INNOVATION AND DYNAMIC CAPABILITIES OF THE FIRM: DEFINING AN ASSESSMENT MODEL

Innovation and dynamic capabilities have gained considerable attention in both academia and practice. While one of the oldest inquiries in economic and strategy literature involves understanding the features that drive business success and a firm's perpetuity, the literature still lacks a comprehensive model of innovation and dynamic capabilities. This study presents a model that assesses firms' innovation and dynamic capabilities perspectives based on four essential capabilities: development, operations, management, and transaction capabilities. Data from a survey of 1,107 Brazilian manufacturing firms were used for empirical testing and discussion of the dynamic capabilities framework. Regression and factor analyses validated the model; we discuss the results, contrasting with the dynamic capabilities' framework. Operations Capability is the least dynamic of all capabilities, with the least influence on innovation. This reinforces the notion that operations capabilities as "ordinary capabilities," whereas management, development, and transaction capabilities better explain firms' dynamics and innovation.

KEYWORDS:
Innovation capabilities; dynamic capabilities; firm; assessment model; innovative performance

Driver	Capabilities definition	Items to be measured	References	What dynamic capabilities asserts about
Technological driver	Development capability (DC)Any firm's ability to interpret the current state-of-the-art, absorb, and eventually transform a given technology to create or change its operations capacity; and any other capability aiming to reach higher levels of technical-economic efficiency.	Ability to design its own productsMonitoring of latest tendencies in technology in the sectorUse of formal product management methods (Stage-Gate, PMBOK, innovational funnel, etc.) Ability to adapt the technology in use to its own needs Ability to prototype of own products Development of products in partnerships with science and technology institutionsAbility to launches its own products	Lall (1992)Lall, S., 1992. Technological capabilities and industrialization. World Development, 20(2), 165-186. doi:10.1016/0305-750X(92)90097-F https://doi.org/10.1016/0305-750X(92)900... ; Bell and Pavitt (1995)Bell, M., & Pavitt, K. (1995). The development of technological capabilities: Trade, technology and international competitiveness. Economic Development Institute of the World Bank, 22(4831) 69-100.; Saphia et al. (2016); Teece et al. (1997)Teece, D., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic managerial. Strategic Managerial Journal, 18(7), 509-533. doi: 10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z https://doi.org/10.1002/(sici)1097-0266(... ; Teece (2007)Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... .	Teece et al. (1997)Teece, D., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic managerial. Strategic Managerial Journal, 18(7), 509-533. doi: 10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z https://doi.org/10.1002/(sici)1097-0266(... comment regarding the observation of rate and direction, which relevant scientific frontiers are pointing to, and how the firm can learn and reconfigure its technological path. The dynamic capability framework emphasizes the ability to sense technological and market opportunities by “scanning, creating, learning, and interpreting” technological and market signals (Teece, 2007Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... ).
Technological driver	Operations capability (OC)The ability to perform to the given productive capacity through the collection of daily routines that are embedded in knowledge, skills, and technical systems at a given time.	Use of formalizes PPC procedures Use of statistical control of processes Use of leading edge technology in the sector Ability to maintain of adequate stock of materials for processes Ability to conduct the production process as programmed Ability to establishment production routines that do not generate rework Ability to promptly deliver the product Ability to manage the expansion of the installed capacity whenever necessary Ability to ensure the process does not lead to products' return	Hayes and Pisano (1994)Hayes, R. H., & Pisano, G. P. (1994). Beyond world-class: The new manufacturing strategy. Harvard Business Review. Retrieved from https://hbr.org/ https://hbr.org/... ; Ward et al. (1998)Ward, P., McCreery, J., Ritzman, L., & Sharma, D. (1998). Competitive priorities in operations management. Decisions Science, 29(4), 1035-1046. doi:10.1111/j.1540-5915.1998.tb00886.x https://doi.org/10.1111/j.1540-5915.1998... ; Skinner (1969)Skinner, W. (1969). Manufacturing: Missing link in corporate strategy. Harvard Business Review, 47(3). Retrieved from https://hbr.org/ https://hbr.org/... ; Teece et al. (1997)Teece, D., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic managerial. Strategic Managerial Journal, 18(7), 509-533. doi: 10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z https://doi.org/10.1002/(sici)1097-0266(... ; Teece (2007)Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... .	Teece et al. (1997)Teece, D., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic managerial. Strategic Managerial Journal, 18(7), 509-533. doi: 10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z https://doi.org/10.1002/(sici)1097-0266(... describe factors of production and resources, and routines and processes as elements of the framework; however, in a globalized economy this may not necessarily be conducted inside the same firm that developed the solutions. Operations are heavily routine-based, and are often not considered a dynamic capability. As Teece (2007)Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... argues, the adoption of “best practices” are not likely a dynamic capability, and especially if they are widely adopted by other firms.
Business driver	Management capability (MC)The firm's ability to transform the technological outcome into a coherent operational and transactional arrangement.	Use of formally defines its strategic aims annuallyUse of technology to integrate all its sectorsUse of internal standards and documents for work proceduresUpdated management tools and techniquesMaintenance of adequately trained personnel for the company's functions Use of modern financial management practices	Penrose (1959); Mintzberg (1973)Penrose, E. (1959). The theory of the growth of the firm. New York, USA: Oxford University Press.; Chandler (1977)Chandler, A. D., Jr. (1977). The visible hand. Cambridge, USA, and London, England: The Belknap Press of Harvard University Press.; Zawislak et al. (2012Zawislak, P. A, Alves, A. C., Tello-Gamarra, J., Barbieux, D., & Reichert, F. M. (2012). Innovation capability: From technology development to transaction capability. Journal of Technology Management & Innovation, 7(2), 14-27. doi:10.4067/S0718-27242012000200002 https://doi.org/10.4067/S0718-2724201200... , 2013)Zawislak, P. A, Alves, A. C., Tello-Gamarra, J., Barbieux, D., & Reichert, F. M. (2013). Influence of internal capabilities of firms on their innovation performance: A case study investigation in Brazil. International Journal of Management, 30(1), 329-348.; Teece et al. (1997)Teece, D., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic managerial. Strategic Managerial Journal, 18(7), 509-533. doi: 10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z https://doi.org/10.1002/(sici)1097-0266(... ; Teece (2007)Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... .	Teece et al. (1997)Teece, D., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic managerial. Strategic Managerial Journal, 18(7), 509-533. doi: 10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z https://doi.org/10.1002/(sici)1097-0266(... perceive management as playing three roles: coordination and integration (static), learning (dynamic), and reconfiguration (organization and managerial processes). Eisenhardt and Martin (2000)Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: What are they? Strategic Management Journal, 21(10-11), 1105-1121. doi:10.1002/1097-0266(200010/11)21:10/11<1105::aid-smj133>3.0.co;2-e https://doi.org/10.1002/1097-0266(200010... view dynamic capabilities as essentially organizational processes. Teece (2007)Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... observes that management is important dynamic capability in the task of identifying, developing, and utilizing a combination of specialized and co-specialized assets, whether built or bought. Teece (2007)Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... calls for entrepreneurial management.
Business driver	Transaction capability (TC)The ability to reduce marketing, outsourcing, bargaining, logistics, and delivering costs; in other words, transactional costs.	Conduction of formal research to monitor the marketAbility to impose its negotiating terms on its suppliersAbility to impose its prices on the marketAbility to impose its negotiating terms on its customersConduction of research to measure its customers' satisfactionUse of formal criteria to select its suppliers	Coase (1937)Coase, R. (1937). The nature of the firm. Economica, 4(16), 386-405. doi:10.1111/j.1468-0335.1937.tb00002.x https://doi.org/10.1111/j.1468-0335.1937... ; Williamson (1985)Williamson, O. (1985). The economic institutions of capitalism. New York, USA: Free Press.; Cannon and Hamburg (2001)Cannon, J., & Homburg, C. (2001). Buyer-supplier relationships and customer firm costs. Journal of Marketing, 65(1), 29-43. doi:10.1509/jmkg.65.1.29.18136 https://doi.org/10.1509/jmkg.65.1.29.181... ; Kotabe et a. (2002)Kotabe, M., Srinivasan, S. S., & Aulakh, P. (2002). Multinationality and firm performance: The moderating role of R&D and marketing capabilities. Journal of International Business Studies, 33(1), 79-97.; Mayer and Salomon (2006)Mayer, K., & Salomon, R. (2006). Contract design as a firm capability: An integration of learning and transaction cost perspectives. Academy of Managerial Review, 49(5), 942-959.; Zawislak et al. (2012Zawislak, P. A, Alves, A. C., Tello-Gamarra, J., Barbieux, D., & Reichert, F. M. (2012). Innovation capability: From technology development to transaction capability. Journal of Technology Management & Innovation, 7(2), 14-27. doi:10.4067/S0718-27242012000200002 https://doi.org/10.4067/S0718-2724201200... , 2013)Zawislak, P. A, Alves, A. C., Tello-Gamarra, J., Barbieux, D., & Reichert, F. M. (2013). Influence of internal capabilities of firms on their innovation performance: A case study investigation in Brazil. International Journal of Management, 30(1), 329-348.; Teece et al. (1997)Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... ; Teece (2007)Teece, D., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic managerial. Strategic Managerial Journal, 18(7), 509-533. doi: 10.1002/(sici)1097-0266(199708)18:7<509::aid-smj882>3.0.co;2-z https://doi.org/10.1002/(sici)1097-0266(... .	A key aspect to define firms' position involves deciding where to position organizational boundaries. Market structures continuously change; therefore, the task of positioning is dynamic. Reputational assets must be built and strengthened, which contributes to market power.
Innovation performance (IP)	The new products, processes, equipment, organizational forms, and commercial market approaches that lead to extraordinary profits.	Growth in net profits over the last three yearsGrowth in company's market share has over the last three yearsGrowth in company's revenue over the last three years	Schumpeter (1934)Schumpeter, J. A. (1934). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle (Vol. 55). Piscataway, USA: Transaction Publishers.; Francis and Bessant (2005)Francis, D., & Bessant, J. (2005). Targeting innovation and implications for capability development. Technovation, 25(3), 171-183. doi:10.1016/j.technovation.2004.03.004 https://doi.org/10.1016/j.technovation.2... ; OECD (2005)Organisation for Economic Co-operation and Development. (2005). Oslo Manual: Guidelines for collecting and interpreting innovation data, 3rd Edition, OECD Publishing, Paris, France. doi:10.1787/9789264013100-en https://doi.org/10.1787/9789264013100-en... ; Eriksson (2014)Eriksson, T. (2014). Processes, antecedents and outcomes of dynamic capabilities. Scandinavian Journal of Management, 30(1), 65-82. doi:10.1016/j.scaman.2013.05.001 https://doi.org/10.1016/j.scaman.2013.05... .	Schumpeter argues that innovation leads to extraordinary profits (or rents). Teece et al. (1997)Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319-1350. doi:10.1002/smj.640 https://doi.org/10.1002/smj.640... asserts that dynamic capabilities seek the generation of Schumpeterian rents that come from innovation. “The goal of dynamic capabilities is to generate abnormal returns” (Teece, 2010Teece, D. J. (2010). Technological innovation and the theory of the firm: The role of enterprise-level knowledge, complementarities, and (dynamic) capabilities. Handbook of the Economics of Innovation, 1, 679-730., p. 692).

Industry sectors	Sample	Percent
Metal products	136	12.3
Machinery & equipment	125	11.3
Footwear and leather	116	10.5
Food	108	9.8
Furniture	92	8.3
Plastic and rubber	86	7.8
Clothing	70	6.3
Automotive	50	4.5
Chemicals	45	4.1
Wood	43	3.9
Non-Metal products	41	3.7
Diverse	31	2.8
Electric	27	2.4
Pulp and paper	24	2.2
Printing	21	1.9
Metallurgy	19	1.7
Electronics	13	1.2
Machinery maintenance	12	1.1
Textiles	12	1.1
Missing	11	1
Beverage	9	0.8
Tobacco	7	0.6
Transportation equipment	6	0.5
Petroleum refining	2	0.2
Pharmaceuticals	1	0.1
Total	1,107	100

Capabilities	Cronbach's alpha	N of Items
DC	0.845	6
OC	0.796	5
MC	0.793	5
TC	0.758	4
IP	0.843	3
Total	0.879	20
N = 1,107

Rotated component matrix
N = 1,107		Component
N = 1,107		1	2	3	4
DC5.	Prototypes its own products	0.761
DC7.	Launches its own products	0.759
DC1.	Designs its own product base	0.744
DC2.	Monitors the latest tendencies in technology in the sector	0.689
DC3.	Uses formal product management methods (Stage-Gate, PMBOK, innovation funnel, etc.)	0.643
DC4.	Adapts the technology in use to its own needs	0.625
MC6.	Uses modern financial management practices		0.753
MC4.	Updates its management tools and techniques		0.743
MC1.	Formally defines its strategic aims annually		0.707
MC5.	Maintains personnel adequately trained for the company's functions (training)		0.646
MC3.	Standardizes and documents work procedures		0.620
OC7.	Promptly delivers the product			0.752
OC9.	Manages to ensure the process does not lead to products' return			0.745
OC6.	Establishes a productive routine that does not generate rework			0.743
OC5.	Conducts the production processes as programmed			0.675
OC8.	Manages to expand the installed capacity whenever necessary			0.594
TC3.	Imposes its prices on the market				0.784
TC4.	Imposes its negotiating terms on its customers				0.772
TC2.	Imposes its negotiating terms on its suppliers				0.752
TC6.	Uses formal criteria to select its suppliers				0.632

	5-factor model	4-factor model
DC	0.822	0.845
OC	0.843	0.796
MC	0.800	0.793
TC	0.794	0.758
TOTAL	Alpha = 0.910	Alpha = 0.889
KMO	0.922	0.905
% Cumulative 4 factors	45.47%	57.89%
% Cumulative 5 factors	54.28%	-

Coefficients^a a Dependent variable: Innovation performance (IP)
N = 1,107
Model	Unstandardized Coefficients		Standardized Coefficients	t	Sig.
Model	B	Std. Error	Beta	t	Sig.
(Constant)	0.004	0.028		0.140	0.889
DC	0.268	0.028	0.271	9.515	0
MC	0.309	0.028	0.311	10.927	0
OC	0.094	0.028	0.094	3.321	0.001
TC	0.233	0.028	0.236	8.291	0

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