Question

Worldwide innovation and the development of capability to create, leverage and apply knowledge are now considered to be a new requirement to gain competitive advantage by multinational firms.
Using relevant examples, identify four types of innovative capabilities and the problems associated with each of them. According to you, which type of innovative capability is more suitable to multinational firms? Justify your answer.

Answer 1

The four types of innovative capability are:

1) Development Capability - It relates to development of new value solutions that can be translated into new technologies and new products. It also relates to management of technical change consciously using knowledge and skills. This helps firm to gain competitive advantage over time.

Problem associated with it is that such capability depend heavily on knowledge, skills and experience. Patent rights and rules around it may prevent development of development capability. Availability of skilled engineers and requirement of licensing may turn out to be a costly affair.

2) Operations Capability - It relates to development of operational efficiencies such that goods are produced on mass scale. It also encompasses product quality, cost effectiveness, efficient delivery system and flexibility of operations.

The problem with this capability is that it cannot generate technical change and cannot keep pace with constantly changing technologies.

3) Management Capability - It relates to capability to effectively manage , coordinate and integrate processes to attain economies of scale and that which led to emergence of large business conglomerates. It depends heavily on human capital and cognitive development.

The problem with this capability is that it requires a wide range of abilities to be applied flexibly in challenging situations for resolution.

4) Transactions Capability - It relates to ability to transact in the market effectively and efficiently. It involves ability to reduce marketing costs, creation of logistics & distribution network arrangement that minimizes on transaction costs.

The problem with this capability is that it does not help firm to be economically feasible on standalone basis. The firm focusing on transaction capability is required to be with development capability to greater extent. It can not drive technological change.

For multinational companies, management capability is more suitable. Multinational companies are like managed firms in different region & under different cultural influence and are managed by business professionals. The process of decision making is also de-centralized.