Module MT010

Absorptive Capacity

 

Module author

Stefan Schwarzkopf

Copenhagen Business School
Denmark

Learning objectives

After you studied this module, you will be able to:

  • Define absorptive capacity.
  • Explain what the concept of absorptive capacity is about and what it tries to explain.
  • Explain why it is relevant to know about this concept in today's economic environment and management practice.
Workload units 1
Reading extract Absorptive Capacity

 

Why Open School of Management believes that knowing the concept of absorptive capacity is helpful

Absorptive capacity is defined as the "firm's ability to recognize the value of new information, assimilate it, and apply it to commercial ends." The topic can be studied on a national, firm, group, or individual basis. Prior to learning about absorptive capacity, it's helpful to learn about stocks, knowledge flows, and communication. In theory, the more diverse the background, the better prepared the student will be. There are several different types of models including Cohen and Levinthal's model.

Absorptive capacity is cumulative. It's easier for a firm to invest on a continual basis than to invest punctually. It will be easier to accumulate in the next period if they are investing on a constant basis.

To fully understand absorptive capacity, you must understand the firm's innovation performance, organizational learning, and aspiration level. Innovation is a must in any organization that wants to develop absorptive capacity. In general, absorptive capacity is the reason why companies will invest in research and development (R&D) as opposed to just purchasing patents or results "post factum."

Every organization should know that internal R&D teams increase the absorptive capacity of a company. The more a firm invests in R&D, the more that it will recognize the full value of external information.

Cohen and Levinthal encourage the use of diversity, which will allow individuals to make novel linkages and associations. When a variety of individuals from different walks of life work together, they are more apt to develop unique and novel solutions.

Shaker Zahra and Gerry George have also developed a concept that is often reviewed by experts in the industry. These pundits examined the concept of potential absorptive capacity and realized absorptive capacity. Here is an explanation of both concepts:

Potential Absorptive Capacity

The knowledge acquisition describes the firm's ability to identify and acquire externally generated knowledge. The knowledge gathered is critical to its operations. There is assimilation capability, which is used to describe how the firm operates daily and runs its processes. It describes how it analyzes, interprets, processes, and understands the information obtained from external sources. With absorptive capacity, the firm is able to assimilate external knowledge and acquire external knowledge.

Realized Absorptive Capacity

Realized absorptive capacity is the ability of a firm to develop and refine routines. Existing and newly acquired knowledge is used to facilitate this practice. The exploitation capability of a firm can be determined by absorptive capacity. Firms that are able to apply newly acquired knowledge the best are more likely to thrive using the concepts of realized absorptive capacity.

 

Why study this course unit?

In an uncertain economic environment where improvement is needed, the concept of absorptive capacity can be helpful. When companies are continually improving, they can ensure that their products or services are not reason their company is not thriving. When the economy is restored, they will be better poised to capture a larger market share.

Companies that thrive during economic turmoil will perform better by applying the concepts of absorptive capacity. These concepts require that firms continually review acquired knowledge and assimilate it with existing knowledge for improvement. Any company that successfully applies the knowledge will improve incrementally and potentially, become more financially stable.

 

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