned in Chapter 6 to create corporate (organizational) DC and SIC.
More generally speaking, holistic leadership induces the ability to think and act
in response to organizational adaptability to changes in actors’ environments (uncer-
tainty and speed of change) and brings about DC and SIC in companies (or organi-
zations). The continuous realization of the framing and implementation of strategic
agenda is achieved through management with concentration and decentralization by
holistic leadership through controlled attentional processing.
8.3 Holistic leadership as complex adaptive leadership

One of the major issues facing corporate leaders is raising organizational adapt-
ability to demonstrate innovation as well as develop the existing businesses of indi-
vidual practitioners and organizations in constantly changing and wildly fluctuating
competitive environments. In other words, in organizational adaptability, develop-
ing existing business means “exploitation”, while innovation means “exploration”
(March, 1991).
March (1991) expressed these diametrically opposed requirements as the two
aspects of organizational learning of “exploration” and “exploitation”. Exploration
is the act of generating new knowledge, skills, and processes to maintain the surviv-
ability of a company (organization) into the future through such aspects as investiga-
tion, diversity, risk-taking, experimenting, play, flexibility, innovation, and discovery.
In contrast, exploitation entails using existing knowledge, skills, and processes for
the purpose of bringing about successful corporate (organizational) results at the
current time through such aspects as selection, refinement, screening, efficiency, and
execution.
Leadership for organizational adaptability that combines both exploration and
exploitation is different from that described in conventional leadership theories. The
traits of leadership for organizational adaptability newly derived from this research
differ from traits of “style leadership” theory, which, like conventional leadership
theory, are attributes of only top management and certain leaders. Style leadership
theory has been criticized for not sufficiently taking into consideration contingen-
cies (Gill, 2006). This is due to the existence of style leadership independent of a
strategy context or organizational context that changes dynamically, and the leader-
ship style and behavior therefore remain static. Therefore, it can be said that static
leadership of this type is unsuitable as a leadership theory for achieving business
innovation in a dynamically changing management environment.
As identified by Uhl-Bien and Arena (2018), leadership for organizational adapt-
ability is not the same as simply commanding transformation. For example, it does
not place a focus on driving transformation top-down from leaders with visions
and inspiration, etc. (e.g., Baur et al., 2016), but instead the focus is on how leaders
can make organizations and their members demonstrate adaptability when faced
with complex challenges such as the achievement of innovation. In other words,
managers and leaders at various management layers in an organization must drive
communication and collaboration among organizational members, so that they have
the flexibility, agility, and adaptability to handle changes in the world that are often
dramatic and unpredictable (e.g., Keister, 2014; Uhl-Bien et al., 2007).
According to Uhl-Bien and Arena (2018), in the integrated framework, leader-
ship for organizational adaptability requires the three aspects of (a) “entrepreneurial
leadership” (e.g., endogenous entrepreneurship), (b) “enabling leadership” to enable
adaptive processes through adaptive spaces, and (c) “operational leadership” that
handles novelty (e.g., reintegration) with novelty incorporated into the core of busi-
ness management as an adaptive new order.
Rather than a hierarchical process, these three types of leadership forms are
demonstrated in all management layers, and in informal and formal organizations.
In particular, entrepreneurial leadership, which focuses on innovation, is mainly
demonstrated in informal organizations, which are autonomous, decentralized net-
works in new organizations, and corresponds to the distributed leadership described
earlier. On the other hand, operational leadership, which focuses on core busi-
nesses, is mainly demonstrated in formal organizations as existing organizations with
centralized control and corresponds to the centralized leadership described earlier.
Enabling leadership corresponds to the dialectical leadership described earlier, and is
exercised between decentralization and concentration of informal (networked) and
formal organizations (structures).
Entrepreneurial leadership (distributed leadership) is not necessarily bottom-up.

In actual fact, this type of leadership is often demonstrated from the top (e.g., the
CEOs such as Steve Jobs discussed earlier). Even if driven by top leaders, these
business issues are the same in whatever layer of management. Leaders must move
forward to commercialize an entrepreneurial idea, a process which takes place in
“adaptive spaces” (see Figure 8.1).
In complex adaptive systems, by creating adaptive spaces (Arena et al., 2017;
Uhl-Bien and Arena, 2017) to bring about adaptability in the connections between
the diametrically opposite requirements of exploration (entrepreneurial activity) and
exploitation (activity of main, existing business), conflicts and relationships of ten-
sion can be overcome. These adaptive spaces handle tensions (conflicts) that arise
from these pressures and bring about adaptive reactions (elements of dynamic capa-
bilities such as learning, innovation, etc.) that enable new adaptive order as new
business in the core of business management (new structures of resources and busi-
ness routines – reintegration) by using integration mechanisms (e.g., connecting).
Here, integration mechanisms (e.g., connecting) mean mechanisms to connect
ideas, knowledge, human resources and technology, etc. to expand novelty and
innovation, and to bring about advantageous new orders to existing management
(business) systems. Leaders achieve these connections (Arena et al., 2017; Uhl-Bien
and Arena, 2017) by configuring informal organizations that invigorate and amplify
the emergence of novelty and innovation (network structures such as strategic
Figure 8.1 A framework of holistic leadership from complex adaptive theory

Source: Created by the author, citing Figures 4 and 5 in Uhl-Bien and Arena (2018)
communities) (e.g., Kodama, 2005) and creating adaptive spaces. Such organiza-
tional processes correspond to asset orchestration by dynamic capabilities (DC).
Leaders’ effective involvement in conflicts (i.e., tensions) and connections (i.e.,
integration) triggers and amplifies the generation of ideas (adaptive reactions for
innovation), which enables the creation of “adaptive spaces” and “adaptive processes”
to bring about structures and processes to achieve organizational new adaptive order
(i.e., reintegration). To realize such adaptive space and adaptive process, the struc-
tured interaction of the two elements of attentional control and problem-solving
or strategic action through controlled attentional processing and the organizational
process of synchronization (convergence) of the actors to pragmatic boundaries as
described in Chapter 7 are necessary (see Figures 7.1 and 7.3). This enables lead-
ers to demonstrate dynamic capabilities, reconfigure resources (assets) (transforming
existing ordinary capabilities), and thereby stimulate and amplify the emergence of
novelty and innovation, including ideas.
These core adaptive processes are initiatives for handling tense relationships
between the necessity of innovation and driving existing main business (March,
1991). These adaptive processes by leaders entail the following behavioral forms:
Entrepreneurial leaders move forward through the demonstration of entrepreneur-
ial leadership (distributed leadership) of new ideas that conflict with the manage-
ment systems of existing main business (because the idea can’t be achieved easily,
it’s too expensive, it requires resources that the organization currently doesn’t have,
it goes against the dominant organizational identity, or its disruptive technology
etc.). Then, entrepreneurial leaders reconfigure the best and most feasible ideas (new
products, processes, services, technology or marketability, etc.), which then is taken
to commercialization as a formal management system (business system) through the
demonstration of operational leadership (centralized leadership) by leaders of exist-
ing organizations involved with commercializing the idea.
During the processes of generating such an idea through to commercializing it,
enabling leaders to create conditions (adaptive spaces) to enable conflict and con-
nection through the demonstration of “enabling leadership (dialectical leadership)”,
trigger, invigorate, and amplify ideas, and expand these ideas to reach new orders
(emergence) in forms matched to the adaptive needs of organizations and their envi-
ronments. Enabling leaders support the process all the way from the generation of
ideas through to commercialization (see Figure 8.1).
In such adaptive spaces and adaptive processes, actors need to continuously focus
their attention and efforts related to controlled attentional processing and to syn-
chronize (converge) to pragmatic boundaries to generate dynamic capabilities (DC)
for the realization of the core business model of a strategy.
As described earlier, the three types of leadership form – entrepreneurial lead-
ership (distributed leadership), enabling leadership (dialectical leadership), and
operational leadership (centralized leadership) – can be positioned in organizational
management layers, informal and formal organizations, new and existing organiza-
tions, and adaptive space categories, as shown in Figure 8.1. An important perspec-
tive is that these three types of leadership forms are appropriately positioned and
demonstrated in any management layer (the three layers of top, middle, and lower
management), in any organizational structures (formal and informal organizations)

and in adaptive spaces that enable conflict and connection, rather than being a hier-
archical process.
These three types of leadership forms can also be described as “ambidextrous
leadership” (O’Reilly and Tushman, 2004) that has two different elements of entre-
preneurial leadership (distributed leadership) and operational leadership (centralized
leadership), centered on enabling leadership (dialectical leadership). Ambidextrous
leadership characteristically appears not only in top management but also in all per-
sons in an organization (Birkinshaw and Gibson, 2004). Staff who engage in ambi-
dextrous leadership make their own judgments and consciously select objects and
methods to pour their energy into without looking for permission or support from
their superiors. These people are sufficiently motivated to act by their own will, rec-
ognize the necessity to take actions consistent with strategy while aiming for adap-
tion, and create cooperative situations between differing organizations (Birkinshaw
and Gibson, 2004).
8.4 Asset orchestration or knowledge integration processes of

companies (organizations) that bring about DC and SIC
8.4.1 Findings from knowledge boundary theory and network theory
Leonard-Barton (1995) mentions that many innovations occur between disciplines

or specialties. In knowledge in organizations, knowledge boundaries (e.g., Brown
and Duguid, 1991) exist between disciplines. Knowledge is both a source and a
barrier to innovation. Knowledge (or assets) is also the reason why tasks performed
across boundaries are a major source of competitive advantage and why innovation is
so difficult to generate and sustain (Carlile, 2002). Therefore, knowledge boundaries
are deeply related to the innovation process and have a significant impact on the
knowledge integration process.
Carlile (2004), referring to the three properties of knowledge in boundaries (syn-
tactic boundaries/semantic boundaries/pragmatic boundaries) from the boundaries-
based view (BBV) mentioned in Chapter 7, pointed out that the correlative
properties of knowledge (difference, dependency, novelty) can be represented by
imagining boundaries as vectors between two or more actors (see Figure 8.2). One
of the characteristics of innovation-related boundaries is that on particularly impor-
tant pragmatic boundaries, actors transform existing knowledge through friction,
conflict, and even political power among themselves to accomplish new tasks and
goals that didn’t exist before.
These boundaries correspond to the specific achievement of new business con-
cepts (new product and service developments to achieve new business models, new
technical architecture or component developments or new development and pro-
duction methods, etc.). New knowledge, the source of innovation, is born on these
pragmatic boundaries.
In the context of organizational learning theory, semantic boundaries, charac-
teristic of communities of practice (e.g., Brown and Duguid, 1991), share meaning
Figure 8.2 Characteristics of organizational boundaries (knowledge boundaries)

Source: Created by the author, citing Carlile (2002, 2004) and Kodama (2007a)
for learning when individuals participate in similar activities (Dougherty, 1992).

On pragmatic boundaries, on the other hand, increased novelty creates a variety of
interests among actors, preventing them from sharing and evaluating knowledge.
Therefore, it is necessary to form business communities (Kodama, 2007a) to real-
ize appropriate means for sharing and evaluating knowledge on boundaries and to
transform existing knowledge. This is where an understanding and sharing of inter-
ests, intentions, and perspectives is required as common knowledge among actors.
The formation of organizational entities as business communities, matches (or
converges) the capacity for common knowledge among actors and the types of
boundaries they face, creating the ability for actors to evaluate and leverage (and
transform) the common knowledge and expertise (Kodama, 2018a, 2018b). How-
ever, Carlile (2004) does not clarify what organizational forms (e.g., informal
organizations) with pragmatic boundary characteristics generate and integrate new
knowledge.
I focus on the formation of informal organizations, which are dynamic multi-
layered networks of small-world structures with characteristics of pragmatic bound-
aries that span within and between organizations (Kodama, 2007a, 2009) (see
Figure 8.3). The formation of contextual networks called group interlock networks
(Watts, 2004) is assumed to evaluate, integrate, and transform knowledge on multi-
ple layered pragmatic boundaries for new knowledge creation (or knowledge inte-
gration) (e.g., Kodama, 2002, 2005), but detailed research is a future issue.
Carlile’s (2004) 3T (Transfer/Translate/Transform) model, which further extends
Shannon and Weaver’s (1949) communication theory to organizational theory, has
been used as an analytical framework in case studies and quantitative empirical
research on product innovation and corporate transformation in companies.
Figure 8.3 Knowledge integration through uniting boundaries (graphic): group interlock

network
Source: Created by the author, citing Kodama (2009)
For example, prior studies such as Matsushita’s model of corporate transforma-

tion through knowledge integration (Kodama, 2007d), the knowledge integration
process in new product development spanning companies (Kodama, 2007c), the
knowledge sharing process between customers and suppliers in product develop-
ment (Le Dain and Merminod, 2014), project management among stakeholders
(Van Offenbeek and Vos, 2016), and the correlation between knowledge integra-
tion capability and common knowledge in the 3T model (Acharya et al., 2022) and
others have been reported. From the above perspectives, analysis and considera-
tion from such knowledge boundary theory and network theory are important to
unravel the black box that is the knowledge integration process.
8.4.2 Positioning of knowledge integration capabilities in dynamic capabilities –

the relationship with asset orchestration in dynamic capabilities
Few prior studies exist on the relationship between knowledge integration capa-
bilities and dynamic capabilities (e.g., Teece, 2007, 2014). However, the fact that
many innovations occur on inter-disciplinary boundaries (Leonard-Barton, 1995)
indicates that effectively managing knowledge across various boundaries within and
outside organizations can provide a competitive advantage. Applying the knowledge
boundary theory framework (e.g., the 3T model) to strategic questions may provide
a concrete way to explain the core concept of dynamic capabilities (Carlile, 2004).
Carlile (2004) mentions that at the company level, dynamic capability can
be viewed as various combinations of capacities and abilities that can be used to
share and evaluate knowledge across various boundaries. From perspectives such
as these, he argues that a company can be more perfectly described by viewing
it not as a bundle of resources (Barney, 1991) but as a bundle of various types
of boundaries that require knowledge sharing and evaluation, but the details are
not clear. However, based on the i-mode case study in Chapter 7 and the results
of my own action research on new service development, the aforementioned
integration of a multi-layered network of small-world structures with the char-
acteristics of pragmatic boundaries crossing inside and outside an organization
(in other words, a bundle of many pragmatic boundaries) provides a hint for
clarifying the strategic and organizational characteristics of dynamic capability
(Kodama, 2018a, 2018b).
On the other hand, the asset orchestration function (Teece, 2007), a central
concept in dynamic capability, is reinforced by three organizational processes: (1)
coordination/integration, (2) learning, and (3) reconfiguration (Teece et al., 1997).
Coordination and integration routines link various types of knowledge in an entre-
preneurial manner for the purpose of, for example, new product development.
Learning is an outcome of practice and experimentation and enables more efficient
task performance. Reconfiguration or transformation involves recombining, modi-
fying, or transforming existing knowledge. The ability to orchestrate assets through
dynamic capability is more of a creation, difficult to imitate, and generally impossible
to purchase (Teece, 2014). In another interpretation, the asset orchestration function
refers to the ability to transform (recombine, modify, or convert) existing knowledge
on pragmatic boundaries, to which Carlile (2004) referred.
Teece (2014, p. 340) discusses the comments of U.S. Army General Stanley
McChrystal regarding such asset orchestration functions.
We had a culture in our forces, of excellence. It was how good can I be

at my task? . . . But that’s not as important as how well those pieces mesh
together . . . The real art is . . . cooperating with civilian agencies, it’s coop-
erating with conventional forces, it’s tying the pieces together. That’s the art
of war, and that’s the hard part.
This means that resources alone were not sufficient during the period the U.S. Army
was involved in Iraq.
In addition, the late Steve Jobs of Apple Inc. had the following to say about new
product development:
designing a product is keeping 5,000 things in your brain, these concepts, and
fitting them all together and kind of continuing to push to fit them together
in new and different ways to get what you want, and every day you discover
something new that is a new problem or a new opportunity to fit these things
together a little differently, and it’s that process that is the magic and . . .
(Jobs, 1995)
Figure 8.4 Positioning knowledge integration capabilities in dynamic capabilities
The asset orchestration function for realizing innovation, as well as the knowl-
edge integration process, are essentially about how skillfully to combine individual
pieces, how to recombine a large number of concepts through trial and error and
connect them in new ways to create what you want.
Teece (2014) mentions that VRIN resources (Barney, 1991) are, by definition,
inherently valuable in themselves, but VRIN resources alone do not create long-
term corporate value (e.g., the aforementioned military forces or Apple’s ability to
develop new products). Long-term growth and survival of a company requires smart
orchestration (i.e., knowledge integration processes) by management and middle
managers who pursue good strategies with dynamic capabilities.
The common denominator between knowledge integration capabilities and
dynamic capabilities is the knowledge integration process of asset orchestration.
However, the dynamic mechanisms of the knowledge integration process and asset
orchestration are largely unknown (see Figure 8.4). Furthermore, which pieces are
skillfully combined to achieve cospecialization? – It is assumed that the creation
of boundaries knowledge (Kodama, 2019, 2020) is necessary for cospecialization
(Teece, 2007). This is a topic for future research.
8.5 Conclusion
This book describes the dynamic innovation process for companies to achieve strate-
gic innovation (both incremental innovation and radical innovation) from a systems
approach. The book also presented the “strategic innovation system”, a holistic
theoretical model that is a capabilities system for companies to realize strategic

innovation, and defined the capabilities (strategic innovation capabilities) necessary
for companies to continuously implement incremental and radical innovation and
realize strategic innovation. To achieve rapid and slow incremental innovation for
exploitation and radical innovation for exploitation, companies must demonstrate
strategic innovation capabilities to skillfully use both dynamic and ordinary capabili-
ties on the capabilities building map, combine them and execute the dynamic spiral
of these two different capabilities through time. The concept of strategic innovation
capabilities covers the four capabilities of:
(1) Capabilities integrating DC and OC throughout the company

(2) Management capabilities for achieving spiral “strategic innovation loops”
(3) Management capabilities within and among domains (including shifts between
domains)
(4) Capabilities for balancing two different archetypes through dialectical management
In terms of promoting existing businesses and developing new businesses, the

business process of corporate activities generally consists of four domains, as shown
in the “Business Activity Map” in Chapter 2 (Figure 2.4). Therefore, the capabilities
exhibited by organizations in each domain (capabilities building map in Figure 2.6)
are different. In each domain, the existing ordinary capabilities (OC) of organiza-
tions are the foundation, but environmental conditions (uncertainty and speed of
change) will inevitably require existing OC to be transformed and dynamic capabili-
ties (DC) to be demonstrated. In particular, sustainable strategic innovation requires
shifting between domains on the capabilities building map.
Companies need to find capability opportunities and aim for new radical inno-
vation to create new businesses to break out of the fast-changing environment of
competitive markets, the war of attrition with competitors, and declining markets.
To this end, it is important for companies to create new DC for existing OC (which
may include existing DC) to transform, evolve, and develop capabilities (Shifts
A and B in Figures 7.6 and 7.10).
Based on the findings of systems theory, strategic innovation capabilities are a
component of the strategic innovation system (SIS) as a corporate system. Further-
more, the SIS that guarantees sustainable growth of a company through strategic
innovation capabilities should be corporate system that integrates RIS (exploratory
processes) and IIS (exploitative processes). Such an SIS has the characteristics of a
complex adaptive system (CAS) and autopoiesis.
Collaborative research systems with industry, government, and academia that
transcend the boundaries of corporate organizations globally have expanded the
scope of business opportunity exploration, while excellent middle managers, includ-
ing those at the executive level, have identified customer needs and worked with
suppliers to actively develop “open innovation” (Chesbrough, 2003) and “hybrid
innovation” (Kodama, 2011) that incorporate outside technologies, which have
become increasingly more and more common in recent years. Here, in addition to
OC, practitioners use strategic innovation capabilities to perform the core elements
of DC, sensing, to search, filter, and analyze business opportunities, seizing to create
a grand design for a new business model, and transforming to change and implement
the strategy. New insights into such dynamic strategic innovation are becoming
important management elements in the era of convergence.
In the advanced IT age, superior core technologies in cutting-edge business fields
are distributed and innovated all over the world. Therefore, in the era of conver-
gence, where valuable cospecialized assets create wealth, it is increasingly impor-
tant in the knowledge economy for management to integrate excellent intangible
assets that are open and distributed inside and outside companies, including custom-
ers, from multiple perspectives, through the demonstration of strategic innovation
capabilities.
Future research on dynamic capabilities (DC) needs to explore more deeply the
dynamic processes and mechanisms by which dynamic capabilities affect existing
ordinary capabilities (including existing dynamic capabilities) in a variety of busi-
ness environments (e.g., levels of uncertainty, speed of change, and relative stability).
Furthermore, it is necessary to study the mechanism of asset orchestration, which is
a core function of DC, and the leadership (including holistic leadership presented
in this book) that executives and managers should exercise to realize asset orchestra-
tion. I think that the capabilities building map that expresses dynamic changes in
capabilities, and strategic innovation capabilities presented in this book, as well as
the integrated and theoretical perspectives of the boundaries-based view (BBV) and
the attention-based view (ABV) will provide new insights for future capabilities
research.
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Index
3T model 152, 200 – 201 breakthrough innovation 1 – 2, 11, 24, 62,

82, 100, 104
activities-based view of the firm 18, 21 breakthrough innovation capability 47 – 48,
adaption dynamic capabilities 70 55 – 56, 58 – 59, 80 – 81, 83, 92
adaptive processes 196 – 198 Brusoni, S. 150, 157 – 161, 191
adaptive spaces 195 – 199 business activities map 22 – 24, 26 – 27, 204
ambidextrous leadership 199, 207
ambidextrous organization 11, 45, 62, 64, capabilities abrasion 165, 179, 183
68, 73 – 74, 77, 91, 104 – 105, 144, capabilities building 4 – 5, 7 – 9, 13, 15 – 17,
148, 174, 191, 206 – 207 20 – 21, 26 – 27, 34, 39, 45 – 46,
Apple 3, 9, 19, 39 – 40, 45, 63, 90, 102, 58 – 59, 63, 70, 73 – 75, 79 – 80,
118 – 119, 125, 131 – 132, 136, 86 – 87
143, 161 – 163, 166, 174, 185 – 187, capabilities building map xi, 7 – 8, 15 – 17,
193 – 195, 202 – 203, 205 20 – 22, 26 – 27, 31, 34, 39 – 40, 51,
asset orchestration xi, 9, 20 – 21, 56, 58, 58 – 59, 74 – 75, 79 – 80, 86, 92 – 94,
80 – 85, 87, 89 – 91, 97 – 101, 96, 98, 101, 107 – 109, 117, 126,
113 – 114, 116, 149 – 150, 153 – 156, 132 – 133, 138 – 139, 141, 166, 175,
158 – 159, 161, 163, 166 – 167, 170, 181 – 183, 204 – 205
173 – 174, 181, 187 – 188, 192, capabilities lifecycle 17, 20 – 22, 34 – 37, 39,
198 – 199, 201 – 203, 205 41, 69 – 70, 74 – 75, 86, 88, 103,
attentional control 150, 156 – 162, 198 107 – 109, 146, 166, 175, 189
attention-based view 149 – 150, 156 – 160, Carlile, P. 33, 40, 91, 102, 150 – 152,
165 – 166, 187 – 188, 190, 192, 194, 158 – 159, 188, 199 – 202, 205 – 206
197, 205 centralized leadership 67 – 68, 85, 163,
autopoiesis 131, 134 – 135, 137 – 140, 194 – 199
145, 204 centralized networks 154, 162 – 163,
194 – 196
Barabási, A. L. 153 – 154, 188 chain-linked model 50 – 51, 88, 92
Barney, J. B. 6, 9, 13, 40, Chesbrough, H. W. 9, 26, 40, 43, 48, 53,
202 – 203, 205 60, 61, 75, 81, 98, 101 – 102, 146,
Bonardi, J. P. 5 – 8, 11 188, 204, 206
boundaries-based view 149 – 150, 158 – 161, Christensen, C. M. 1, 10, 33, 40, 81, 89,
187 – 188, 192, 197, 205 91, 100, 102, 152, 184, 189
boundaries vision 33, 42, 76, 89, 104, 133, collaborative innovation i, 98 – 99, 104,
147, 151 147, 206
boundary designs 101 communities of practice 151, 153 – 154, 191,
Branscomb, L. M. 5, 9, 22, 35, 40, 54, 199 – 200, 202, 205
60, 64 – 65, 75, 83, 102, 115, complex adaptive system 24, 42, 61,
146, 188 134 – 136, 145, 195, 197, 204
Index 209
convergence 3, 42 – 43, 71, 76, 96 – 98, enabling leadership 196 – 199

100 – 102, 104 – 105, 107, 113, 143, entrepreneurial leadership 185, 196 – 199
147, 153, 155 – 156, 158, 160 – 161, executive team 163, 194 – 195
165, 169, 176, 180 – 181, 186 – 187, exploitation 2 – 5, 8 – 9, 11, 27, 31 – 32, 34,
198, 205 – 206 45 – 47, 50 – 51, 57, 60 – 61, 63 – 64,
core rigidities 1, 11, 42, 177 – 178, 185, 66 – 77, 83, 85 – 87, 89, 91, 94,
187, 190 100 – 102, 104, 107 – 108, 112 – 113,
corporate system 5, 8, 45, 87, 106 – 107, 116, 118, 120, 124, 129 – 133, 135,
109, 130 – 131, 133 – 134, 137 – 140, 139 – 140, 142 – 144, 146, 184,
144 – 145, 204 193 – 197, 204, 207
cospecialization 82, 90, 97 – 98, 100, 166, exploitation Ba 70, 72, 143 – 144
173, 203 exploitation SC 72 – 74, 111 – 119, 122, 124,
COVID-19 37, 39 126, 128 – 129, 140 – 144, 194 – 195
creative abrasion 68, 91, 131, 135, 140, 142, exploration 2 – 5, 8 – 9, 11, 24, 27, 30 – 32,
151, 165, 200 34, 45 – 47, 50 – 51, 60 – 61, 63 – 64,
cross-functional team 124–125, 129, 142, 173 66 – 77, 81 – 82, 86 – 87, 89, 91,
cross innovation 89 94, 99 – 102, 104, 107 – 108, 110,
112 – 113, 117 – 118, 120, 124,
Darwinian sea 5, 22, 25, 31, 35, 57, 64 – 67, 129 – 133, 135, 139 – 140, 142 – 144,
70 – 71, 75, 84 – 85 146, 184, 193, 195 – 197, 204, 207
Day, G. 54 – 55, 60, 89, 102 exploration and exploitation approach 6 – 9,
decentralized networks 154, 196 46, 59, 63 – 78, 79, 87
Devil’s River 65 exploration Ba 70 – 72, 143 – 144
discontinuous innovation 1, 42, 44, exploration SC 72 – 74, 113 – 118, 120,
100, 147 124 – 125, 128 – 129, 140 – 144, 195
disruptive innovation 1, 33, 100,
113, 152 feedback loop 23 – 25, 30, 50 – 51, 88, 92,
distributed networks 162 – 163, 195 135, 138 – 139, 166
Dixon, S. 69 – 70, 75 five forces 6, 28
doing the right things 14, 58, 66 – 67, Fujifilm 8 – 9, 38 – 39, 42, 74, 76, 104,
80 – 81, 83 – 84 108 – 116, 136 – 139, 143, 147, 175
doing things right 14 – 15, 36, 56, 58, 80
dual-purpose capabilities 93 – 94, 96 group interlocked networks 156, 200 – 201
dynamic capabilities i–ii, xi–xii, 4, 7, 9, 11–17, Grove, A. S. 184, 189
19–21, 27–31, 33, 35–37, 39, 41–44,
46–49, 54–56, 58–62, 66–67, 70–77, Helfat, C. E. 15 – 17, 20 – 21, 28, 34 – 38,
79–80, 86, 89–90, 92–94, 96, 100, 41, 47, 56, 60, 86, 88, 92 – 96,
103–108, 112–114, 116, 118–120, 103, 108 – 110, 145 – 146, 149, 166,
124–126, 128, 131, 141, 146–162, 175 – 176, 189
166, 174–175, 177–178, 180–181, holistic leadership i, 76, 142 – 144, 147,
183–189, 191–192, 197–198, 150, 158, 163, 190, 192, 195, 197,
201–207 205 – 206
dynamic capabilities approach 6 – 9, 13, 27, HUAWEI 8, 108, 120 – 125, 136 – 139, 142
46, 49, 51, 59, 74 – 75, 79, 86 hybrid innovation 101, 204
dynamic capabilities cycle 70 – 71
dynamic capabilities lifecycle 69 – 71, 74 – 75 ICT industry 3, 32, 102, 107
i-mode 131 – 132, 163 – 181, 183 – 187,
edge of chaos 136 – 137, 148 190, 202
Ehlers, E. 64 incremental innovation i, 2 – 3, 5, 8, 10,
Ehlers, V. J. 64, 76 20, 22, 24, 33, 45, 50 – 51, 58, 64,
Eisenhardt, K. 1, 10, 24, 27, 30, 40 – 41, 66 – 68, 70 – 71, 73, 80 – 81, 85 – 87,
46 – 47, 53 – 54, 60, 132, 146, 89, 94, 100 – 101, 106, 108, 131,
171, 189 140, 178, 203 – 204
210 Index
incremental innovation system 109, March, J. 1, 3 – 5, 11, 46 – 47, 61, 64, 71, 77,
116 – 119, 121, 124, 126, 130 – 131, 89, 104, 171 – 172, 176, 186, 195,
134, 140, 145, 195 198, 207
innovation process xi, 3, 5 – 6, 8, 18, 20, 22, market-access capability 93 – 94
24 – 26, 49 – 50, 74, 101, 106 – 107, Markides, C. 2 – 3, 11, 32, 42, 53, 61, 69,
145, 199, 203 77, 85 – 86, 88, 104, 106, 147
innovation process approach 6 – 9, 45 – 46, Matsushita Electronic 103, 152, 172,
58 – 59, 79, 86 201, 206
integrated capabilities 94 – 96, 100 MI dynamic capability 47 – 48, 55 – 56,
Intel 47, 184 58 – 59, 80 – 82, 92
multi-layered SC 72 – 73, 113 – 114, 124,
J-PHONE 177 – 178 129, 141 – 143, 166, 181
multiple-variant capabilities 93 – 94, 96
KDDI 178, 185
Kline, S. J. 23 – 24, 41, 49 – 50, 61, 88, Nelson, R. 1, 4, 11, 16 – 17, 41 – 42, 47, 61,
92, 103 68, 77, 85, 90, 104, 149, 190
knowledge creation xi – xii, 3, 10, 18, 41, networked organizations 72, 141
43, 61, 63 – 64, 70 – 71, 76 – 77, networked strategic communities 10,
103 – 104, 118, 143, 147 – 148, 189, 41, 61, 76, 103, 147, 159, 161,
193, 200, 206 – 207 189, 206
knowledge integration i, xi, 10, 18, 21, 27, new product development 5, 10 – 11, 18,
33, 42, 70, 89, 103, 107, 144, 147, 23 – 24, 41 – 42, 44, 46 – 47, 49, 51,
190, 192, 199 – 201, 203, 205 – 206 59 – 62, 75 – 76, 90, 95, 102 – 104,
knowledge triad 70 – 71 112, 123, 143, 147, 152, 161, 186,
knowledge triads model 70 – 71, 74 – 75 188 – 190, 201 – 202, 205 – 207
Kodak 38 – 39, 109 – 110, 175 NIST 64, 75
Kodama, M. i–iv, xii, 1–3, 5, 10–11, 16, Nobel Prize 28, 65, 77
18–19, 22, 25–31, 33, 38–39, 41–42, Nonaka, I. 3, 11, 18, 43, 64, 69 – 71, 77, 81,
45, 51–54, 57, 61, 64, 66–69, 72, 88, 101, 104, 115, 143 – 144, 148,
74, 76–77, 81–82, 84–85, 88–89, 193, 207
91, 96–101, 103–104, 107–109, NTT DOCOMO i, xi, 9 – 10, 74, 76,
115, 130–135, 137–138, 140–143, 103, 131 – 132, 142, 147, 163 – 174,
146–154, 156, 158–159, 163–166, 176 – 178, 180 – 182, 184 – 187,
169–170, 174–175, 179–181, 183, 190, 206
185, 189–191, 191, 193, 195, 198,
200–204, 206–207 Ocasio, W. 150, 157 – 158, 160 – 162, 165,
186, 189 – 190
LCD 38, 110, 145, 165 O’Connor, G. 2, 4, 11, 22, 27, 29 – 31, 43,
leader team 72 – 74, 118, 120, 124, 46 – 49, 55 – 59, 61 – 62, 76, 80 – 83,
128 – 129, 140, 142 – 145, 195 87, 92, 104, 106, 147 – 148
learning before doing 15, 56, 58, 80 OECD 44, 65, 78
Leonard-Barton, D. 1, 11, 13, 42, Okhuysen, G. 5 – 8, 11
49 – 50, 61, 68, 77, 91, 104, 142, open innovation 26, 40, 43, 48, 53, 60 – 61,
147, 151, 153, 177, 187, 190, 81, 98, 101 – 102, 204, 206
199 – 201, 207 operational leadership 196 – 199
linear model 23, 25, 49 – 51 ordinary capabilities xi, 8 – 9, 12, 14 – 17,
line networks 73 – 74, 129, 140 – 142, 144 19, 21 – 22, 27 – 28, 31, 35 – 37,
Luhmann, N. 138 – 139, 147 40, 43, 47, 56 – 58, 62, 67, 71,
73 – 74, 77, 79 – 81, 83, 85 – 86,
major innovation 11, 43, 47 – 48, 55 – 56, 92 – 95, 100 – 101, 105, 107 – 108,
58 – 59, 61, 80, 104, 148 118 – 119, 122, 125 – 126, 131,
management system i – ii, 4, 12, 19, 43, 46, 141, 145, 148 – 150, 153, 155,
48 – 49, 61 – 62, 92, 104, 106, 118, 157 – 159, 162, 166, 173, 175, 180,
120, 122 – 124, 128, 134 – 135, 138, 182, 187 – 188, 191 – 192, 198,
146, 193, 198 204 – 205, 207
Index 211
O’Reilly, C. 2, 4 – 5, 11 – 12, 45, 62, 64, retirement (death) 22, 34, 37 – 38, 109, 175
68 – 69, 71, 73, 77 – 78, 89, 91, 95, retrenchment 22, 34, 37 – 38, 109, 175
100, 104 – 105, 144, 148, 174, 191, Rumelt, R. 13, 16 – 17, 43, 84, 105
199, 207
organizational slack 115, 146, 185, 188 Schoemaker, P. 54 – 55, 60, 89, 102
Schulze, A. 150, 157 – 161, 191
path dependency 1 – 2, 4, 13, 67, 81, 85, SECI 71, 143
151 – 152, 178 seizing 13 – 14, 39, 54 – 57, 59, 67, 80 – 82,
Penrose, E. T. 6, 11, 13, 43, 132, 148 84, 90, 92, 97, 149 – 150, 153, 159,
peripheral vision 54 – 55, 89 161, 182, 203, 205
Peteraf, M.A. 15 – 17, 20, 34 – 38, 41, 86, 88, semantic boundaries 150 – 153, 155,
103, 108, 110, 145 – 146, 149, 166, 158 – 159, 161, 187, 199 – 200
176, 189 sensing 13 – 14, 54 – 57, 59, 80 – 82, 90, 92,
phronesis 72, 143, 148 97 – 98, 101, 109, 149 – 150, 153,
pliant organization 137 159, 161, 178, 182, 184 – 185,
Porter, M. 6, 11, 13, 17, 20 – 21, 28, 43, 149 187, 205
positioning-based view 6, 8 signature processes 14, 18, 58, 66 – 67,
practical knowledge 72, 92, 143 80 – 81, 83 – 84
practice-view 18, 20 small-world network 154 – 155, 162, 191
pragmatic boundaries91, 124, small-world structure 154 – 155, 200 – 202
150 – 153, 155 – 156, 158 – 162, SoftBank 185
165, 169, 176, 181, 186 – 188, 192, S-shaped curve 25 – 26
197 – 200, 202 Steve Jobs 19, 45, 90, 163, 193 – 194,
process-view i, 7, 18, 20, 46 – 47 197, 202
productive friction 68, 76, 91, 102, 131, strategic actions 86, 88, 150, 158, 160 – 163,
135, 140, 142, 146, 151, 165 – 166, 165 – 166, 176, 181 – 182, 186, 192,
183, 189, 200 195, 198
project management 19, 23 – 24, 35 – 36, 39, strategic agenda 150, 158, 160 – 163,
46, 49, 51 – 52, 55, 58 – 59, 152, 191, 166 – 167, 173 – 174, 181 – 182,
201, 207 194 – 195
project networks 73 – 74, 129, 140 – 142, 144 strategic communities xii, 10, 30, 33,
41 – 42, 61, 70, 72, 74 – 76, 89,
Qualcomm 8, 108, 116 – 118, 136 – 139 91, 103, 124, 141, 146, 150 – 151,
153 – 155, 158 – 163, 166, 168 – 170,
radical innovation i, 1 – 3, 5, 8, 10 – 11, 181, 189, 194 – 195, 201, 206
24, 39, 41, 43, 45 – 51, 53, 57 – 58, strategic contradiction 68, 77, 91, 105
60 – 61, 64, 66 – 68, 70 – 76, 80, strategic innovation i – iii, xi, 1 – 2, 4 – 11,
82 – 83, 86 – 89, 91, 94, 96, 100 – 102, 13, 18, 33, 41 – 42, 45 – 46, 61, 66,
104, 106, 108 – 109, 117 – 118, 72 – 73, 76, 86, 89, 91 – 92, 98 – 99,
120, 124, 128, 130 – 131, 134 – 135, 101 – 104, 106, 120, 125, 128 – 130,
138 – 140, 142, 145, 147, 166, 174, 135, 139, 145, 147, 190, 203 – 206
178, 182, 195, 203 – 204 strategic innovation capabilities xi,
radical innovation systems 109, 117 – 118, 7 – 10, 42, 86 – 87, 89, 92, 94,
120, 124, 128, 130 – 131, 134, 140, 96, 98 – 101, 104, 107 – 108,
145, 195 117, 129 – 130, 135, 139, 144 – 145,
recombination 22, 34, 37 – 39, 97, 109 – 111, 147, 192 – 194, 204 – 205, 207
135, 149, 174 – 175, 202 – 203 strategic innovation loop xi, 8, 86 – 87,
redeployment 22, 34, 37 – 39, 109 – 111, 135, 89 – 90, 92, 94, 101, 107 – 108, 117,
174 – 175 129 – 130, 139, 204
renewal 11, 13, 22, 34, 37 – 39, 42, 44, strategic innovation system i, xi, 2, 4 – 5,
61, 77, 81, 104, 109 – 111, 135, 7 – 9, 45, 79 – 148, 160, 192,
138 – 139, 147, 153, 174 – 175, 190 203 – 204
replication 22, 34, 37 – 38, 42, 109 – 110, 175 strategic management i, xi – xii, 4, 12,
resource-based theory 6, 9, 13, 15 – 17, 26, 18, 28, 42 – 43, 51, 68, 77, 101,
39 – 40 104 – 105, 145, 147 – 148, 191, 194
212 Index
strategic management as practice 10, 18, 41, 89, 91, 95, 100, 102, 104 – 105, 131,
103, 147, 189, 206 133, 144, 146, 148, 154, 174, 191,
strategy as practice 18 199, 207
strategy transformation 1, 8, 39, 42, 45, 98,
104, 147, 174, 176, 184, 207 Uhl-Bien, M. 193, 196 – 197, 205, 207
style leadership 196 unproductive paranoia 178, 183 – 184, 187
subsystems i, 45, 54 – 55, 98, 106 – 107, 109,
130 – 131, 134 – 135, 139 – 140, 142, valley of death 5, 22, 25, 35, 54, 64–67,
145, 149 70–71, 75, 77, 83, 95, 115,
systems theory 4, 12, 43, 62, 106 – 107, 131, 117, 188
135 – 136, 138, 145, 146, 148, 204 von Bertalanffy 4, 12, 106, 134 – 135,
system-view 7, 46, 59 138, 148
VRIN 6, 203
Teece, D. xi–xii, 1, 4, 6, 9, 11 – 17, 19 – 20,
27 – 31, 36, 43 – 44, 54 – 55, 56 – 59, Watts, D. 153 – 154, 156, 162, 191, 200, 207
62, 66, 71, 77, 80 – 82, 84 – 85, 90, Weick, K. E. 2, 12
97 – 98, 100, 105, 109, 133, 143, Wernerfelt, B. 6, 12 – 13, 16 – 17, 20 – 21, 44,
148 – 149, 191, 201 – 203, 207 132, 148
Tim Cook 163, 194 Wessner, C. 22, 44, 65 – 66, 78
Toyota 70 – 71, 143 willpower 58, 75, 80, 84, 102, 156
transformational experience 33, 88 – 89, Winter, S. 1, 4, 11, 14 – 17, 28, 38, 41 – 42,
92, 132 44, 47, 56, 60 – 62, 68, 77 – 78, 85,
transforming 10, 13 – 14, 17, 31, 39 – 41, 89 – 90, 92 – 96, 103 – 105, 108, 110,
54 – 57, 59, 67, 80 – 84, 90, 92, 122, 133, 145, 148 – 149, 189 – 191
98, 102 – 103, 146, 149, 159, 161,
182, 188 – 189, 198, 202 – 203, Xiaomi 8, 108, 118 – 120, 136 – 139
205 – 206
trinity & triad 20 – 21, 34 Yoshino, T. 65, 77
TSMC 8, 108, 117 – 118, 136 – 139
Tushman, M. 1 – 2, 4 – 5, 9, 11 – 12, 45, 62, Zoom Video Communications 8, 108,
64, 68, 69, 71, 73, 75, 77 – 78, 85, 125 – 128, 136 – 139

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Management System for Strategic

Strategic innovation dynamically brings about strategic positioning through new

Mitsuru Kodama is Professor of Innovation and Technology Management in the

Advancing Big Data Analytics for Healthcare Service Delivery

Open Labs and Innovation Management

Technology Brands in the Digital Economy

Business Models for Industry 4.0

Innovation in the Digital Economy

Information Technology in Contemporary Organizations

Impact of Artificial Intelligence in Business and Society

Management System for Strategic Innovation

For more information about this series, please visit: www.routledge.com/Routledge-Studies-in-

List of figures viii

1 The need for a new theoretical model and the research

2 Capabilities building through dynamic capabilities approach 13

3 Capabilities building through the innovation process approach 45

4 Capabilities building through the exploitation and

5 Strategic innovation system – a new theory from synthesis

6 The strategic innovation system – multi-case analyses in

7 The asset orchestration process based on the boundaries-

8 Implications, conclusion, and future research issues 192

1.1 Research approach to building a new theory 8

6.4 Realization of “intellectual fusion and innovation” through the

4.1 Paradoxical management of exploration and exploitation 69

The book discusses strategic management and innovation activities in corporations

1.1 Aims and objectives of this book – strategy transformation

1.2 Combining incremental and radical innovation

range of challenges such as increased globalization of business, rapid technologi-

Realistically, it is important for companies to dynamically create original stra-

in the transition from exploratory to exploitative activities (or from exploitative to

1.4 Structure of this book

Figure 1.1 Research approach to building a new theory

Figure 1.2 The structure of the book

Kodama, M. (2018). Sustainable Growth Through Strategic Innovation: Driving Congruence in

2.1 Dynamic capabilities approach

Figure 2.1 Dynamic capabilities (DC) and ordinary capabilities (OC)

Another significant feature of DC is its strategic involvement and commitment

2.2 The capabilities building map

2.2.1 Resource and capabilities

To clarify future discussions, as mentioned in the previous section, this book

2.2.2 Evolution and patterns of capabilities building through time

The concept of dynamic resource-based theory, as well as dynamic capabilities with

A firm is a collection of discrete, but interrelated economic activities such as

In other words, the activities exhibited by companies imply the importance of

And also said the following:

It is consistent with the fundamental process-based account of firms’ activities

Process-view and Practice-view

about through non-routine interactions between human beings in informal human

Trinity & triad – the capabilities building map

The “activities-view” consists of elements of integration (or compatibility) with

Figure 2.2 Activities-based view of capabilities building

2.2.3 The business activities map

Figure 2.4 “Business Activities Map” for corporate activities

Capabilities building through DC approach

2.2.4 The capabilities building map concept – the two axes of speed of

Domain IV (strategic efficiency)

Of the four domains, Domain IV represents environments of gradual change and

Domain I (strategic emergence)

Strong dynamic capabilities are critical to success, especially when an innovative

Domain II (strategic selection)

Domain III (strategic concentration)

New findings from the capabilities building map

(strategic emergence) and Domain II (strategic selection) correspond to the explora-

List of figures viii

2 Capabilities building through dynamic capabilities approach 13

3 Capabilities building through the innovation process approach 45

8 Implications, conclusion, and future research issues 192

1.1 Research approach to building a new theory 8

4.1 Paradoxical management of exploration and exploitation 69

1.1 Aims and objectives of this book – strategy transformation

1.2 Combining incremental and radical innovation

1.4 Structure of this book

Figure 1.1 Research approach to building a new theory

Figure 1.2 The structure of the book

2.1 Dynamic capabilities approach

Figure 2.1 Dynamic capabilities (DC) and ordinary capabilities (OC)

2.2 The capabilities building map

Figure 2.4 “Business Activities Map” for corporate activities

2.2.4 The capabilities building map concept – the two axes of speed of

2.3 Contrasting the capabilities building map and the capabilities

Figure 2.7 The process of building capabilities in the capabilities lifecycle

3.1 The need for a new theoretical model, and the research

3.2 New insights from the “innovation process approach”

Figure 3.1 Capabilities – management systems in NPD processes

Figure 3.2 The dynamic chain-linked model – recursive framework

Figure 3.3 Micro strategy formulation and implementation in project management

Figure 3.4 Components and processes of dynamic capabilities

3.3 Revisiting the capabilities building map

4.1 Exploitation and exploration

4.2 The valley of death and Darwinian sea models – from the

Figure 4.1 The valley of death and the Darwinian sea models

4.3 Combining exploration and exploitation

Figure 4.2 Exploration and exploitation dynamic combination processes

Figure 4.3 Leader teams, project and line networks in a corporation

Figure 4.4 Dynamic capabilities building through exploration and exploitation processes

5.1 New theoretical development – the strategic innovation

Figure 5.2 The strategic innovation system

5.2 The “strategic innovation loop” and “strategic innovation

5.3 DC and OC positioning in capabilities building map –

5.4 Implications – dynamic restructuring of corporate

Figure 5.4 Cospecialization through convergence

Figure 5.5 The asset orchestration model (asset orchestration firm)

Figure 5.6 Value chains and capabilities in advanced IT environments

6.1 Developing strategic innovation – A balance of radical