Breakthrough innovation: the roles of

dynamic innovation capabilities and open

innovation activities
Colin C.J. Cheng and Ja-Shen Chen
College of Management, Yuan Ze University, Chung-Li, Taiwan

Abstract
Purpose This study aims to examine the roles of dynamic innovation capabilities and open innovation activities in breakthrough innovation. Drawing
from the absorptive capacity perspective, organizational inertia theory, and open innovation, the authors seek to argue that dynamic innovation
capabilities have a curvilinear effect on breakthrough innovation that is moderated by open innovation activities.
Design/methodology/approach A mail survey was sent to the top 1,000 firms in Taiwan, the target respondents being senior managers with
experience in developing at least three successful breakthrough innovations in the past five years. A total of 218 usable questionnaires were collected,
resulting in a respondent rate of 22.9 percent.
Findings The findings support the argument that dynamic innovation capabilities have an inverted U-shape relationship with breakthrough
innovation. Meanwhile, open innovation activities strengthen the positive effects of dynamic innovation capabilities on breakthrough innovation.
Research limitations/implications The findings enrich the existing literature by proposing and confirming empirically that open innovation
activities help firms with effective coordination of dynamic innovation capabilities.
Practical implications Managers must be aware of the limitations of their existing dynamic innovation capabilities in terms of developing
breakthrough innovation.
Originality/value This study not only resolves the conflicting views about the relationship between dynamic capabilities and innovation but also
adds to the existing literature that indicates the failure of leading firms in the face of rapid environmental change.

Keywords Breakthrough innovation, Dynamic innovation capabilities, Open innovation, Innovation, Taiwan, Managers, Business performance

Paper type Research paper

An executive summary for managers and executive
readers can be found at the end of this article.
Introduction
To enhance breakthrough innovation, proponents of the
resource-based view and the dynamic capability view suggest
that firms should invest heavily in developing dynamic
innovation capabilities (Davenport et al., 2006; Song et al.,
2005; Teece, 2007). Meanwhile, Chesbrough (2006, 2010)
and Gassmann et al. (2010) suggest that firms can use open
innovation to produce radically new products.
However, the innovation literature is divided over whether
dynamic innovation capabilities lead to breakthrough
innovation (e.g. Antikainen and Vaataja, 2010; Rosenkopf
and Nerkar, 2001). For example, studies rooted in the
absorptive capacity perspective suggest that dynamic
innovation capabilities may foster greater breakthrough
innovation (Rosenkopf and Nerkar, 2001). When a firm
builds its dynamic innovation capabilities, its absorptive
capacity increases, and as a result it is encouraged to explore
new information and eventually develop breakthrough
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innovation (Lavie and Rosenkopf, 2006). However, studies
rooted in organizational inertia theory (Hannan and Freeman,
1984) suggest that dynamic innovation capabilities may
discourage breakthrough innovation (e.g. Benner and
Tushman, 2003; Levinthal and March, 1993). When firms
accumulate more experience and become more efficient at
using their existing knowledge, the self-reinforcing nature of
learning produces more incremental innovation rather than
breakthrough innovation (Benner and Tushman, 2003).
Thus, the relationship between dynamic innovation
capabilities and breakthrough innovation remains unclear.
There are equally conflicting views regarding open
innovation (e.g. Lichtenthaler, 2011). Not all firms adopt
open innovation activities because some firms prefer to have
more control over the source breakthrough innovation and
their relationships with innovation partners (Cheng and
Huizingh, 2010; Di Benedetto, 2010; Lichtenthaler, 2011).
In addition, despite research on the effects of open innovation
on innovation performance (e.g. Gassmann et al., 2010;
Gassmann and Zeschky, 2008), not all firms are successful
adopting open innovation activities. For example, the direct
cost of acquiring technology from third parties is often greater
than the indirect value generated by having this technology.
As a result, the net effect on firm performance is negative
(Faems et al., 2009).

Journal of Business & Industrial Marketing

28/5 (2013) 444 454 Received 29 May 2011
q Emerald Group Publishing Limited [ISSN 0885-8624] Revised 15 May 2012
[DOI 10.1108/08858621311330281] Accepted 25 June 2012

444
 Breakthrough innovation: the roles of capabilities and activities
Colin C.J. Cheng and Ja-Shen Chen
Our purpose therefore is to investigate the effect of dynamic
innovation capabilities on breakthrough innovation in light of
the moderating role of open innovation. This study
contributes to the innovation literature in the following
ways. First, it increases understanding of the effects of
dynamic innovation capabilities on breakthrough innovation.
Second, it enriches the extant literature by empirically testing
whether open innovation activities help firms strengthen their
breakthrough innovation. Evidence for positive effects of
breakthrough performance will further demonstrate the
legitimacy of open innovation as an important research
field. Finally, an analysis of the performance effects of
breakthrough innovation is critical to firms that attempt to
profit from using dynamic innovation capabilities and open
innovation activities.
The rest of this paper is organized as follows. We begin by
describing the theoretical background and hypotheses. We
then present the research method and the results of a series of
statistical assessments. Finally, we discuss our conclusions
and the implications of the findings.
Theoretical background
Breakthrough innovation
The degree of innovation can range from totally new to a
minor improvement (Garcia and Calantone, 2002).
Depending on their newness, innovations can be categorized
as incremental or breakthrough innovations (Johannessen
et al., 2001; OConnor and De Martino, 2006; Song and Di
Benedetto, 2008). Incremental innovations are minor changes
in technology, simple product improvements, or line
extensions that minimally improve existing performance. In
contrast, breakthrough innovations involve substantially new
technology, offer substantially greater customer benefits
relative to existing products, and demand considerable
changes to consumption or usage patterns (Chandy and
Tellis, 2000; OConnor and De Martino, 2006; De Visser
et al., 2010). Thus, a breakthrough innovation may imply a
greater level of complexity (Rogers, 2003) and may require a
new knowledge base and innovation capabilities (Song and Di
Benedetto, 2008).
Dynamic innovation capabilities
Dynamic capabilities are an organizations abilities to
integrate, build, and reconfigure internal and external
competencies to address rapidly changing environments
(Teece et al., 1997, p. 516). Several authors, such as Teece
et al. (1997), and most recently Zollo and Winter (2002),
have challenged other researchers to further explicate the
concept and build a solid theoretical foundation for it. This
has led us to classify dynamic capabilities into two major
streams:
1 Teece et al.s (1997) ability view; and
2 Zollo and Winters (2002) process and routine
perspective.
The ability view is clearly in the lineage of Barney (1991), and
claims that dynamic capabilities are unique abilities that
cannot be replicated accurately or fully comprehended. This
camp, which is an extension of the resource-based view, is
well represented by Teece et al.s (1997) work on how some
firms develop and sustain competitive advantages and
superior profitability. The process and routine perspective
claims that dynamic capabilities, as organizational social
learning processes, are uniquely determined by each firms
unique history, which confers on each organization specific
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know-how and traditions that are not easily replicated. The
social learning underlying dynamic capabilities is accumulated
along the specific and unique path that each firm follows
(Zollo and Winter, 2002).
Dynamic innovation capabilities are operational capabilities
that include organizational learning processes and routines
rooted in innovation knowledge and that involve
transformation of a firms innovation knowledge resources
and routines. Therefore, following Zollo and Winter (2002),
we define dynamic innovation capabilities as those hard-to-
transfer and hard-to-imitate innovation capabilities that firms
use to develop, integrate, and reconfigure existing and new
resources and operational capabilities.
Hypotheses development
Two theories can be used to describe dynamic innovation
capabilities:
1 absorptive capacity; and
2 organizational inertia (Davenport et al., 2006; Zahra and
George, 2002).
Absorptive capacity refers to a firms ability to recognize the
value of new information, assimilate it, and apply it to
commercial ends (Cohen and Levinthal, 1990, p. 128).
Absorptive capacity is primarily a function of a firms prior
knowledge and is especially related to how well it can use new
knowledge to achieve desired innovation (Volberda et al.,
2010; Lewin et al., 2011). Each firm has its own specific
innovation capabilities. Thus, dynamic innovation capabilities
are capabilities that organizations already have or have newly
developed to manage the process of innovation (Hertog et al.,
2010; Davenport et al., 2006). When dynamic innovation
capabilities become embedded in organizational routines over
time, they become more valuable, inimitable, and non-
substitutable, therefore representing an important source of
absorptive capacity (Davenport et al., 2006).
When a firm builds its dynamic innovation capabilities, it
invests substantial resources in new product development,
which involves discovering radically new product ideas,
accumulating state-of-the-art knowledge, and training
personnel (Afuah, 2002). The accumulation of
breakthrough innovation knowledge increases the firms
ability to evaluate and use new techniques and skills in
breakthrough innovation (OConnor, 2009; Zahra and
George, 2002). Thus, the firm can quickly identify
breakthrough innovation trends, experiment with emerging
designs, and engage in breakthrough innovations beyond
current innovation boundaries (Gassmann et al., 2010;
Rosenkopf and Nerkar, 2001). Accordingly, the
accumulation of dynamic innovation capabilities facilitates
breakthrough innovation.
The opposite perspective can be found in the organizational
inertia literature. Organizational inertia refers to the stability
in innovation development that underlies insufficient
adaptation to changes in the environment (Hannan and
Freeman, 1984). Organizations in the throes of organizational
inertia often establish routines to maximize the efficiency.
When these routines become embedded within an
organization over time, they decrease the firms innovation
capabilities in response to demands in the environment and as
a result create strong internal resistance against radical change
(Benner and Tushman, 2003; Nelson and Winter, 1982).
Thus, firms dynamic innovation capabilities develop over
time and accumulate as a result of their past experience. They
reflect firms abilities to use existing resources (Christensen
et al., 2005; Afuah, 2002). Levinthal and March (1993) and
 Breakthrough innovation: the roles of capabilities and activities
Colin C.J. Cheng and Ja-Shen Chen
Christensen (1997) suggest that firms with a superior
capability in a particular field are more likely to search for
more current information and use their existing knowledge
stores to achieve immediate advantage. Empirical evidence
provides support for this argument. For example, Benner and
Tushman (2003) indicate that process management
techniques and skills promote exploitative learning and as a
result facilitate incremental innovation.
Thus, the accumulation of innovation expertise enables a
firm to better understand and recognize the value of new
product development in the existing innovation trajectory,
which in turn provides insights into how to exploit current
knowledge and skills. When the firm accumulates knowledge,
the self-reinforcing nature of learning makes the firm more
efficient at integrating additional skills into its existing
knowledge base (Lieberman and Montgomery, 1998). As a
result, dynamic innovation capabilities can facilitate greater
exploitation of existing knowledge that thus produces
incremental innovation (Lavie and Rosenkopf, 2006).
Therefore, we propose the following:
H1. There is an inverted U-shape relationship between
dynamic innovation capability and breakthrough
innovation.
To enhance breakthrough innovation, it is necessary for firms
to break down institutional boundaries (Gassmann et al.,
2010; Chesbrough, 2007). A recently proposed model for
boundary breaking is open innovation (Chesbrough, 2003),
which refers to the use of purposive inflows and outflows of
knowledge to accelerate internal innovation, and expand the
markets for external use of innovation, respectively
(Chesbrough, 2006, p. 2). Because open innovation
emphasizes the flexible use of resources and the
reconfiguration of innovation processes with third parties, it
enables firms to achieve a competitive advantage through
open coordination (Chesbrough, 2010). Following this new
approach, firms are beginning to share or sell their internal
resources to third parties to create value (namely, inside-out
processes). Meanwhile, firms are also able to incorporate
external resources into their own innovation activities (namely
outside-in processes; Gassmann et al., 2010; Chesbrough,
2007).
Open innovation may create activities that support
breakthrough innovation (Chesbrough, 2007, 2010; Deck,
2008). However, because open innovation activities serve as
an organizing principle for coordinating various resources and
functional units (Wirtz et al., 2010; Chesbrough, 2006), they
may not directly affect a firms innovation output by
themselves. Instead, they may enhance dynamic innovation
capabilities in breakthrough innovation. Although current
research has yet to determine how a firm integrates open
innovation activities into dynamic innovation capabilities, we
argue that open innovation activities strengthen the positive
effect of dynamic innovation capabilities on breakthrough
innovation.
Firms that actively seek out external resources to
supplement their own innovation projects (outside-in
processes) can enjoy more advantages than firms that
choose to do everything in house, from research and
development productivity to radical innovation (Dodgson
et al., 2006; Gassmann et al., 2010; Rohrbeck et al., 2009). In
addition, because of the dramatic increase in the number and
mobility of knowledge workers in various industries, firms that
engage in open innovation activities can not only
commercialize new products themselves but also license or
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sell their breakthrough ideas (inside-out processes) to increase
their potential profit and enhance their radical innovation
performance (De Man and Duysters, 2005; Chesbrough and
Appleyard, 2007; Gassmann et al., 2010).
More specifically, high open innovation activities require
that a firm openly cooperates with its third parties, and this
active cooperation process increases the chance of the firm
finding the adequate breakthrough ideas it requires. In
addition, this open cooperation can help the firm to
successfully integrate the internal and external resources
that breakthrough innovation requires. Therefore, it is
reasonable to assume that open innovation activities can
have an enhanced effect on dynamic innovation capabilities,
leading to greater breakthrough innovation.
H2. Open innovation activities strengthen the positive
effect of dynamic innovation capabilities on
breakthrough innovation.
Research method
Questionnaire development
The questionnaire used in this study was developed over
several stages, following Churchill (1979), Gerbing and
Anderson (1988), and Adams et al. (2006). We began by
conducting a search of the relevant literature (e.g. Hertog
et al., 2010; Vrande et al., 2009; Chesbrough, 2003, 2010;
Laursen and Salter, 2006) and explored the perspectives of
practitioners and academics specializing in the resource-based
view, the dynamic capability view, and open innovation. We
also consulted documents such as annual reports, press
releases and financial statements. By doing so, we were able to
cross-check the empirical findings, which led to more precise
results (Eisenhardt, 1989; Yin, 2009).
Because some items were originally written in English
(e.g. breakthrough innovation and the control variables), we
had to translate them into Chinese. We used a double-
translation method to ensure conceptual equivalence
(Hoskisson et al., 2000; Song and Parry, 1996). One of the
authors translated the items into Chinese, and then two other
academics translated the Chinese version back into English.
The original items and the back-translated items were then
compared by a third academic to check for consistency of the
translation. The translation was confirmed by a fourth
academic.
To assess the quality of the measured items, we conducted a
pilot test. The scale was tested using a convenience sample of
67 senior managers with experience in developing
breakthrough innovation. Based upon their feedback, a few
concerns were raised and adjustments were made in terms of
wording and formatting. The final questionnaire contained 26
items, each measured using a seven-point Likert scale. The
entire scale is shown in the Appendix.
Measures
Dynamic innovation capabilities were measured with five
items adapted from Hertog et al. (2010), Davenport et al.
(2006), and Song et al. (2005). Open innovation activities
were measured by five items adapted from Vrande et al.
(2009), Chesbrough (2003, 2010), and Laursen and Salter
(2006). Breakthrough innovation was measured with six items
adapted from Zhou et al. (2005) and Gatignon and Xuereb
(1997).
As recommended by innovation researchers (Zhou et al.,
2005; Im and Workman, 2004; Atuahene-Gima and Ko,
 Breakthrough innovation: the roles of capabilities and activities
Colin C.J. Cheng and Ja-Shen Chen
2001), we used subjective performance measures to overcome
the difficulties inherent in asking respondents to reveal
sensitive information. In addition, the relative method was
used to overcome difficulties associated with comparing
different sectors and sizes of firms (Van Egeren and
OConnor, 1998). Both approaches have been widely used
in innovation research (Zhou et al., 2005; Im and Workman,
2004; Blindenbach-Driessen et al., 2010).
To account for the effects of extraneous variables, we
considered firm size a control variable. Following similar
research (Menguc et al., 2007), we used the logarithmic
transformation of the number of full-time employees to
measure firm size, because it is widely believed that large firms
can access key resources and are able to take on more
breakthrough innovation (Wagner and Hansen, 2005; Shefer
and Frenkel, 2005). In addition, market turbulence,
technological turbulence, and competitive intensity (adapted
from Citrin et al., 2007; Zhou et al., 2005; Han et al., 1998)
were considered control variables because of their effects on
innovation-related outcomes (Zhou et al., 2005; Atuahene-
Gima and Wei, 2011).
Sampling and data collection
Data were drawn from the top 1,000 Taiwanese firms in terms
of total revenue (China Credit Information Service, 2009). As
in similar studies of innovation and dynamic capabilities
(e.g. Morgan et al., 2009; Zhou et al., 2005; Narver et al.,
2004), senior managers were selected. We first called each
firm to identify a senior manager to be the key respondent.
We then screened the key respondent to ensure that he or she
possessed sufficient knowledge about the firms various
functional areas and was committed to cooperating with the
research project. Furthermore, to check whether each firm
had engaged in breakthrough innovations, we sent a copy of
our description of incrementally and radically new products/
services (Baker and Sinkula, 2007) to each firm, asking
whether the firm had introduced at least three successfully
and radically new products/services over the past five years
(e.g. De Brentani and Kleinschmidt, 2004).
Using Dillmans (2000) total design method for mail
surveys, we mailed questionnaires with preaddressed postage-
paid envelopes and a cover letter explaining the purpose of the
study. This procedure yielded 218 usable questionnaires,
representing a response rate of 22.9 percent. This response
rate is within the acceptable range for surveys of top managers
(Homburg et al., 1999; Menon et al., 1996). The firms
sampled represented six industries:
1 electronics (21.5 percent);
2 consumer products (20.5 percent);
3 information technologies (19.2 percent);
4 software (17.7 percent);
5 telecommunications (17.6 percent); and
6 other (3.5 percent).
The firms annual sales ranged from $US2.3m to $US8.3bn.
Finally, the number of firm employees ranged from 1,534 to
26,473, with 70.6 percent of units reporting more than 1,000
full-time employees.
Nonresponse bias
As nonrespondents have been found to resemble late
respondents (Armstrong and Overton, 1977), we assessed
nonresponse bias by comparing early and late respondents
(late responses were those received after a reminder mailing,
representing 30.8 percent of the total respondents) on all
items. Results of t tests showed no significant difference
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Volume 28 Number 5 2013 444 454
between the two groups, indicating no systematic differences
between early and late respondents.
Common method bias
Because the data for dependent and independent constructs
were measured using the same method, there is a potential for
common method bias (Podsakoff et al., 2003). If common
method bias exists, a confirmatory factor analysis containing
all constructs should produce a single method factor
(Podsakoff and Organ, 1986). The goodness-of-fit indices
(x2 =df 33:5, root mean square error of approximation
RMSEA 0:45, comparative fit index CFI 0:34,
nonnormed fit index NNFI 0:21, parsimony-adjusted
normal fit index PNFI 0:35) indicate a poor fit for the
single-factor model, which suggests that bias from common
method variance is unlikely.
Analyses and results
Validation of measures
To determine the factor structure, we conducted a principal
component analysis with Varimax rotation and used the
eigenvalues to identify the number of factors to retain.
Following the suggestions of Hair et al. (2006), an item was
removed if;
. the factor loading was less than 0.5;
.
the item loaded on two different factors at the same time;
or
.
the item did not load in the group to which it belonged.
The remaining items loaded on six factors as expected. Thus,
these results indicate the unidimensionality of the various
constructs. Reliability was then measured; the Cronbachs a
values for all measures are well above the threshold value of
0.7 that Nunnally (1978) recommended (see the Appendix).
Measurement models
We further evaluated measurement properties by running a
confirmatory factor analysis. Following similar studies (Baker
and Sinkula, 1999; Hult et al., 2004), we divided the variables
into related groups. Each item was set to load only on its
respective latent construct, and the latent constructs were
allowed to be correlated. The results indicate that the
measurement model of dynamic innovation capabilities fits
the data satisfactorily ( x2 =df 1:32, RMSEA 0:04,
CFI 0:92, NNFI 0:95, PNFI 0:83). The open
innovation activities measures are represented satisfactorily
(x2 =df 1:45, RMSEA 0:05, CFI 0:94, NNFI 0:95,
PNFI 0:85), and breakthrough innovation measures also fit
the data satisfactorily ( x2 =df 1:62, RMSEA 0:05,
CFI 0:92, NNFI 0:93, PNFI 0:86). The factor
loading of indicators is significant (p , 0:01) and well above
the recommended level of 0.45 (Joreskog and Sorbom, 1993).
Convergent and discriminant validity
We next examined construct convergent and discriminant
validity. Composite reliability is an indicator of shared
variance among the set of observed variables used as
indicators of a latent construct (Kandemir et al., 2006;
Fornell and Larcker, 1981). As shown in the Appendix, the
composite reliabilities of all constructs exceed the usual 0.60
benchmark (Bagozzi and Yi, 1988). The results provide the
necessary evidence that all constructs exhibit convergent
validity.
We then examined discriminant validity using a procedure
suggested by Fornell and Larcker (1981) that has been widely
 Breakthrough innovation: the roles of capabilities and activities
Colin C.J. Cheng and Ja-Shen Chen
used in other studies (e.g. Kandemir et al., 2006). We
computed the average variance extracted by the indicators
corresponding to each of the six factors and compared this
with the variance that each factor shared with the other
factors in the model. The results in Table I indicate that all
diagonal elements representing the square root of the average
variance extracted are greater than the highest shared variance
(the off-diagonal correlations).
We also examined discriminant validity using an alternative
approach recommended by Anderson and Gerbing (1988).
The x2 values for the unconstrained models, which allowed
each pair of constructs to covary freely, were always
significantly lower than those of the constrained models,
which constrained the estimated correlation of each pair of
estimated constructs to 1. In this study, the value of the
unconstrained model is significantly lower than that of the
constrained model in all cases (e.g. for the pair of constructs
dynamic innovation capabilities and breakthrough innovation,
the unconstrained model has a x2 of 34.9 and the constrained
model has a x2 of 114.3. The x2 difference (i.e. 79.4) is
significant at p , 0:001).
As the criteria for both approaches are satisfied, an
inference error of multicollinearity is unlikely (Grewal et al.,
2004). Accordingly, the measurement model fits the data
satisfactorily and exhibits unidimensionality and convergent
and discriminant validity.
Testing of the hypotheses
After the preliminary analyses we tested hypotheses using
hierarchical moderated regression analyses (Aiken and West,
1991). Hierarchical moderated regression analyses offer some
complementary benefits to structural equation modeling,
such as the ability to easily assess differences between nested
models and calibrate the relative impact of the interaction
between dynamic innovation capabilities and open innovation
activities in H2 (Hair et al., 2006). As shown in Table II, three
hierarchical regressions were estimated:
1 one including the control variables only;
2 one adding dynamic innovation capabilities, open
innovation activities, and dynamic innovation capabilities
squared; and
3 one adding the dynamic innovation capabilities open
innovation activities interaction and the dynamic
innovation capabilities squared open innovation
activities interaction.
To address possible multicollinearity, we mean-centered each
scale that constituted an interaction term and created the
interaction terms by multiplying the relevant mean-centered
scales (Aiken and West, 1991). The results show that the
largest variance inflation factor in any of hierarchical
Table I Basic descriptive statistics and correlation matrix
Variable Mean SD
1. Dynamic innovation capabilities 5.12 0.25
2. Open innovation activities 5.04 0.61
3. Breakthrough innovation 5.25 .62
4. Market turbulence 4.58 0.66
5. Technological turbulence 4.46 0.48
6. Competitive intensity 4.61 0.62
7. Firm size 4.39 .56
Notes: *p , 0:05; * *p , 0:01
Journal of Business & Industrial Marketing
Volume 28 Number 5 2013 444 454
regressions is 1.25 (below the cutoff of 10), indicating that
no multicollinearity concerns exist (Mason and Perreault,
1991).
The key to whether a relationship is U-shaped or inverted
U-shaped lies in the second derivative, which contains only
the coefficient for the squared term. A positive sign for the
coefficient of the squared term indicates a U-shaped
relationship, whereas a negative sign indicates an inverted
U-shaped relationship (Aiken and West, 1991).
As shown in Table II (Model 2), dynamic innovation
capabilities are positively related to breakthrough innovation
(b 0:32, p , 0:01), and the coefficient for dynamic
innovation capabilities squared is negative and significant
(b 20:19, p , 0:05). We further explored this curvilinear
relationship through a partial derivative of the regression
function. As shown in Figure 1, the results
(Y 20:19X 2 0:32X, where Y is breakthrough
innovation and X is dynamic innovation capabilities)
indicate that the regression function reaches its maximum
when dynamic innovation capabilities 0:84. This suggests
that for values less than 0.84, there is a positive relationship
between dynamic innovation capabilities and breakthrough
innovation. However, beyond that, the relationship turns
negative. Thus, there is evidence of an inverted U-shaped
relationship between dynamic innovation capabilities and
breakthrough innovation. H1 is supported.
We then assessed the model with the interaction variable of
open innovation activities. As Model 3 in Table II shows, the
interaction between open innovation activities and dynamic
innovation capabilities positively affects breakthrough
innovation (b 0:21, p , 0:05), and dynamic innovation
capabilities squared interacts is negatively related to
breakthrough innovation (b 20:18, p , 0:05). The results
indicate that open innovation activities strengthen the positive
effects of dynamic innovation capabilities on breakthrough
innovation.
To better understand the interaction effects, we performed
simple slope tests and plotted the relationships following
Aiken and West (1991). We first split open innovation
activities into high and low levels (standard deviation above/
below the mean). Then we estimated the effect of dynamic
innovation capabilities on breakthrough innovation for both
levels. Hypothetically speaking, when open innovation
activities are high, dynamic innovation capabilities have a
stronger positive effect on breakthrough innovation. The
results show that the effect of dynamic innovation capabilities
on breakthrough innovation is stronger when open innovation
activities are high (b 0:36, p , 0:01) than when they are low
(b 0:21, p , 0:05). The optimal level of dynamic innovation
capabilities for breakthrough innovation is moderate when
open innovation activities are low, whereas when open
1 2 3 4 5 6
0.77
0.34 * * 0.83
0.29 * * 0.31 * * 0.84
0.10 0.03 0.09 0.75
0.22 * * 0.19 * 0.25 * * 0.08 0.85
20.09 0.04 2 0.04 20.11 20.02 0.78
20.15 * 20.26 * * 2 0.05 0.15 * 0.02 0.14 *
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Colin C.J. Cheng and Ja-Shen Chen Volume 28 Number 5 2013 444 454

Table II Hierarchical moderated regression results (t values)

Breakthrough innovation
Model 1 Model 2 Model 3
Market turbulence 0.09 (1.04) 0.11 (1.44) 0.11 (1.15)
Technological turbulence 0.02 (0.10) 0.04 (0.41) 0.06 (0.83)
Competitive intensity 0.04 (0.35) 0.01 (0.11) 0.07 (0.97)
Firm size 0.11 (1.34) 0.08 (1.03) 0.03 (0.14)
Dynamic innovation capabilities (DIC) 0.32 * * (3.29) 0.44 * * * (5.41)
Open innovation activities (OIA) 0.20 * (2.32) 0.16 * (2.01)
DIC2 20.19 * (22.20) 20.15 * (2 1.83)
DIC 3 OIA 0.21 * (2.42)
DIC2 3 OIA 20.18 * (2 2.04)

Adjusted R2 0.34 0.39 0.45

F 5.42 * * * 5.61 * * * 5.84 * * *
Incremental R2 0.05 * * 0.06 * *
Notes: *p , 0:05; * *p , 0:01; * * *p , 0:001

Figure 1 Inverted U-shape of the curvilinear effects of dynamic innovation capabilities on

innovation activities are high, the optimal level shifts to a
higher point. These results suggest that H2 is supported.
Finally, the regression results indicate that the relationships
are not significantly affected by market turbulence,
technological turbulence, competitive intensity, or firm size.
Discussion
Drawing from the absorptive capacity perspective and
organizational inertia theory, we tested the impact of
dynamic innovation capabilities on breakthrough innovation
in light of the moderating role of open innovation activities.
We find that dynamic innovation capabilities have an inverted
U-shaped relationship with breakthrough innovation. We also
find that open innovation activities enhance the positive
relationship between dynamic innovation capabilities and
breakthrough innovation.
Our results contribute to the existing literature in the
following ways. Our findings provide a better understanding
breakthrough innovation. The previous literature highlights
the role of dynamic capabilities in new product success
because a firms dynamic capabilities to deal with rapid
changes in the environment are critical for product innovation
(e.g. Morgan et al., 2009; Verona and Ravasi, 2003; Danneels,
2004). Extending this logic, we find that dynamic innovation
capabilities have an inverted U-shape relationship with
breakthrough innovation. That is, at the beginning stage,
dynamic innovation capabilities relate to the highest degree of
breakthrough innovation, whereas in later stages, dynamic
innovation capabilities prevent breakthrough innovation (see
Figure 1). More specifically, the longer firms have dynamic
innovation capabilities, the more rooted firms may become in
existing environments such that they might overlook emerging
changes in the environment; moreover, the longer firms have
dynamic innovation capabilities, the more they are unable to
manage changes in the environment. Organizational inertia
further discourages breakthrough innovation. As a result, the
longer firms have dynamic innovation capabilities, the less
firms intend to develop breakthrough innovation.
These findings enrich the existing literature by
demonstrating the possible problems associated with
dynamic innovation capabilities: When firms hold onto
dynamic innovation capabilities longer, they may be less
able to sense changes in the environment. These findings not
only resolve the conflicting views about the relationship
between dynamic capabilities and innovation (e.g. Rosenkopf
and Nerkar, 2001) but also add to the existing literature that
indicates the failure of leading firms in the face of rapid
environmental change (Christensen, 2006).
Moreover, we enrich the existing literature by proposing
and confirming empirically that open innovation activities
help firms with effective coordination of dynamic innovation
capabilities. As noted by Eisenhardt and Martin (2000),
researchers need to identify dynamic capabilities that firms
can use to adapt, integrate, and reconfigure their resources
and competencies in response to changing environments.
Lavie (2006) further points out that there is a lack of
empirical evidence for dynamic capabilities. In particular,
Chesbrough (2010) suggests that open innovation activities
promote the open coordination of resources to support
various developments in innovation. Thus, we argue that open

449
 Breakthrough innovation: the roles of capabilities and activities
Colin C.J. Cheng and Ja-Shen Chen
innovation activities as an organizing principle may not
directly affect breakthrough innovation. In accordance with
our arguments, the present findings indicate that open
innovation activities enhance the positive effect of dynamic
innovation capabilities on breakthrough innovation. More
specifically, open innovation activities strengthen the positive
influence of dynamic innovation capabilities. Therefore, open
innovation activities are one type of enhancement to dynamic
innovation capabilities that enables firms to achieve
breakthrough innovation.
Our findings have some implications for managers. Firms
must be aware of the limitations of their existing dynamic
innovation capabilities in terms of developing breakthrough
innovation. For example, firms with strong dynamic
innovation capabilities should understand that although
their dynamic innovation capabilities increasingly enhance
their breakthrough innovation, they may trap them in
incremental innovation, causing them to focus on existing
customers and preventing them from exploring breakthrough
innovation. To overcome such obstacles, firms with strong
dynamic innovation capabilities could use open innovation
activities to coordinate their resources with third parties. Such
open innovation activities stimulate greater breakthrough
innovation, which may help firms avoid this disadvantage.
Our results should be interpreted in light of some of the
limitations of the study. First, our analysis of breakthrough
innovation is limited to the new product domain. Further
research should examine breakthrough innovation in other
domains (e.g. new services) and investigate the role of
dynamic innovation capabilities in those contexts. Second, all
of our measures relied on senior managers subjective
judgments. Objective data would be useful for validating our
hypotheses. Third, the results based on the perspectives of
senior managers. A potential limitation of this is possible bias
from collecting data from a single key informant. Although
measures were taken to reduce such bias, the use of multiple
respondents would have been preferable. Future research
could examine similar characteristics using data provided by
lower level managers. Fourth, the results of this study
represent a cross-section of senior manager perceptions.
However, the cross-sectional nature of this research into
breakthrough innovation allows us to analyze firms conduct
at only one specific point in time, not over a period of time.
Thus, further longitudinal evaluation may be needed. Finally,
while the response rate is less than we had hoped, we believe
this is thanks partly to the very sensitive nature of the
questions. Future research could attempt to obtain data on
the dependent and independent variables from multiple
sources.
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 Breakthrough innovation: the roles of capabilities and activities Journal of Business & Industrial Marketing
Colin C.J. Cheng and Ja-Shen Chen Volume 28 Number 5 2013 444 454

Appendix

Table AI The scale

Factor loading t-value

Dynamic innovation capabilities (a 5 0:92, CR 5 0:88, AVE 5 0:60)

Compared to your major competitors, how would you evaluate your firms dynamic innovation capabilities in the following areas? (1 5 much
worse; 7 5 much better)
Acquiring important new product information 0.71 9.26
Responding to new product changes 0.72 8.95
Mastering state-of-the-art new products 0.81 10.84
Developing a series of new products constantly 0.81 11.22
Identifying new product opportunities 0.82 11.34

Open innovation activities (a 5 0:90, CR 5 0:91, AVE 5 0:69) (1 5 strongly disagree; 7 5 strongly agree)
Our firm produces new products in open ways 0.78 10.07
Our firm brings together new participants 0.82 11.22
Our firm links participants to transactions in open ways 0.89 13.08
The richness (i.e. quality and depth) of our links with participants is open 0.86 12.29
Overall, our firm uses any possible external sources 0.80 10.88

Breakthroughinnovation (a 5 0:89, CR 5 0:93, AVE 5 0:70) (1 5 strongly disagree; 7 5 strongly agree)

Our new products are highly innovative, replacing inferior alternatives 0.87 12.29
Our new products incorporate radically new technological knowledge 0.84 12.01
Our new product concepts are difficult for mainstream customers to understand 0.83 11.64
Our new products involve high switching costs for mainstream customers 0.81 11.22
The use of our new products requires a major learning effort on the part of mainstream customers 0.82 11.34
It takes a long time for mainstream customers to understand our new products benefits 0.85 12.19

Market turbulence (a 5 0.90, CR 5 0:84, AVE 5 0:57) (1 5 none; 7 5 very much)

Extent of turbulence in the market 0.72 9.27
Frequent changes in customer preferences 0.79 10.78
Ability to reduce market uncertainty 0.76 10.22
Ability to respond to market opportunities 0.75 9.67

Technological turbulence (a 5 0:87, CR 5 0.89, AVE 5 0.73) (1 5 strongly disagree; 7 5 strongly agree)
The technology in this industry is changing rapidly 0.81 8.97
Technological changes provide big opportunities in our industry 0.89 13.58
A large number of new product ideas have been made through technological breakthroughs 0.86 11.13

Competitiveintensity (a 5 0:81, CR 5 0:83, AVE 5 0:61) (1 5 strongly disagree; 7 5 strongly agree)

There are too many similar products in the market 0.76 9.52
It is very difficult to differentiate our products 0.78 10.22
This market is too competitive 0.71 8.26
Notes: Overall model: x2 =df 1:43, RMSEA 0:04, CFI 0:94, NNFI 0:95, PNFI 0:85; RMSEA, root mean square error of approximation; CFI,
comparative fit index; NNFI, non-normed fit index; PNFI, parsimony-adjusted normal fit index; CR, composite reliability; AVE, average variance extracted

Polytechnic Institute, NY. His research interests include

About the authors
Colin C.J. Cheng is an Associate Professor of College of
Management in Yuan Ze University, Taiwan. He received his
PhD in Commerce from the University of Birmingham, UK.
His primary research interests include innovation and new
product/service development.
Ja-Shen Chen is currently a Professor and Dean of College
of Management in Yuan Ze University, Taiwan. He holds MS
and PhD both in Decision Sciences from Rensselaer
service innovation, customer relationship management, and e-
business management. He has published a number of research
articles including recent ones appearing in Information and
Management, Industrial and Marketing Management, Journal of
Service Research and OMEGA. He also actively associates with
industries as a consultant or a principal project investigator.
Ja-Shen Chen is the corresponding author and can be
contacted at: jchen@saturn.yzu.edu.tw

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Colin C.J. Cheng and Ja-Shen Chen
Executive summary and implications for
managers and executives
This summary has been provided to allow managers and executives
a rapid appreciation of the content of the article. Those with a
particular interest in the topic covered may then read the article in
toto to take advantage of the more comprehensive description of the
research undertaken and its results to get the full benefit of the
material present.
Innovation is one word that you can guarantee will be spoken
when anyone is talking about how companies can flourish,
particularly when those organizations might be very similar in
what products or services they supply, either to other
businesses or individual consumers. Standing still is not an
option no matter how good your product or service.
Constant innovation is key.
Recognizing this is the easy bit. Knowing how to achieve
that innovation is rather more complex, especially when you
have to grapple with the concepts of breakthrough innovation,
dynamic innovation, open innovation, incremental innovation
etc., and also because there are conflicting opinions about
how to mix and match such notions to achieve what your
organization needs to secure its innovative credentials.
To enhance breakthrough innovation, some say firms
should invest heavily in developing dynamic innovation
capabilities. Others suggest that firms can use open
innovation to produce radically new products. It is said that
dynamic innovation capabilities may foster greater
breakthrough innovation. When a firm builds its dynamic
innovation capabilities, its absorptive capacity increases, and
as a result it is encouraged to explore new information and
eventually develop breakthrough innovation. However, others
claim that dynamic innovation capabilities may discourage
breakthrough innovation. When firms accumulate more
experience and become more efficient at using their existing
knowledge, the self-reinforcing nature of learning produces
more incremental innovation rather than breakthrough
innovation.
There are equally conflicting views regarding open
innovation. Not all firms adopt open innovation activities
because they prefer to have more control over the source
breakthrough innovation and their relationships with
innovation partners. In addition, not all firms are successful
in adopting open innovation activities. For example, the direct
cost of acquiring technology from third parties is often greater
than the indirect value generated by having this technology.
Aiming to shed some light on the effect of dynamic
innovation capabilities on breakthrough innovation in the
light of the moderating role of open innovation, Colin C.J.
Cheng and Ja-Shen Chen warn that firms must be aware of
the limitations of their existing dynamic innovation
capabilities in terms of developing breakthrough innovation.
In Breakthrough innovation: The roles of dynamic
innovation capabilities and open innovation activities they
say: For example, firms with strong dynamic innovation
capabilities should understand that although their dynamic
innovation capabilities increasingly enhance their
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Journal of Business & Industrial Marketing
Volume 28 Number 5 2013 444 454
breakthrough innovation, they may trap them in incremental
innovation, causing them to focus on existing customers and
preventing them from exploring breakthrough innovation.
To overcome such obstacles, firms with strong dynamic
innovation capabilities could use open innovation activities to
coordinate their resources with third parties. Such open
innovation activities stimulate greater breakthrough
innovation, which may help firms avoid this disadvantage.
Dynamic innovation capabilities are operational capabilities
that include organizational learning processes and routines
rooted in innovation knowledge and that involve
transformation of a firms innovation knowledge resources
and routines. The authors describe them as those hard-to-
transfer and hard-to-imitate innovation capabilities that firms
use to develop, integrate, and reconfigure existing and new
resources and operational capabilities.
The degree of innovation can range from totally new to a
minor improvement. Depending on their newness,
innovations can be categorized as incremental or
breakthrough. Incremental innovations are minor changes in
technology, simple product improvements, or line extensions
that minimally improve existing performance. In contrast,
breakthrough innovations involve substantially new
technology, offer substantially greater customer benefits
relative to existing products, and demand considerable
changes to consumption or usage patterns. A breakthrough
innovation may imply a greater level of complexity and may
require a new knowledge base and innovation capabilities.
The study finds that dynamic innovation capabilities have
an inverted U-shape relationship with breakthrough
innovation. That is, at the beginning, dynamic innovation
capabilities relate to the highest degree of breakthrough
innovation, whereas in later stages they prevent breakthrough
innovation. More specifically, the longer firms have dynamic
innovation capabilities, the more rooted they may become in
existing environments such that they might overlook emerging
changes in the environment. Moreover, the longer firms have
dynamic innovation capabilities, the more they are unable to
manage changes in the environment. Organizational inertia
further discourages breakthrough innovation. As a result, the
longer firms have dynamic innovation capabilities, the less
firms intend to develop breakthrough innovation.
Cheng and Chen argue that open innovation activities as an
organizing principle may not directly affect breakthrough
innovation. Their findings indicate that open innovation
activities enhance the positive effect of dynamic innovation
capabilities on breakthrough innovation. More specifically,
open innovation activities strengthen the positive influence of
dynamic innovation capabilities. Therefore, open innovation
activities are one type of enhancement to dynamic innovation
capabilities that enable firms to achieve breakthrough
innovation.
(A precis of the article Breakthrough innovation: the roles of
dynamic innovation capabilities and open innovation activities.
Supplied by Marketing Consultants for Emerald.)
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