Dynamic capabilities

Lene Foss, Tatiana Iakovleva, JillKickul, Elin Oftedal and Anne Solheim
This paper augments and extends the dynamic capability perspective by investigating the
microfoundationsthatunderlie the dynamic capabilities of discontinuous innovation. We contend
that the dynamiccapabilitiesperspective can provide a useful theoretical lens for investigating this
type of innovation, particularly as we focus on the origins and development (microfoundations) of
such capabilitieswithinnascentyet emergingentrepreneurial firms. Drawing on the analysis of data
from two firms operating within drilling and exploration activities in the Norwegian petroleum
industry, we apply the innovation framework of Francis and Bessant (2005) and develop four
propositionsregardingthe developmentof microfoundations of dynamic capabilities (e.g., product,
position, process, and paradigm) that may be essential and tangent to a firm’s ability to innovate
withintheirrespective marketplace. Ourfindings through our case study approach reveal the types
and breadth (including subindices) of these microfoundations. We thereby conclude by discussing
the theoretical and practical implications of our research.
The Role of Microfoundations in Explicating Dynamic Capabilities:
A Case Study of Commercializing Discontinuous Innovation
in the Norwegian Petroleum Sector
Petroleum sector
in Two
Companies in the Norwegian Petroleum Sector
Key Words:dynamiccapabilities; microfoundations; discontinuous innovation; petroleum industry

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1. Introduction
A central concern of a firm’s overall strategy and the management of its own
innovations is to maintain a dynamic fit between what the firm has to offer and what
the environment dictates (Learned et al., 1965; Miles and Snow, 1978). As such, a
firm must possess the essential capabilities so as to constantly reconfigure, renew,
and redeploy its resources and capabilities to better capture and exploit the changing
opportunities (Teece, Pisano, and Shuen, 1997). Given their smallness and newness
of entrepreneurial firms, the need for dynamic capabilities and the leveraging of
resources and capabilities in overcoming challenges and introducing new innovations
within an industry environment can prove to be an extremely daunting task.
As highlighted by Lee and Kelley (2008), the dynamic capabilities perspective can
provide a useful theoretical lens for investigating innovation at the organizational
level. In lack of a common accepted and well-received definition of dynamic
capabilities several scholars have recently come together and define dynamic
capabilities as the capacity of an organization to purposely create, extend, or modify
its resource base (Helfat et al., 2007:4) arguing that this definition is meaningful and
enables others to better understand the nature and origins of dynamic capabilities
through continual research. As also posited by Easterby-Smith et al. (2009), dynamic
capabilities are determined in a variety of forms, involving a diversity of functions,
including product development innovations, process development, as well as idea
generating improvements. Finally, and one common theme that aligns well with the
nature of innovation, is that dynamic capabilities are more speciﬁcally associated
with change (Zollo and Winter, 2002; Winter, 2003; Zahra et al., 2006).
As an emerging area of research, several calls for how to develop a theory of dynamic
capabilities have been issued. First, the concept of dynamic capabilities has been
criticised for being tautological in nature and for not being operational (Mosakowski
and McKelvey 1997; Priem and Butler 2000). Thus, this paper follows recent calls
for enhancing conceptual models of dynamic capabilities (cf., Wang and Ahmed,
2007) by exploring possible antecedents of dynamic capabilities. Second, scholars
agree that the field lacks empirical studies of new firms (Zahra et al., 2006), as new
firms are likely to have fewer initial resources to the development of dynamic
capabilities. We therefore examine early-stage firms where the development of
dynamic capabilities has yet to fully materialize. Third, research needs to frame
micro-questions concerning of how and why managers use dynamic capabilities, what
dynamic capabilities look like in organizations, and how they are deployed
(Ambrosini and Bowman, 2009). Following this call the research question in this
paper requires an empirical study of the experience of managers in entrepreneurial
firms. Fourth, following the call for contextualizing theory building (Zahra, 2007),
this study makes use of the fact that few studies relate dynamic capabilities to a firm’s
innovation. Thus our framework contains the context of dynamic capabilities in
commercializing a discontinuous innovation.
In following these calls we recognize that while the breadth and variety of dynamic
capabilities can vary across firms, an important question is how fundamental dynamic
capabilities are associated with firm specific processes, the purported
microfoundations of dynamic capabilities (Teece, 2007). This leads us to investigate

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possible antecedents of dynamic capabilities and examine the role that a firm’s
microfoundations have on the process, creation, and evolution of its dynamic
capabilities. We will further explore the unique functions that these microfoundations
might have on the innovation process as firms develop their own capabilities toward
the commercialization of their innovations. In studying firms within a similar
business environment their microfoundations and ensuing innovation may facilitate
the degree and type of dynamic capabilities developed. While dynamic capabilities
can be considered as the resource-based changes that facilitate innovation, we
examine the unique antecedents – microfoundations - that lead to the development of
these capabilities within early-stage entrepreneurial firms. The research question to be
answered in this paper is: How do entrepreneurs and their firms build the essential
microfoundations that underlie the dynamic capabilities needed to commercialize
discontinuous innovations?
In answering this question this study contributes to the literature by relating micro
foundations and dynamic capabilities to the context of innovation. Because
innovation and entrepreneurial performance is a consequence of the strategic fit
between organizational capabilities, resources, and the environment (Helfat and
Lieberman, 2002), we align the microfoundations investigated within a framework of
discontinuous innovation. We adopt a framework and offer propositions based on the
innovation research advanced by Francis and Bessant (2005). They describe
processes of innovation changes within a firm that are similar to the central processes
that underlie the creation of dynamic capabilities. By drawing on the analysis of data
from two innovative firms operating within drilling and exploration activities in the
Norwegian petroleum industry, we uncover specific microfoundations that are closely
aligned with models that describe the innovation process. Thus this study also
contributes to the perspective that capabilities are embedded and processual of nature
(Henderson 1994; Lee 1999; Eisenhardt and Martin 2000). Following this, the
methodological contribution of the study is its aims for gaining a deeper
understanding of the antecedents of dynamic capabilities by getting rich data from
those experiencing it (cf. Shah and Corley, 2006). Hence, this case study is carried
out in close interaction with practitioners who deal with real management situations, a
strategy suited for creating managerially relevant knowledge (Amabile et al., 2001,
Leonard-Barton, 1990; Gibbert, Ruigrok and Wicki, 2008).
The paper proceeds as follows. First, we introduce and discuss the development of a
firm’s microfoundations of dynamic capabilities within the context of
commercializing discontinuous innovations. Second, we apply the innovation
framework of Francis and Bessant (2005) and discuss the relationship between their
four processes of innovation and the creation of the microfoundations of dynamic
capabilities and develop propositions. Next, we describe our case study approach
that focus on the types and breadth of microfoundations as well as our findings that
reveal specific subindices of our firm’s microfoundations. We conclude by
discussing the theoretical and practical implications of our research.

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2. The Development of a Firm’s Microfoundations of Dynamic Capabilities in
Commercializing Discontinuous Innovations
2.1. Context: Commercializing Discontinuous Innovation
Managers in established companies have acknowledged that discontinuous innovation
is vital to their sustainability (Rice et al., 2002). According to Tushman and O'Reilly
(1997), discontinuous innovation means leaving the old technologies and processes.
Thus, discontinuous innovation that involves "disruptive technologies,"
"discontinuities," or "radical innovations" let entire industries and markets emerge,
transform, or disappear (Christensen, 1997; Hamel and Prahalad, 1994; Utterback,
1996).
However, the economic benefits of innovations are never fully realised until the
innovation is actually introduced to the market. Commercialization is often seen as a
poorly managed phase (Luoma, Paasi and Nordlund, 2008). Discontinuous innovation
transforms the relationship between customers and suppliers, restructures marketplace
economics, displaces current products, and often creates entirely new product
categories (Rice et al., 2002). Firms encounter difficulties and uncertainties when a
new technology-based product reaches commercialization, because the product or
market is unknown and undefined (Tidd, Bessant and Pavitt, 2005). This problem is
further magnified when both the product and market is complex. Without delicate
commercialization preparations during the innovation process, even high-quality new
products or services may fail. Another important aspect at this stage is the
accumulation of costs, as this is actually the most expensive part of the new product
development process (Luoma, Paasi and Nordlund, 2008).
The traditional domain of discontinuous innovation is marked by high technical and
market uncertainty (Rice et al., 2002; Souder et al., 1998; Lynn and Akgun, 1998).
Rice et al. (2002) described different aspects of technical uncertainties, such as the
comprehensiveness and accuracy of the essential scientific knowledge, the degree to
which the technical specifications of the product can be implemented, the consistency
of the manufacturing processes, maintainability, and so forth. However, market
uncertainties include the degree to which customer needs and wants are clear and well
understood, the extent to which conventional forms of interaction between the
customer and the product can be used, the appropriateness of conventional methods
of sales and distribution, and the project team’s understanding of the relationship of
the discontinuous innovation to competitors’ products. Further, they claim that
discontinuous innovation projects involve high levels of uncertainty (Rice et al.,
2002).
This study considers discontinuous innovation as every kind of innovation that will
induce change and as such, deliver discontinuity. The change may be associated with
new knowledge or technology (radical innovations) or incremental innovations result
in radical or discontinuous innovations (i.e., small changes have big effects and the
input of new knowledge can push thought into radical new directions). Because of the
high level of uncertainties when commercializing discontinuous innovations, only a
fraction of the cases succeed. Our argument is that development of the
microfoundations of dynamic capabilities is important for reducing the uncertainty in
commercializing such innovations.

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2.2 Dynamic capabilities
There has been a considerable amount of research recently focusing on dynamic
capabilities. Dynamic capabilities are viewed as drivers behind creation, evolution,
and recombination of other resources into a new source of competitive advantage
(Henderson and Cockburn, 1994; Teece et al., 1997). Barney (1991) described
resources as all assets, capabilities, organizational processes, firm attributes,
information and knowledge controlled by the firm which enable the firm to conceive
of and implement strategies that improve its efficiency and effectiveness. However,
resources alone are not enough to explain firm’s competitive advantage, they need to
be employed in some way in order to be useful (Penrose, 1959; Grant, 1991). In reply
to this critique, the dynamic capability approach has evolved, and defined as the
ability to coordinate and deploy resources in order to achieve the firm’s goals (Amit
and Schoemaker, 1993). This capabilities approach thus overcomes the critique of
whether possession or usage of resources is the primary concern (Wiklund and
Shepherd, 2003). Further, as they are not simply inputs into a productive process,
capabilities cannot be purchased from the market (Makadok, 2001).
The resource-based thinking has recently been extended by viewing the firm as a
stock as well as a dynamic flow of resources (McKelvie and Davidsson, 2009). The
constantly changing circumstances to a new firm call for the constant restructuring
and transformation of resources (Eisenhardt and Martin, 2000). Dynamic capabilities
are now seen as the firm’s ability to integrate and change resource base to address
changing environment (McKelvie and Davidsson, 2009). The role of dynamic
capabilities is to impact on the firm’s extant resource base and transforms it in such a
way that a new bundle or configuration of resources is created so that the firm can
sustain or enhance its competitive advantage (Ambrosini and Bowman, 2009).
Therefore, the dynamic capability perspective offers an attempt to explain how firms
can leverage their strategies and change their valuable resources that enable them to
confront and overcome multiple challenges over time. Eisenhardt and Martin (2000:
1107) defined dynamic capabilities as “the firm’s processes that use resources –
specifically the processes to integrate, reconfigure, gain and release resources – to
match or even create market change.” Therefore, this approach allows us to study not
only the resources firms’ need to successfully commercialize its new products, but
also the methods and ways of managing these resources to achieve superior
competitive advantage and innovation. Examples of dynamic capabilities having been
identified and described in the literature include R&D (Helfat, 1997), acquisition
process (Karim and Mitchell, 2000), product innovation process (Danneels, 2002),
absorptive capacity (Zahra and George, 2002), organizational structure
reconfiguration (Karim, 2006). This demonstrates where dynamic capabilities are
used in managing large-scale firm processes or changes.
The common characteristics of dynamic capabilities across firms are identifiable and
demonstrate the nature of “commonalities in key features” (Eisenhardt and Martin,
2000). Wang and Ahmed (2007) argue that it is possible to identify three main
components of dynamic capabilities across studies, namely adaptive capability,
absorptive capability and innovative capability. These capabilities underpin a firm’s
ability to integrate, reconfigure, renew and recreate its resources and capabilities in
line with external changes. Adaptive capability stresses a firm’s ability to adapt itself

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in a timely fashion through flexibility of resources and aligning resources and
capabilities with environmental changes. Hence, the focus of adaptive capability is to
align internal organizational factors with external environmental factors. Absorptive
capability highlights the importance of taking external knowledge, combining it with
internal knowledge and absorbing it for internal use. Innovative capability effectively
links a firm’s inherent innovativeness to marketplace-based advantage in terms of
new products and markets. Therefore, innovative capability explains the linkages
between a firm’s resources and capabilities with its product markets. In building on
this framework these three types of capabilities are described in more detail below
and also linked to the context of commercialization.
Adaptive Capabilities
Adaptive capability is defined as a firm’s ability to identify and capitalize on
emerging market opportunities (Chakrovarthy, 1982; Hooley et al., 1992). Therefore,
adaptive capabilities are essential in the context of commercialization. Adaptive
capability focuses on effective search and balancing exploration and exploitation
strategies (Staber and Sydow, 2002). This type of “balancing” act is brought to a
strategic level and linked to the resource perspective. The development of adaptive
capability is often accompanied by the evolution of organizational forms. According
to Rindova and Kotha (2001) firms undergo comprehensive, continuous changes in
products, services, resources, capabilities and modes of organizing. Other empirical
studies (e.g., Alvarez and Merino, 2003; Camuffo and Volpato, 1996; Forrant and
Flynn, 1999) also reveal that the ability to adapt to environment and align internal
resources with external demand is critical to firm evolution and survival in several
industries. Adaptive capabilities often refer to the firm’s ability to adapt their product-
market scope to respond to external opportunities, to scan the market, monitor
customers and competitors and allocate resources to marketing activities, and to
respond to changing market environment in a speedy manner (Oktemgil and Gordon,
1997). According to Gibson and Brikinshaw (2004) adaptive capability refers to the
management ability to encourage people to challenge outmoded traditions, practices
and sacred cows, which allows the firm to respond quickly to changes in the market
and evolve rapidly in response to shifts in its business priorities. In the context of
newly established firms this capability refers to positioning itself in the market space.
Absorptive Capabilities
Cohen and Levinthal (1990: 128) refer to absorptive capability: “the ability of a firm
to recognize the value of new, external information, assimilate it, and apply it to
commercial ends… the ability to evaluate and utilize outside knowledge is largely a
function of the level of prior knowledge”. Firm’s ability to acquire external, new
knowledge, assimilate it with existing internal knowledge and ability to create new
knowledge is an important factor of dynamic capabilities in several industries
(George, 2005; Salvato, 2003; Verona and Ravasi, 2003). Absorptive capacity is
crucial for learning processes such as those which are taking place in development.
Commercializing discontinous innovations are a specifically challenging process
because of the level of newness to the marketplace. Therefore, the process of
absorbing new knowledge and to learn from other industries, partners and other actors
become essential. This is also true for the product development and integration of
new technological solutions.

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Innovative Capabilities
Innovative capability refers to a firm’s ability to develop new products and (or)
markets, through aligning strategic innovative orientation with innovative behaviours
and processes (Wang and Ahmed, 2004). This is quite close to the firm’s
entrepreneurial orientation construct. This encompasses several dimensions, such as
developing new products and services, developing new methods of production,
identifying new markets, seeking unusual and novel solutions (Schumpeter, 1934;
Miller and Friesen, 1983). Capon et al. (1992) study three dimensions of
organizational innovativeness which are relevant for innovative capability: market
innovativeness, strategic tendency to pioneer and technological sophistication. While
the majority of studies on dynamic capabilities have primarily focused on large and
established firms, the context of newly established firms created to take innovation to
market is different. In this context firms are created to develop and bring to market
new products so they exhibit innovative capability. The concept of innovative
capability therefore, applies well to how established companies manages to produce
new products and processes, however for companies established around an innovation
one could argue that all capabilities are innovative. On the other hand, this would
neglect certain important elements of what occurs in the process of commercializing
continuous innovations. Therefore, innovative capabilities in this study points to more
underlying structural processes that promote development, change and innovation in
the company.
2.3 Developing the Microfoundations of a Firm’s Dynamic Capabilities
Easterby-Smith and Peteraf (2009) argues that the problem to identify dynamic
capabilities lies in the inherently intertemporal nature of the phenomena and their
association with tacit organizational elements and intangibles (routines, processes,
managerial cognition and knowledge). These tacit elements are what Teece (2007)
call the micro foundations of dynamic capabilities; distinct skills, processes,
procedures, organizational structures, decision rules, and disciplines. According to
Teece (2007) these micro foundations undergird enterprise-level sensing, seizing, and
reconfiguring capacities and are difficult to develop and deploy. For example,
dynamic capabilities are sometimes argued to include search, or ability to sense
changing customer needs, technological opportunities and competitive developments
(Teece, 2007). According to Ambrosini and Bowman (2009), these factors are not
dynamic capabilities in and of themselves, rather their microfoundations.
Thus, microfoundations of dynamic capabilities can be defined as managerial and
organizational processes that underpin and enable the deployment of dynamic
capabilities. Teece (2007) argue that these firm specific micro foundations of
dynamic capabilities are necessarily incomplete, inchoate and opaque. As claimed by
Helfat et al. (2007), prior literature has placed less emphasis on the underlying
processes that an organization requires in order to move from its starting position to a
new or adjusted path. Answering for this call our study will focus on exploring micro
foundation of dynamic capabilities and their role in facilitating three types of
dynamic capabilities – adaptive, absorptive and innovative.
Following the conceptual distinctions made above, the theoretical scope of dynamic
capabilities needs to be narrowed down to issues that will contribute with new

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knowledge in the field, particularly as it relates to commercializing an innovation. In
their article, ‘Targeting Innovation and Implications for Capability Development,’
Francis and Bessant (2005) discuss the four ‘P’s’ of innovation targeting that are
related to discontinuous innovation (from incremental to radical). They discuss
innovation capability around four categories; product, process, position, paradigm
that can be pursued at the same time and are closely related. See Figure 1 below.
Figure 1: Microfoundations of Dynamic Capabilities (4 P’s Classification)
Since our focus is on the processes and development of the different types of
microfoundations and how they are created through the process of commercializing
discontinuous innovations, the emphasis on capability development makes the four p
framework excellent proxies for microfoundations in our investigation and case study
approach. This study therefore will look at the role of each of the four dimensions of
innovation in the commercialization process. In this study role is associated with the
focus or importance that each of the dimensions receives in the companies’ pursuit to
commercialize their innovation.
Product role
That a new product or service (or an improvement of such) is a prerequisite for
innovation can be traced back to Schumpeter’s (1934) types ways of innovation. Here
we relate the product role to improvements or radical changes in the product and
services that the organization offers. We argue that developing firm specific
competencies in changing the product according to the needs of customers constitute

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microfoundations for creation of dynamic capabilities in the organization. ”Targeting
innovation capability on developing new and/or improved products can involve
multiple actors engaged in complex and inter-linked processes with a single end in
view— creating value for the customer” (Francis and Bessant 2005:174.). Therefore,
the focus or role that the product has for the company may influence the development
of dynamic capabilities and we advance the following proposition:
Proposition 1: The product role will be a key microfoundation underlying
dynamic capabilities
Process role
Processes are sequences of activities, often proceeding horizontally across
organizations (Francis and Bessant, 2005) and are a widely accepted area of change
and innovation (Schumpeter, 1934) Processes can be developed and enhanced in a
number of ways for example through reducing waste and optimizing performance.
(Gallagher et al., 1997). Further, new technology can add precision, improved
training can increase conformance or process mapping can identify time wasted in
unnecessary activities (Stalk, 1993). There is also substantial opportunity to identify
new process routes that offer better performance along one or more dimensions.
Enhanced processes may also be important in the innovation process. The process
role is here understood as the extent that process is focused upon within the
organization. We argue that the process role is essential in the development of
dynamic capabilities. Thus, we propose:
Proposition 2: The process role will be a key microfoundation underlying
dynamic capabilities.
Position role
The position role focuses on the meaning of the product in the eyes of the potential
customer and/ or the market (Francis and Bessant, 2005:175). Positioning can be
summarised as “what the firm would like typical costumers from targeted groups to
feel and say about their product”. Further, the right positioning can significantly alter
the features of a marketplace or create a market that does not exist
We believe that position role in the firm affect the firm’s ability to seek and develop
new markets in addition to find ways of communicating with the marketplace. The
role of the position in the commercialization process therefore may influence the
development of dynamic capabilities. Thus, we advance the following proposition:
Proposition 3: The position role will be a key microfoundation underlying
Paradigm role
The paradigm role influences innovation capability in an organization. Further, the
role of the paradigm may influence commercialization activities and thus the
development of dynamic capabilities. The role of the paradigm refers to changes in
the underlying mental and business models which frame what the organization do
(Francis and Bessant, 2005). Further, the paradigm role thus includes the focus on

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self-reflection and continual development. Francis and Bessant (2005) describes the
paradigm as twofold: Firstly it targets firm values and human resource management
policies. This is called inner-directed paradigms. Secondly, it refers to business
models – “a systemof coherent, comprehensive, explicit and/or implicit constructs
used by managers to understand their ﬁrm and shape its development” which is
called the outer-directed paradigms. (Francis and Bessant (2005: 177). The paradigm
may develop and change during the commercialization process, hence we propose:
Proposition 4: The paradigm role will be a key microfoundation underlying
3. Research Method
3. 1 A Comparative Case Study Design
With regard to empirical setting the increasing need and interest for research and
development within the offshore petroleum industry in Norway makes a powerful and
compelling context for examining discontinuous innovations. As the offshore
industry moves toward deeper sea, field development solutions change innovate from
fixed to floating production units and smaller installations on the seabed. As
exploration drilling takes place in increasingly more challenging environments,
existing technological solutions approach their technical or cost limits, creating a
need for new technologies and innovation. Hence, research and development within
subsea drilling and exploration technologies constitute a “natural laboratory” for
investigating discontinuous innovations.
In order to contribute to theory development a case study design was chosen to enable
answers on “how” (cf. Bacharach, 1989). Thus, the embedded, processual and
contextual nature of the microfoundations of dynamic capabilities can be revealed. In
meeting the criticisms of case study research in the field of dynamic capabilities
(Wang and Ahmed, 2007), we demonstrate the potential of case studies for inspiring
new ideas and approaches (Siggelkow 2007) by producing rich data to inform theory.
According to the taxonomy scheme of Colquitt and Zapata-Phelan (2007), our
research design is similar to archetype “builders,” being relatively high in theory
building and relatively low in theory testing. Following the theoretical sampling of
cases, we build on the suggestive arguments that multiple cases create more robust
theory grounded in varied empirical evidence (Eisenhardt and Graebner, 2007). We
controlled for industry, type of company and type of innovation. Hence, both
companies are within the exploration and drilling segment of the Norwegian
petroleum industry and they are in the early stages of commercializing their product.
The cases vary in organizational size, somewhat in technology and market niche. This
leaves ample opportunities for use to observe variation among our firms.
In choosing an interpretive paradigm (Burell and Morgan, 1979; Gioia and Pitre,
1990), we aim to gain a deeper understanding of a phenomenon through
understanding the interpretations of that phenomenon from those experiencing it
(Shah and Corley, 2006). This study encompasses in-depth individual, semi-
structured interviews with the CEOs, and members of management teams in the

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selected firms. The informants were selected to provide a balance of opinions from
different professional areas, and different levels of responsibility and seniority in an
attempt to gather and integrate a variety of perspectives. Semi-structured interviews
were chosen as the method of gathering information since they leave room for
adjustments during the interview.
3.2 Data collection strategy
In October 2008, part of the management team in Beta, and the CEO in Alpha were
interviewed. The one-hour interviews were conducted with the aim of getting
acquainted with the companies and to obtain their formal agreement to participate in
the research project. We also attempted to determine the main challenges faced by
each company as well as to obtain general information about the firm history, current
situation with regard to product development, customer and competitor relationships
and the management team. We conducted further interviews in December 2008 and
February 2009. These interviews were focused on technology development and
technology fit, on developing the organization as well as aspects of
commercialization. More precise the interviews were organized in three rounds. The
primary goal with the first round was to get to know the companies, their product
history, their innovation process, who has been involved, the people working there
and their background and their skills and what they considered as their main
challenges. The primary goal with the second round was to get a detailed
understanding of the microfoundations. It became very clear after the first round how
the commercialization process was associated with these distinct and parallel
processes.
The primary goal in round three was to cover topics not covered in round two, i.e. a
deeper dive in understanding the firm’s microfoundations. Whereas the informants in
round one and two were CEO and members of management teams, round three also
covered important key informants in the companies’ environment, such as the leaders
of the technology/research departments in two petroleum companies, as well as one
board member/industry adviser who was connected to one of the firms. Hence the
third round of interviews were also conducted in order to learn more about the
industry setting and conditions innovative companies face in this particular industry.
To summarize, we have conducted 12 interviews, three with each company, two with
two different oil companies and one with a board member/business advisor.
4. Empirical results
This section contains the empirical results and consists of two parts. First, a general
description of the cases is presented. Table 1 in Appendix describes the resources,
including firm assets, and attributes of the two firms. Second, microfoundations of
dynamic capabilities are revealed. In this part, quotations from the informants are
used to support the empirical claims.

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4.1 Description of Alpha and Beta
Alpha was founded 2005 and was established by a team of four founders based on a
technology foresight process where several ideas were assessed. The idea they are
developing is based on a radical new automated solution within the drilling and
exploration sector that is integrating cutting edge technologies. The idea was chosen
based on an explicit market need, an enhanced technology to face the increasingly
challenged environments in the arctic and deep sea. The market position Alpha is
targeting is currently in a developing stage. The company’s strategic intent is to
develop innovative technology, commercialise it, and eventually exit.
The company was started by four founders, one of which is employed in the
company; another is hired as a consultant, all four founders own equal shares. As
funding for developing the product idea has been obtained in several stages the
company has gradually grown. The ownership structure has changed several times, as
a technology park, a professional investment fund, and lastly an oil company have
invested in the company. In terms of commercialization, Alpha has started to
commercialize the first module, which can serve both as an independent product and
a vital part of the complete package they are developing.
Beta was founded in 2003, but the idea was “born” and patented in 1999 by a
researcher having worked in this specific field. The idea is described as a radical new
solution that will position itself as a “game –changer” in the market.
The company has developed in structured phases. First, the idea was brought to a
venture company. A company with professional structure (board, management team
etc.) was set up early on. The inventor quickly became a minor shareholder of the
company and a team of different people worked with the idea. This phase was based
on finding money to build the new technology and the company found partners in the
petroleum industry who invested equal shares in the technology development, along
with the Norwegian Research Council. The company raised substantial funds for the
technology development through an initial public offering (IPO) early on.
The current phase is characterised by organization building and the formulated
strategic intent is to develop innovative technology, commercialise it and stay in the
market providing drilling and exploration services. During the time of our study Beta
has moved into the last stage of the product development.
Both Alpha and Beta are developing products that we categorise as potential
discontinuous innovations. Both firms are in a stage where the technology is mature
enough to start the commercialization process. Table 2 describes Alpha and Beta as
discontinuous innovations.

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Table 2: Alpha and Beta as discontinuous innovations
Alpha Beta
New world product Yes Yes,game changer
New world technology Industry driven
Integrating existing
cutting edge technologies
with robot technology.
Develop new technical
solutions and technology
where none exists.
Research driven, brand
new technology. Also
integrates existing
technology into product
New knowledge The technology
development gives new
knowledge about subsea
robot operations.
The technology
development has given
results that contests the
established knowledge
Spin out technology Yes Yes
4.2 Dynamic Capabilities and their microfoundations
This section reveals the empirical findings related to our four propositions. The
section is structured according to the propositions. Rich quotes from our interviewees
illustrate the managerial experiences related to our conceptual framework, and are
used to support our claims. The findings are summarized in Table 3 in the end of the
section.
Focused technological development
The product role refers to the focus of product innovation. Both cases studied here are
product oriented, one will sell the product, the other will commercialize its’ product
as a service encompassing the use of the technology, thus the product role is
important. The product idea is a prerequisite for innovation, hence the origin of idea
is also of some importance.

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”The background wasthat we had a network, the four entrepreneurs, focusing on
technology gaps in drilling and well technology. We got some funding from
Norwegian Oil Company to make a report about which technologies could be
interesting.And then we presented 7 technologies and ranked them, and Alpha was
one of the projects,and it’s a bit funny because it wasn’t given that this would take us
further.But Norwegian Oil Company put their head up and said that it could be very
exciting to start on something like that.” (CEO, Alpha)
The idea of Alpha came from mapping technology gaps, combined with a signaled
customer need. Thus we see that the ability to identify a technology gap can be a
microfoundation for developing dynamic capabilities.
“What happened was that Venture Company took the idea and established Beta in
2003. To apply for this type of funding from the Research council it has to be
company based, and in connection with this the ownership of the patent which was
filed at the research institute was transferred to the company.” (CEO, Beta)
The product idea for Beta was patented by a research institute, but no steps had been
taken to commercialize it until the venture fund took initiative. The ability to act on
ideas seems to be an important microfoundation in this venture. As Alpha and Beta
are entrepreneurial companies the product idea has been the starting point for
building the organization and the developing the product. As such the product idea is
a basic microfoundation for developing all capabilities in the firms.
As entrepreneurial firms with unfinished products the main priority is to get the
product to work. The following quotes illustrate that developing the technology
constitute the core processes in the firms.
“When we are at work, we work with just one thing and very goal oriented, and I see
at least for my part and for the people involved in the work that effectiveness is much
higher. And I don’t think it would been possible to develop….that component we used
one year fromwe started drawing until the prototype was ready. This would not have
been possible in an ordinary manufacturing firm. I’m certain of it!” (CTO, Alpha)
“The strength in it (the organizational model) is that it is a technology course. It is a
focused technology course,which implies that our project team have one point and
that is technology development.” (CEO, Beta)
To summarize; the quotes support the notion that the product role in the firms is
essential to develop dynamic capabilities. More specifically our data suggests that the
product role seems to be an important microfoundation for innovative capabilities.

15
The process role describes to what degree the company addresses the ways products
are developed and introduced to the market. This role is related to how the firm
interacts with its environment in order to acquire resources. Our interviews contain
rich information on how the entrepreneurial firms deal with two kinds of processes
related to technology development.
Searching for technology and selecting suppliers
Alpha has applied technology searches in several other industries, including robotics,
space and car industry. They identify technology from other industries, integrate,
modify and develop it with petroleum technology for application in drilling and
exploration activities. Thus, they make use of technology gaps between petroleum
and other industries. The company uses suppliers ranging from local industry to
international universities to help them develop and produce the individual
components, which they then assemble. The CTO describes how they learn through
their suppliers and in the process of selecting the suppliers.
“We (make) specifications for how it will function, and then we approach three
vendors. Then we ask “how would you have made it, and what will it cost us? What
are the pros and cons?” And then we sit down and compare. Then we learn from all
of them, and we can pick the one doing the best job.” (CTO, Alpha)
Alpha has a strategy for what kind of traits they look for in their suppliers. They
deliberate select suppliers who are open to try new things, are innovative and who
understand their needs. They are extending the boundaries of their resource base, to
encompass other firms and their competencies.
” …If they return with something that looksmuch as possible as what they made last
time, then maybe they are not the right people. But if they come back with something
and say ”oh,we think this is going to be the best for you”, that they’ve been thinking
new technology. Then we’ll use them.” (CTO, Alpha)
Making specifications for suppliers is part of the product development process.
Having potential suppliers offering their solutions represents a way of comparing
ideas and extending the resource base of the organization. Through this process the
microfoundation of absorptive capacity is demonstrated.
Alpha also works closely with research institutes. For example, they chose an
American university to develop brand new components, based on their expertise but
also on motivation:” … they seemvery responsive. They really want to and they are
ready. It’s not like; “Oh yes, but we have to do a feasibility study to see if we are
going to try to decide some time,” which is what you might run into other places. So
they’ve been darned, like, we want to do this, this is exciting.” (CTO, Alpha)
Beta uses technology searches in universities; developing technology to perform
close to what they claim is theoretically feasible, as well as implementing technology
from other industries. In order to handle technological challenges Beta outsources

16
certain aspects of technology searches. Beta is constantly in the process of searching
for technologies from other fields to be implemented:
”….So, it’s the whole... to hunt, to be curious, make use of other industries. Space,
military technology,which has solutions,we are using valves in (the product) which
are in Formula 1 cars and can endure extreme heat. And then we test it to the
extreme, far more than we actually need.” (CEO, Beta)
This kind of learning has do be documented in order to serve as an absorptive
capability. Organizational learning is demonstrated in writing technical notes. These
are used to document progress in technology development.
“And what they are doing now, they are building competency. But we have to
document this in technical notes, which we call it, in some form of documentation.”
(CEO, Beta)
There seems to be a difference between the two cases in the degree of involving
partners. Whereas Alpha uses partners actively for developing the technology, Beta
seems to use partners less actively. Alpha seems more open in their technology
searches and interactions with their partners. The CEO in Beta told us that they are
careful in protecting IP, names of employees are not on the web cite and the suppliers
are not allowed to use the company as reference. Our impression is the Beta is more
protective of their technology development and thus has less open interaction with
actors in the environment. These observations suggest that Alpha and Beat are
somewhat different in developing their absorptive capacity. Beta rely more on
internal resources. Both companies use their environment for finding new
technological solutions, thus the process role seem to underlie innovative capabilities.
These quotes illustrate microfoundations underlying absorptive capability in the two
companies. Our observations are in line with previous findings. The ability to learn
from partners, to integrate external information and to transform it to the firm-
embedded knowledge has been found to be positively associated with the
performance outcomes especially in the oil and gas industry (Woiceshyn and
Daellenbach, 2005). We found that the companies are constantly searching for new
technology from other industries, to implement in their products. This shows that the
microfoundations allowing dynamic capabilities to foster can be described as search
for technology and selection of suppliers.
Integrating innovative products with dominant technology
Alpha’s technological strategy is to develop each module as a closed system. As
explained by the CTO below, it is important that this system can easily be integrated
with other equipment and existing technology.
“If we go to another supplier and look at a drilling system, everything is integrated.
They have a common power supply, common communication. They have a very
integrated control system. This means that when running operations the main control
is much more entangled,like one large systemwith many machines. We have a strict
philosophy that every single machine shall be its’ own individual which will handle
everything itself: all closed-loops, control loops all will be inside the machine.”
(CTO, Alpha)

17
Their sales argument is to make the technology as flexible as possible. This enables
the firm to fit their product to all existing technologies within drilling technology and
in operations from other suppliers. Thus, making the product integrative with existing
technology seems to be a vital microfoundation for the ability to adapt the product to
the market, i.e. adaptive capability. Thus, we may say that technical integration is a
microfoundation of dynamic capabilities.
The data from Beta do not support similar processes with integrating their technology
with existing solutions. This is because their product intend to replace existing
technology, hence they do not need to focus on this adaptability. We may conclude
that Alpha demonstrates a microfoundation for adaptive capability here, which Beta
does not need. This clearly shows that the need for developing dynamic capabilities
varies between firms. Our data indicates that firm specific microfoundations work as
antecedents for this need.
dynamic capabilities
As the position role deals with activities identifying and capitalizing on emerging
market opportunities, our entrepreneurial firms reveal several types of
microfoundations in commercializing their novel products. The following issues
emerged through the interviews; Involving potential customers to participate in
development of the product, collaboration with large organizations, gaining
legitimacy through being visible.
Involving potential customers to participate in development of the product
During interviews, both companies stressed the importance of involving potential
customers into the development of the product. This may improve the product and
increase the chances for first sale to these customers. Interestingly, these potential
customers are also partners in technology development.
Alpha developed capabilities to involve potential customers into the project. As one
outcome of these efforts, the Norwegian Oil Company has invested money in the
product development. This increases the chances for first sale.
“One advantage is that we work together with the industrial development
department of Norwegian Oil Company, having a program committing the use of
technology. They can commit to use the first part, and after that it will be a
commercial transaction. When being involved in this program, the product is tested
as a pilot, without competition fromanybody else. When the pilot is tested then you
are on commercial terms and have to compete.” (CEO, Alpha)
Thus, involving potential customers in product development is a microfoundation
enabling adaptive capability in terms of getting knowledge about the need of the
customer. In this case the customer is also a partner in a project funded by the
research council. They have invested in the company and they are making their
internal expertise available for Alpha.

18
An informant in Beta describes the challenges of getting potential customers
committed to the product idea:
”.. The challenge is to find a partner who is a customer, industrial partner or a
technologically expert. One who senses the idea, understands the needs, and who is
willing to develop the idea with the owner. Call it customer based, orindustry based
innovation development. It’s crucial.” (CFO, Beta)
According to our informants, getting approval from potential customers is an
important factor for pre-appraisal of the innovative product, and can stimulate
innovative processes.
Both companies have succeeded in involving potential customers to invest in product
development; Alpha has one whereas Beta have three petroleum companies involved.
Close relations with potential customers also gives access to important resources, as
technical know-how and funding. The data indicates that that position role of
involving customers is an important microfoundation underpinning the development
of the adaptive capability.
Challenges in size: Collaboration with large organizations
Communication addresses the challenge of positively transferring the knowledge of
the new innovative product to the market. Given the smallness and newness of
entrepreneurial firms collaboration with larger organizations may prove difficult. In
this industry our two firms, each with less than 20 employees, interact closely with
international petroleum companies. Such companies are the organizations, with the
smallest one comprising about 30.000 employees and is present in over 40 countries.
To face this challenge, our companies need to identify the right departments,
managerial and technical staff. This actualizes personal relations and networking to
access the key functions in the petroleum companies. A further challenge is managing
the different communication flow in large organizations compared to their small
entrepreneurial firms.
A “double” sales strategy was described, targeting both directors who supervise
money and budget and technology departments. This is described as a sensitive
process since one needs to make sure that these two parties meet internally in the
organization and that engineers and managers have the right information for their
needs. This way they may be perceived as important external resources to their
potential customers.
Our informants have a similar understanding of how a large industrial bureaucracy
like Norwegian Oil Company works. Both Alpha and Beta have managed to develop
a special capability to approach this challenge.
”Norwegian Oil Company is a large organization. Often one person doesn’t talk to
another person because he doesn’t know that he is sitting there. So therefore we have
to be very active ourselves and use our network… Also, there are constantly new
people coming in to Oil Company, who may not be able to see the value or make the
decision. That’s why it’s very important to pick the few decision makers there are
there. It is a lot of work for us.Basically we try to use the network, use the people in

19
Norwegian Oil Company we are working with, and also other resource persons and
former employees.We use themto find the best way entry the right people.” (CEO,
Alpha)
Beta has hired people who know the industry from inside, which enables them to
build reciprocal dialog with potential customers:
”So I think the competence I have wasa bit attractive because I had knowledge of oil
companies’ way of thinking and doing business. So you easily enter a good dialogue,
get mutual respect. .. and that meansa lot, since they are oursuper customers. I think
this has been of great value.” (CEO, Alpha)
The ability to negotiate with large petroleum companies is based on the knowledge of
the system and concrete people. Our companies use their network – either personal or
through third parties, to find their way in these negotiation processes. Therefore,
networking is one of the important micro-foundations of adaptive capability.
Gaining legitimacy: The art of being visible
Legitimacy is essential to the survival of new firms (Zimmerman and Zeitz, 2002).
One way of meeting the challenge of legitimacy is to become visible, to create
a name and a good reputation. Alpha illustrated how third part approval of
their product idea has been important in building legitimacy for the company.
“The innovation prize says,” ok maybe you’ve got something here”. The patent says
“this is innovative”.When Norwegian Oil Company commits research money, then
it’s definitely worth having a look at. Also when The Research Council says “this is
on top of ourlist, and within the area we support”. Then it’s a validation for you,
which is very important for us.” (CEO, Alpha)
Being visible to the industry means that potential customers are familiar with the
technology, thus more open:.….”It’s extremely important if you want to sell
something, that the customer have heard the company name before.If not you are not
likely to buy it. If you’ve heard about it once before, then you are likely to have a
total different attitude….Being in the papers, and on the “Offshore Northern Seas”,
exhibiting and so on is extremely important because then people have at least heard
the name before.Always being visible is an important part of our strategy.”(CEO,
Alpha)
The quotes illustrates that Alpha position their role so as to being visible to the
industry and potential customers. This microfoundation enhances the firm’s adaptive
capability. This adaptive capability is in fact a process making the market and
industry adapt to their technology.
Beta also has funding from the Norwegian Research Council as well as from three
large petroleum companies, they have won an innovation prize, they participate in
exhibitions, periodically report progress and financial situation to their shareholders.
Beta has developed a routine for being visible as a result of being on the stock
exchange. Being publicly listed also means they have to be careful with how
information is communicated and to whom, to avoid insider-trading. However, the

20
technology is still openly discussed with the technology partners, as a way of building
trust, but also to exchange technological know-how. This company has a relatively
high profile, and seem to have a successful image so far. It has been presented as a
good example in different forums. They also try to create enthusiasm for their
innovation.
”In general two people speak forthe company externally, the CEO and the CFO.And
since we are a joint stock company it has to be that way.But relating to customers we
are very concerned that they have as good a knowledge of the technology as possible.
That they are familiar with what we are developing, and they talk about our
collaboration partners, except the ones on the steering committee. We’re sort of
doing “missionary work”, and informing in wide forums to create enthusiasm,
rapture and resources.” (BM, Beta)
Compared to Alpha this firm is more restrictive, likely due to being publicly listed.
This exemplifies a difference in microfoundations between Alpha and Beta due to
structural differences. Again, we see that this may affect different needs for dynamic
capabilities. Both are dependent on legitimacy, but it proves differently due to
structural constraints in being listed.
Organizational transformation for commercializing
Both Beta and Alpha are conscious of how they position themselves in the market. As
the companies’ first product is getting closer to commercialization, the companies
transform their organizations for meeting this challenge.
The CEO in Alpha describes how they identify key positions in the customer
organization and present the product for them. This represents a tangible step in the
commercialization process.
“Now we are going to identify the right people on these platforms that we know will
be the likely first users, and then we will have presentations for them” (CEO, Alpha).
The CEO stresses the importance of having contact with both “bosses” as well as
with the technical personnel “… because the boss he will say, “yeah, it looks really
great, but get the technical people to approve it”. And then it will come. I always
think it is better to approach both these groups.” (CEO, Alpha)
The company is also transforming their organization by adding a new function in
industrial sales.
“…In the beginning it will be part time work, by partly new people and partly by
myself, more or less. And then as I said when we are doing the second sale, then it
really starts. The first sale like a pilot, I think we have to use the resources that we
already have and some new resources.We have made an agreement to get some new
part time resources. But when we have done the first sale, we will start building; one
business development manager full time.” (CEO, Alpha)
Alpha has engaged one of its board members, who are also a former petroleum
company executive to work part time in industrial sales. Thus, the firm is utilizing
part of the rich resource base which is represented by the board of executives. Using
experienced personnel who are well versed in the industry gives the company a

21
quicker start when setting up new functions, and demonstrates an important step to
reposition the company. Thus it provides a microfoundation for adaptive capability
by changing and extending the mode of organizing (cf. Rindova and Kohta, 2001).
Beta has more capital in their resource base and has chosen a different strategy for
repositioning the organization.
“If everything had gone according to the original plan, then we would have been
correctly positioned today. Since we have the capital base, we can allow ourselves to
be ahead of the technology development. Rather that than the other way around. It
would be a disaster if we suddenly arrived at a robust technological solution, and
then we lack the structures supporting it.” (CEO, Beta)
Where Alpha develops commercialization capabilities timed with the progress of the
product technology, Beta has already developed several functions necessary for a
supplier firm. However Beta is still in a pre- commercialization stage. Again, the
cases illustrate differences in microfoundations due to structural conditions as capital
base. .
In order to consistently solve problems and develop new technical solutions, products
and enhance and improve processes there needs to be an infrastructure in place.
Francis and Bessant (2005) describe this as paradigm and refer to the inner (type A)
and the outer (type B) paradigm. In this section we have identified two types of
paradigm developments that might induce increased innovation and problem solution
activities. The first is called “strategies for human capital”. This we label a type A
development because it relates to organizational and values and people management
policies (Francis and Bessant, 2005). The second type of paradigm development is
called “structuring for innovation”. This is labelled a type B development since it
relates to constructs used by managers to understand their firm and shape its
development (Francis and Bessant, 2005).
Strategic intent
According to Francis and Bessant (2005) the paradigm roles consists of an outer and
an inner type. The strategic intent of the company has to do with both these roles as it
influences the inner paradigm as in human resources, culture etc. as well as the outer
paradigm in terms of development of structures and business model.
Alpha has a clear exit strategy:
“…at some point in time there will be either a sale ora merger or a joint venture or
something like that. Our core competence is early phase, cutting edge technology
innovation. Technology development. That’s what these people have been selected
for.” (CEO, Alpha)
Beta has another strategy as it will build an organization that will be larger innovative
company remaining in Norwegian ownership. This is as a response to what the CEO

22
labels as lack of capability in Norway to bring high technology companies into the
international arena.
"Our strategy is not to be acquisitioned by others.We are going to have the
production capacity,we're going to have the competence,we're going to have direct
customer relations,we're going to have the services and the organization needed."
(CEO, Beta )
On the basis of the strategic intent, employees are selected and recruited and
structures are formed.
Strategies for human capital
According to Francis and Bessant (2005) the second type of paradigm role for
innovation is the inner – directed paradigm, which target the firm’s values and human
resource practices. Well known from the entrepreneurial literature is the effect of
human capital on resource acquisition, and business performance. In the following we
will show how the two firms use the inner- directed paradigm in building dynamic
capabilities for human resource management.
Alpha has a clear preference related to human capital: the company is conscious of
recruiting people who are open to innovation, if they are too much into traditional
technology it is difficult to get the high degree of innovation needed in the product.
“Important in this technology development, is that it is innovation projects. It’s
”state of the art”. That’s why it’s important to hire innovation people. If they
remain too much in traditional technology, it’s hard to get high degree of innovation.
The same goes for ourcollaborative partners.They’re chosen because they show an
enthusiasm for innovation, new approaches and things like that.” (CEO, Alpha)
”And we’re very much based on consultants. Because it takes a long time to build
staff. So you could say we are six employees and in principle six man-years working
as consultants for the company.” (CEO, Alpha)
In Alpha the product development is organized in a multi skilled team working
together:
“… we don’t have anyone who is somebody else’s boss, here everybody has their
own field of expertise. One engineer is in charge of mechanical engineering, another
one has control systems, one is working on the simulatorside and so on. So it’s really
a multi skilled team working together.”(CEO, Alpha)
Organizing product development in a team facilitates open communication and a
relatively flat organizational structure. Consciously focusing on human resource
management for creativity may in turn affect the organization culture, and thus
become a micro foundation for a firm’s innovative capability.
Beta has a more diversified organization, also in terms of acquiring human capital.

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“ The ”Phd department” works very long termwith modelling and that kind of thing,
and then there is a more technical group, who work intensively to get this tool to
work. The scope is somewhat different.” (CEO, Beta)
Regarding human capital Beta’s strategy begins with recruiting experienced
personnel.
”The starting point is that we recruit senior people with experience first. They build
these two different parts of ourorganization. Then they handpick people they have
experience orworked with. In addition, we recruit some young people who haven’t
made all these experiences. Sometimes, you need to have somebody asking stupid
questions. You have to challenge established practice. Young people are good in
doing this because they don’t take anything for given. There has to be a mix between
these two groups. To have the experienced people get in place first and have them let
them shape things has turned out very well in our firm.” (BM, Beta)
Furthermore, their first priority is hiring, second using external expertise:
“In some cases there is competence you really would have liked to have in the
organization. Because these persons already are in a favourable situation (they will
soon be retired, orneed to work in a network to keep up their competence) you are
not able to employ them. But we want link them to the company as tight as possible
so that all the know-how will be shared and remain in the firm.” (BM, Beta)
It can be concluded that acquiring human capital with innovative skills is an
important micro-foundation for innovative capability. Furthermore, the ability to
access competencies outside the organization itself, through consultants (another way
of acquiring human capital) seems also important. Our two firms seem to have a
similar perception of this, though they have developed different team sizes and have
different strategies in terms of hiring and using consultants.
Structuring for innovation
Managers shape and develop their organization. In small entrepreneurial companies,
managers have more influence of the course of the organization development. Both
Alpha and Beta are established around an innovative idea and thus building
infrastructure that might support the development of the idea is of crucial importance.
Both Alpha and Beta raise the topic of the importance of permitting the technology
developer to work freely and protected from pressures of the market situation.
For example Beta has completely separated the project development process from the
commercialization in order to face the challenge of meeting the deadlines and
continuing the technological progress:
”We are in a business world, since we are a joint stock company. Then we have the
technology world. To us it’s very important to shield the technology world, so that
they can focus on their stuff.… There is a mutual respect between those two worlds:
The technology group in our company understands that it’s the company management
and the commercial world that decides at the end of the day.And aslong as we have

24
progress, according to a plan, they run their course and we do what we can to shield
them.” (CFO, Beta)
Beta has been through reorganization of the organizational structure during our study.
The main aim was to focus the technology development even more, and to shield it
from the commercial parts of the organization. The motivation for this was also led
by the fact that they were using more time to develop the technology than foreseen in
their project plans. This put more strains on the organization, also financially, and
forced them to focus their activities. This is an example of reconfiguration of
resources and protection of the technological development process from market
pressure to facilitate innovative dynamic capability.
Also Alpha is aware of the importance of shielding the different processes in the firm
in able to have focus on technical solution and product development. The company
has a relatively flat structure where each person is responsible for a separate technical
field and reports to the CEO. However, while technical problems are openly
discussed, more strategic issues are decided by the management and the board of
directors. It seems that this firm has developed a separating capability to deal with the
commercialization issue as well, as described above.
“…these kinds of things I normally discuss with the board of directors. In that forum
we agree how we do the big lines. So that’sreally howwe make these decisions. The
strategic decisions I make together with the board of directors.” (CEO, Alpha)
The strategy of separating the development from other processes in the firm gives
results according to employees at Alpha:
“No matter how you twist and turn it, the largest obstacle in all development projects
is to be allowed to focuson the project and be able to control the resources. When I
started in Alpha,the pace that we developed the product in was new to me. I have
never seen it happen before. But it is because we just work on one thing here. This is
development! We have no customers, nothing like that! We are allowed to have
focus. It’s a different agenda.” (CTO, Alpha)
Both companies have separated the strategic decision making from the technological
development process. Beta it may be argued that protecting the technological
development from market pressures is an important component for focusing the
technological development and thus enhancing the innovative capability of the firm.
Open exchanges with the potential first customers also gives input to the innovation
process. For Alpha it may be argued that the relatively open process with inputs from
suppliers, research institutes and customers, makes a richer resource base of
knowledge and know how to enhance the innovation process.

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Table 3: Microfoundations of Dynamic Capabilities of Discontinuous Innovations
Microfoundations Alpha Beta
Product
Focused technological
development
Established around theproduct
idea
Established around theproduct idea
Process
Searching for technology and
selecting suppliers
Suppliers are essential in
developing technology
Protect confidentiality of technology.
Do not involve outside partners.
Outsources technology searches
Integrating innovative products
with dominant technology
Uses their connections with a
petroleum company to gain access
to practical drilling expertise.
Created a technical steering committee
with three potentialcustomers who
monitor their technology development
Position
Involving potential customers
in the development of the
product
Carefully works with involving
innovative –oriented partners
Involve potentialcustomers to oversee
the development, but do not directly use
expertise of customers
Challenges in size:
Collaborating with large
organizations.
Expresses concerns that petroleum
companies have the upper hand in
negotiations.
Expresses the importance of using the
same “codes” as their customer, speak
the same language
Gaining legitimacy; theart of
being visible
Mindfulof the importance of
acceptance of technology and
procedures from the market.
Aware of the importance of having trust
from investors and stakeholders
Organizational transformation
for commercializing
Aware of the importance of sales
personnel
Development of organization to meet
customers needs
Paradigm
Strategic Intent Exit strategy. Organizational
development to meet
technological development and
needs
“World domination” building for the
future. Currently restructuring to be
more technology focused
Strategies for human capital Search for key employees, use
consultants, all innovative-
oriented
Very conscious of employing people
with an innovative mindset
Structuring for innovation Technical staff is allowed to work
without exposure to market
pressures.
Separates the technical staff from the
market

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5. Discussion
The perspective and approach of our research taken is based on the need to better
understand for the origins and development of dynamic capabilities in the context of
commercialising discontinuous innovations in new entrepreneurial firms. We narrow
our scope of study to investigate the essential microfoundations of dynamic
capabilities. Hence, this involves how a new firm’s microfoundations play a pivotal
role in developing discontinuous innovation. We differ from previous research that
examines capabilities within entrerpreneurial firms (e.g., McKelvie and Davidsson,
2009) by examining the origins and microfoundations of dynamic capabilities within
early-stage firms where the development of capabilities have yet to fully materialize.
Empirical studies so far have focused on the processes established firms are
struggling with. Established firms already have a product or service, already have
customers, employees and an established organization structure. Thus, the focus has
been on how they change to fit with the changing environment rather than on how
they are initially developed.
Recently, Ambrosini and Bowman (2009) have argued that additional research should
be conducted to better understand the underlying antecedents and consequences of
dynamic capabilities. Additionally, Helfat et al. (2007) assert that “prior literature
has placed less emphasis on the underlying processes that an organization requires in
order to move from its starting position to a new or adjusted path.” This means that in
addition to identifying dynamic capabilities, research must also focus on how and
when they develop. The present perspective explored how managers and their teams
develop dynamic capabilities conditioned by the microfoundations they are engaged
in. Additionally, we align the microfoundations investigated within a framework of
discontinuous innovation. We adopted a framework and offer propositions based on
the innovation research advanced by Francis and Bessant (2005) that is similar to the
central processes that underlie the creation of dynamic capabilities. Thus, research
on how capabilities are developed based on the context of discontinuous innovation
was needed.
In our interviews, we found evidence that four different types of microfoundations –
product, process, position, and paradigm were present in each of our firms. Each of
these microfoundations were concrete activities in the firms. More specifically, they
described how they, among other things, conduct technology searches and
incorporate technology from other industries into their products, work with
universities and research institutes (nationally, regionally, and internationally), gain
knowledge from customers, use customers to open doors to enable them to learn from
existing players, acquire funding, and recruit personnel with the right background.
While both firms are developing innovative and technically advanced products, they
did differ in the manner in which they participated in each of the four
microfoundational roles (as shown in Table 3). In order to succeed, they differ
somewhat in how they absorb knowledge from other industries, involve creative and
innovatively orient partners or suppliers, and recruit innovative-oriented people, to
name a few.
Common for both firms were the search for new technology; however due to Beta’s
innovation being more research based, their search is explicitly on research-based
knowledge. Alpha seems to exhibit a wider range of partnership involvement,

27
including those with suppliers and potential customers in addition to research
institutes and university. Our data also reveals a rich picture of the firm-specific
microfoundations associated with the roles of position and paradigm. With regard to
the position, we found that the microfoundations are related to both involving
potential customers in the development of the product, collaborating with large
organizations, gaining legitimacy through being visible and repositioning their
organization for commercialization. With regard to paradigm the Alpha and Beta
differed in their strategic intent, their strategies for acquiring human capital and how
they structured their organization for innovation.
Our data also indicates that the transformation of the organization through employees,
the reconfiguration of the board, being visible and networking are essential process
and position microfoundations for how the firms respond to the market and external
resources. The organization becomes visible because it makes use of the knowledge
that external actors posit and integrates into the organization. These microfoundation
are strengthened by the firms’ active role in search for employees, board members
and information through their network and being visible. Our findings clearly showed
how the firms used their adaptive capabilities differently in response to differences in
their situation.
We have also shown how creating an “imbalance” between the progress of the
product and the progress in building the organization (paradigm) can contribute to
further strain on the organization as in Beta. Because such innovations are marked
with a high technical and market uncertainty it becomes essential that the building
firm legitimacy and reputation can reduce this uncertainty. Clearly, the issue of
legitimacy building in commercializing discontinuous innovation deserves more
research attention. We may conclude that this study in several ways add to existing
research on shedding light on the complex processes of adaptation when firms face
change in technological and market conditions (Verona and Ravasi, 2003). Our
findings reveal that the microfoundations seem to foster various dynamic capabilities
such as absorptive, adaptive and innovative. We also see that in the case of emerging
firms often elements that are important to facilitate absorptive and adaptive
capabilities are enhancing the innovative capabilities as well. We can also modify our
propositions to include the following:
innovative dynamic capability
absorptive dynamic capability
adaptive dynamic capability
innovative dynamic capability
These findings extend prior research and provide empirical evidence for the role of
micofoundations for building dynamic capabilities in new emerging firms.

28
6. Conclusion
Entrepreneurial Firm and Managerial Implications
As this research concerns with what managers in new firms actually do and how
dynamic capabilities in practice are created and developed, a strategy-as-practice lens
(Jarzabkowski et al., 2007; Johnson et al., 2003) was employed in this study. The
interview material provide rich narrative quotes revealing managerial experience in
how the role of product, process, position and paradigm serve as assets for developing
dynamic capabilities in the process of commercializing their innovations. This is
important in order to research how dynamic capabilities must be well targeted and
deployed towards achieving strategic goals (cf. Zahra et. al., 2006). In our interview
and findings, the idea of new technologies and new ways of doing things can be
found in each of our four microfoundations of the product, process, position, and
paradigm functions that serve as the origins of the creation of dynamic capabilities for
discontinous innovation. At the very basic role of the product, our firms use a
number of novel approaches that can be adopted and employed by other firms as they
adapt their technology, price/value their innovation, and minimize the risk for their
customers.
As for the other microfoundation roles, both position and process become important,
particularly as the firm begins to test the market with its initial product technology.
The importance of building legitimacy with several of their approaches along with
ensuring a power balance with future customers and suppliers should also be
considered in the early stages of an entrepreneurial organization’s development and
future growth. Equally important is the microfoundation concerning process,
particularly as the business identifies new partners in furthering their technology and
finding new markets. Internal processes related to organizational development,
culture, recruitment and selection that can foster commitment and buy-in for those
responsible for implementing and extending the firm’s innovation over time.
The managerial take-away of this paper is that entrepreneurial firms may take
deliberate steps in developing strong capabilities through carefully paying attention to
their firm specific foundations. The findings in this study support the notion that the
positioning plays an important role in developing adaptive capabilities. By involving
potential customers to participate in development of the new product, collaborating
with larger organizations, gaining legitimacy by being visible and reposition the
organization for commercialization, managers adapt more quickly to the demanding
external environment and align their internal resources to handle the challenges of
commercialization. To develop an awareness of a firms’ internal resources or lack
thereof may prove to be an important managerial task in developing specific
strategies for how to develop the organization towards commercializing the product.
This study points to that networking skills, customer orientation, building of human
capital are important microfoundations in this process. Thus this study is our first step
to give a contribution to how entrepreneurial firms must manage capabilities to gain
performance- related benefits (cf. Zahra et al., 2006).

29
Theoretical Implications and Future Research Directions
With our cases,we are at the very early nascent stages of their businesses where they
are merely beginning to develop their own dynamic capabilities related to
commercialisation. A longitudinal case study approach consisting of the continuation
of interviews with the founders and successors will assist and enable us to examine
further the microfoundations and dynamic capabilities of discontinuous innovation.
Until then, we base our early assumptions on the initial microfoundations these firms
used in launching their ventures and first initial successes in prototype development.
That said, this research is one of the first to investigate the role of the
microfoundations of dynamic capabilities of discontinuous innovation of nascent yet
emerging entrepreneurial firms.
Our study extends prior research in producing empirically grounded dimensions of
microfoundations, a concept that barely has received empirical attention since the
contribution of Teece (2007). In applying the framework of targeting innovation
through product, process, position and paradigm to Francis and Bessant (2005) this
study integrates literature on dynamic capability literature to that of innovation. The
implications of our propositions for future research is to refine the theoretical
arguments for the link between microfoundations, various forms of dynamic
capabilities and the more specific challenges related to commercialization of
discontinous innovation. This explorative case study covering a time span of six
months do not allow for the studying the effect of microfoundations and dynamic
capabilities for the first sale of the product. Future research should refine the
framework and propositions used in this study and develop theoretical arguments for
the link of the specifical dimensions of microfoundations, dynamic capabilities to that
of commercialization as shown in our revised propositions (p. 27). The
methodological contribution of this paper has been to provide empirically grounded
managerial knowledge and experience on some recent concepts. However, only
longitudinal studies allow for a more comprehensive follow up of this case study. The
need for longitudinal case studies is also in accordance with the view among scholars
in the field (McKelvie and Davidsson 2009; Wang and Ahmed 2007).
New Opportunities for Continual Research
While the four types of microfoundations of dynamic capabilities may be visible
across different firms, it is reasonable to suggest that some of the microfoundations
differ in development and depth depending on the firm’s mode and stage of
innovation. While we do not have the capacity to assess this directly within our study
because of the early stage of development of our firms, future research may want to
assess the four microfoundations based on the mode of innovation (from incremental
to radical).

30
Figure 2: Microfoundations and Mode of Innovation
Researchers should also recognize that firms vary significantly in their origins,
strategy, and goals. Different founding conditions may cause ventures to evolve
differently and, as a result, to develop different types of learning capabilities at
various stages of their evolution (Vohora et al., 2004). Many of these variables are
likely to shape how these ventures create and reconfigure their microfoundations and
build different dynamic capabilities at different stages of their evolution. Mahoney
(2005) stresses the importance of differences in teams in their firm-specific
experiences as a key source of innovation, especially in transforming capabilities and
resources to a key source of innovation that fosters organizational growth.
As the research continues, our work has the opportunity for an engaged scholarship
approach that crosses multiple disciplines in business and science and adopts a
reciprocal, collaborative relationship with industry to inform, disseminate, and share
many of the leading and emerging practices on the commercialization of innovation.
As such, our own research approach becomes dynamic and in multiple ways is
characteristic of how our own firms integrate and leverage their own learning to
assess and build the microfoundations that underlie organizational capabilities to
deliver measureable results and market innovations.

31
APPENDIX
Table 1: Characteristics of the firms
Alpha Beta
Founded 2005 2003
Idea Industry based (from
technology foresight)
Research based
Technology Patented Patented
Competence in firm CEO with engineering and
business degrees, 10 year
experience in
innovation/technology
development. Team with
different industrial
backgrounds and
experienced in technology
development.
Board of directors: “seniors”
from industry, and investors.
4 board members hold total
of 48 board memberships.
Substantial resource base for
company
CEO with background from
petroleum company and
supplier industry. Seniors with
long industry backgrounds,
combined with “fresh” PhD’s
Board of directors: “seniors”
from industry, and investors. 5
board members hold total of
46 board memberships.
Substantial resource base for
company
Market niche Drilling and exploration
technology
Exploration technology
Number of
employees
6 employees, 6 consultants 17
Founder One of the founders work in
the company, another is
hired as a consultant
Owns 1.3% of company, not
active
Ownership structure Venture fund: 28%
Founders: 14% each Others:
15% (this has changed
during our project)
On Oslo stock exchange
Planned
commercialisation
Relations with
potential customers
2009 (first product)
Petroleum company has
bought substantial share in
Planned start 2009, postponed
Has development, and right of
first refusal contract with
three petroleum companies

32
company
Prototype made First product, working on
second
Sept. 2008
Product estimated
ready for market
First product spring 2009
Complete product in 2013
End of 2010
Strengths of
technology
Minimizes cost and
increases safety, less
environmental damage
Increased automation,
reduced risk to personnel.
Technology also fits with
existing interfaces. Take
market niche where
available technology does
not function well
Minimizes cost, less
environmental damage.
Radical new technology (game
changer)

33
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