Acceleration effects of innovation learning loops

Abstract

There is no doubt that organizational learning has an important role in forwarding firms towards innovative activities, however, the process of such learning needs focus and control to ensure maximum efficiency. In this paper, we present a general model for the accelerative process of organizational learning in the light of innovation outputs performances such as patents and new products. More specifically, we discuss the number and intensity of learning loops a firm can have between R&D, perceived value of innovation output and market itself. The presented model is tested by empirical evidences from a case study.

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Acceleration effects of innovation learning loops
Namazi. M.; Maleki. A. and M.A. Shafia
Abstract
There is no doubt that organizational learning has an important role in forwarding firms towards
innovative activities, however, the process of such learning needs focus and control to ensure
maximum efficiency. In this paper, we present a general model for the accelerative process of
organizational learning in the light of innovation outputs performances such as patents and new
products. More specifically, we discuss the number and intensity of learning loops a firm can have
between R&D, perceived value of innovation output and market itself. The presented model is
tested by empirical evidences from a case study.
Keywords: R&D, Market, Learning Loop, Organizational Learning.
1. Introduction
There ae so many factors affecting innovative activities within a firm, where organizational
learning have been a crucially important factor in management research, defining the role of learning
as an innovation enhancing factor. Effective organizational learning needs high absorptive capacity,
which has two key essentials: prior knowledge base and intensity of effort. While prior knowledge
base is extremely related to individual units of knowledge available within the organization, the
intensity of effort could have many dimensions hence, firms can establish numerous processes, tools
and techniques to elevate it. For example, a research by Kim highlighted the importance of crisis
building in enhancing the intensity of efforts [1]. Organizational learning, occurs at two stages: the
individual and organizational. While the major actors in the course of organizational learning are
individuals within the firm, organizational learning is not, simply the sum of individual learnings [2]
reasonably, it is the process by which knowledge is shaped, is spread across the organization, is
interconnected among organization associates, has general acceptance in the community, and is
combined into the strategy and management of the organization. In the perspective of innovation,
questions rise about the process of organizational learning:What a firm could learn from where to
enhance its innovative activities?
If we imagine an automobile as a metaphor for a firm, prior knowledge acts as an initial velocity
when the firm steps into the market. Then, firms use tangible of intangible resources to fuel their
engines as resource based view of the organization confirms. [1] Having this metaphor in mid, we
discuss about the acceleration of the firm rather than its speed. In this paper we argue that learning
from the output values of firm’s innovative activities, both to the firm itself and to customers, in
addition to market and its reaction to these values, would greatly accelerate the growth of absorptive
capacity of the firm. We also provide a model for the above mentioned process. Stating acceleration
means that the above process would feed a positive feedback to learning mechanism that speedup the
whole process.
The presented model will empirically analyzed with the case of Informatics Services Corporation
(hereafter ISC) in technology development, the most dynamic information technology company in Iran
so far [3],[4]. ISC serves and supports 24 of the largest banks in the country regarding some or all of
services including core banking, card system, VSAT (Very Small Aperture Terminal) network,
National Payment Systems and hardware. It also cooperates with other large network providers like
telecommunication and broadcasting organizations. The case of technology development ISC network
department is the focus of our analysis. In quantitative terms, ISC established a satellite VSAT
network in 1993 by installing 1400 VSAT terminal however, international sanctions prohibited ISC
form further development. To this end, ISC activated its network R&D and developed its own terminal

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enabling to grow its private VSAT network to 8000 nodes by 2010. ISC raises this question that how it
acquired technological capability to transforms itself to the largest VSAT operator outside North
America by 2010 [5]. We will argue that this achievement was greatly dependent to the focus of R&D
team to learn from values they created both for ISC and customers in addition to the market reactions
following the presented process mode.
2. Theoretical background
The focus of this paper is to present a mental model to identify learning loops that accelerate the
firm’s innovativeness. So, we first present a review of literature to indicate the kind and relevance
learning in our research.
Dual role of R&D: First, we highlight the role of R&D in boosting the absorptive capacity of a
firm. Cohen and Leventhal defined absorptive capacity has been defined as “A firm's ability to
recognize the value of new information, assimilate it, and apply it to commercial ends”. They also
presented a second role for R&D other than research and development, which is expected to end up to
new products and services, as to leverage the absorptive capacity of the firm [6]. Zahra and George
had on other perspective of the duality of R&D role. [7] They divided absorptive capacity into
potential absorptive capacity and realized absorptive capacity. They stated “Potential absorptive
capacity makes the firm receptive to acquiring and assimilating external knowledge” and realized
absorptive capacity as “a firm’s capability to develop and refine the routines that facilitate combining
existing knowledge and the newly acquired and assimilated knowledge.”
Learning: All of the above conceptualizations have this idea in common: A firm shall learn from
outside world and compile the acquired knowledge along with internal knowledge into some value.
But, what is this learning all about? Who learns from whom? Organizational learning, happen
frequently within an organization and could be considered as a process of improvement, leading to
increase efficiency accuracy, profits, to name a few exemplars. This learning occurs in units of
learning namely, individual, team, organizational, and inter-organizational. As the smallest unit of
learning, individuals learn new skills or ideas and there productivity could increase as a result of
gaining expertise. Each individual could decide whether to share his knowledge to others or not. If this
sharing happens, group learning occurs [8]. Organizational learning is the way an organization creates
and manages knowledge and the goal is to adapt with ever changing environment [9]. Similarly, inter-
organization learning is the way partners, alliances and stakeholders collaborate and share knowledge
and learn from each other [10].
Dynamic Capability: Teece and Pisano defined dynamic capability as “The firm’s ability to
integrate, build, and reconfigure internal and external competences to address rapidly changing
environments.” This is achieved by learning, acquiring new assets, transformation of exiting assets or
co-specialization [11]. The modern framework of dynamic capability that most successful firms
follow, known as best practice, is to orchestrate and reconfigure externally sources competencies.
Apple’s AppStore or Google’s Android are fruits of following such an open innovation mindsets.
Zeroing in on the dual role of R&D, as an innovation actor within the organization, we can
observe the dynamic role of learning in creating value, as the first step towards gaining dynamic
capabilities. This is discussed in following sections.
2. Framework for Knowledge production
In 1984 Ariel Pakes and Ziv Grilich introduced a framework to study knowledge producing
activities in American industry initiated by National Bureau of Economic Research [12]. This was a
part of an extensive empirical work in the area of technology change and invention and innovation
which contained interpretation of measures of advances in knowledge. This framework concentrated
particularly on patents and the evaluation of its usefulness and value for the firm as shown in Error!
Reference source not found..

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Figure 1: Pake-Grilich model
In Error! Reference source not found. k is produced by a knowledge production function
(KPF) which translates past research expenditures, R, and a disturbance term, U, into inventions. The
disturbance term reflects the combined effect of other non-formal R&D inputs and the inherent
randomness in the production of inventions. Patents, P, are an imperfect indicator of the number of
new inventions, with V are presenting the noise in the relationship between P and K. Itis clear from the
figure that the patent equation, the equation connecting patents to past research expenditures,
combines the proper ties of both the KPF and the indicator function relating to P and K.
24 years later, a team of Japanese scholars developed modified this model to better describe the
importance of the number of patents as a proxy to measure innovation input [13]. They found that
patents can be generated by R&D and other inventive processes, and they are used for firm business
activities captured by performance variables such as productivity and market value. Error! Reference
source not found. displays elaborated sketch of Pake-Grilich model.
Figure 2 :Pake-Grilich model elaborated
Actually, this model was too simple to illustrate the full nature of innovative activities. For
example, difference between research and development [14] however, we just focus on the general
flow of knowledge between firm’s innovative activity, output and the market.
3. The Model
In 2012 Ignatius at al. ran a detailed survey over 105 multinational firms and examined five
dimensions of technological learning, namely knowledge acquisition, information distribution,
information interpretation and organizational memory and only the latter did not possess a direct
relationship with any new product development dimension [15]. This was already stated in a study
by Chang et al in 2006. They presented a model that indicated that the incumbent enjoys an

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advantage of learning from production experiences and receives monopoly profit from the
post-innovation products in the R&D competition [16]. Hence we can conclude that R&D
learns from the outcomes of new products it had developed. Upon this finding, we can
imagine a knowledge flow from product output as an innovation input as depicted in right side
of Figure 1.
On the other hand, the output of innovation would be some productivity to raise the
firm’s value. It could be some internal enhancement or an external output usually in the form
of new product or service. O’Connor suggested that market could learn from such innovation
and this learning could even lead to some radical innovation on return [17]. The research of
Storbacka and Nenonen approve this idea as they indicated how learning with market could
facilitate market innovation for each firm [18]. Therefore, market also simply learns from the
outputs of firm’s innovation. So, we can now draw another knowledge flow from the output
of a firm’s innovative activities to the market as shown in the left side of Figure 1.
Figure 1: Missing knowlwdge flows in Pake-Grilich model
We can modify the above model as there are two lines if information flow from
innovation output to R&D and market and three learning loops show up as depicted in Error!
Reference source not found.. In this figure, three learning loops are named as R&D learning
loop, Market learning loop and R&D-market Learning loop. The suffix loop is here to
emphasis on two way flow of knowledge that circulates through parties. Following sections
suggest that these are positive-feedback loops with accelerating effect.

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Figure 4: Learning loops
Two of the above learning loops are open to the firm as market learning behavior cannot
be controlled by firm and heavily depends on market structure, readiness and other factors.
The open loops are market and R&D-market learning loops while R&D loop itself is
completely closed and the market learning loop is out of firm’s scope when patent and new
products are released. The key point is how a firm can take advantage of these learning loops?
The more a firm’s R&D capabilities of learning, the more probability of future innovations by
this firm. So, measuring learning capabilities within R&D learning loops indicate the potential
of a firm to innovate even more [19]. So, rather than talking about the speed/rate of
innovation, we are talking about the acceleration of a firm’s innovative activities.
R&D learning loop: Knowledge and pioneering advantages of innovative activities lead to
enhance productivity and value for a firm. As described before, innovation actors in the firm such as
R&D, would observe the result of their activities in the form of value and productivity hence, they
could adjust further activities to gain more. In other words, innovation actors can do more by gaining
feedback from the results of their actions. This is a positive feedback loop which can be controlled by
firm. Knowledge management skills and techniques can enhance the speed of knowledge flow within
this loop and subsequently increase the acceleration effect of R&D learning loop.
Market learning loop: Market consists of many stakeholders collaborating with each other. End
users, rival companies, distributors and suppliers an even society are all parts of this environment. A
firm generally can decide whether to disclose its innovation output to the outside world or not. For
example, it may or may not submit a patent application for a specific invention. But whatever the firm
decides, information may leak legally of illegally. For example, how come a firm could hide its
organizational structure from outside word? How long could a firm can keep corporate secrets? So,
there are always chances of deliberate or undeliberate flow of information and knowledge to the
market. In this case market can learn and react to innovation and firms have little or no control over it.
A research in 2000 also confirms it by indicating that the inter-firm technology spillover increases the
innovation capacity within the industry [20].

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R&D-market Learning loop: Innovative actors of a firm such as R&D cloud benefit from the flow
of data from economic and business factors around them. This could be achieved by monitoring the
effect of their innovation over market and predict where the market could move. As described before,
market learns from direct or indirect impacts of innovative activities of firms and react to them. This is
up to corporate innovators to obtain information and knowledge from market and react correctly.
Having such an intelligence would accelerate the firm’s innovative activities as it could keep the
advantage of being the first mover.
3. Empirical evidence
Informatics Services Corporation - ISC - is the leading Iranian IT company focused on banking
automation. When ISC first began to empower the largest Iranian bank, Melli, in 1993, Iran had no
reliable telecommunication network hence ISC decided to deploy its own private satellite network to
provide connectivity to thousands of bank branches nationwide. However, US sanctions imposed right
after this decision put barriers to transfer satellite communication technology to Iran. This led ISC to
establish an R&D center for in-house development of this technology. The firs product of ISC R&D
center was VSAT terminal named PES7000 which was fully compatible with US equipment already
imported before sanctions. Thousands of PES7000 terminals were then deployed in a vast
geographical area.
R&D team did track the value their product had created both for the firm and for the customer:
business continuity and reliable revenue for the firm and seamless connectivity for customer nicely
integrated with core banking services. Combining information gathered from ISC marketing
department and customer technical staff, R&D team realized that there are branches that really need
even higher connection availability but cannot afford to have a second VSAT terminal. This led R&D
team to design a new network equipment named ADBS to transfer banking transactions from a branch
to another VSAT equipped branch through phone line. This was really a breakthrough when new
technologies like DSL had not even come to standards, let alone commercial products. With no
feedback from the values created, R&D team could only have incremental innovations over PES7000
and no new product would have innovated. This case is an instance of R&D learning loop.
Keeping eye on technology, market and economy, landline DSL connectivity signaled to be
successful while Iranian currency – Rial - was losing weight against dollar year by year. Hence
satellite bandwidth prices started to become a burden over customer while rival technologies have
prosperous outlook. Again R&D team began to innovate another device named VNB to enable
customer, benefit both from satellite and landline connectivity at the same time and manage expenses
at will. This is a case of R&D-Market learning loop.
With the rise of VNB and security features it offered in parallel with integrity of satellite and
landline communication, Iranian network device manufacturers took the idea of combining security
and availability features and poured new devices into the market with similar concepts. In this period
ISC R&D team was handed many devices from customers asking for evaluation. This is a Market
learning loop. Actually, the connectivity market in Iran was not unaware of this innovation and did its
best including using satellite communication as backhaul to upgrade the service availability to
compete with satellite communication, tempting customers to let go of expensive VSAT satellite
communication. Again we can consider it as Market learning loop.
Thanks to VNB, ISC was ahead of the market and had time to react to the market. R&D team
observed that landline providers are rapidly improving their service hence satellite expenses was
gaining attention from bank IT managers. Current satellite technology could not respond to this
problem and ISC had already invested millions of dollars over this technology. R&D team again
reacted and developed a new concept of satellite device, AryaSat, ten times faster with one third of
bandwidth usage compared to PES7000, while doing all functionalities of VNB. The new solution was
so impactful and perfect that ISC could even offer banks to replace their existing equipment with
AryaSat for free and they just had to amend their contract. This would be concerned as R&D-Market
learning loop.

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Combining satellite and landline connectivity into one device did offer great values to ISC and its
customers. Network administrators at ISC could configure and manage a single device per branch
instead of two and maintenance costs dropped dramatically. On the other hand, customers enjoyed an
even better service with no change at price. However, this new concept had its own pitfall: Customer
had to install a full-fledged device for every branch without any concern on the importance of that
branch. R&D team was aware of values and burdens of AryaSat over customers and knew that this
would be an issue in the future as banking industry trends indicate that the number of bank branches
would decrease along penetration of internet to PCs and handheld devices while the importance of
branches would dramatically vary. Once more, they invented a new concept for network devices
named AryaGate. This device gave all functionalities of AryaSat along with many other network
functionalities commonly used in most branches like switches, firewalls, etc. But the main novelty
within AryaGate was modularity that enabled customers to select whatever they want for a branch
both in software and hardware level. This one-stop flexible platform was so nicely coupled with
customers’ business trend that they could hardly refuse to have it This would be an R&D learning
loop
5. Discussion and Conclusion
ISC has transformed itself from a sole technology user to technology owner by pursuing a
strategy for maximum independence in developing technological capability. In advancement from
being just an importer and at most, a user of technology to a technology developer, ISC identified
three learning loops and integrated them into its organization learning process. ISC was aware that
market would learn from the output of its innovative activities and react afterwards. In addition, ISC
used the best of concurrently running, positive feedback, three learning loops between the firm’s
innovative actors, namely R&D and market. It enabled ISC to become the largest VSAT provider in a
period of 7 years, from 1993 to 2010. The case of ISC indicated the ability of firm to learn from
outcomes and impacts of its own innovation over market and the value it created for the firm, impacts
the acceleration of innovative activities within the firm whereby three learning loops forms when a
firm introduces an innovation. These loops run concurrently and are in interaction together.
Questions arise that if the presented model would apply for other firms or not and also if there are
more loops or actors to be identified. Considering that we have focused on acceleration of innovative
activities, factors and players in this model are also selected in this regards. Other research in 1998 by
Kim [1] indicated many other factors such as government and technology as inputs to organizational
learning. Alothough, no positive feedback loops are proposed by Kim, expeditious learning spiral
which is placed in the heart of Kim’s model has such an indication as having focus on Hyundai Motors
Company case presented in Kim’s research, specifies the presence and effects of such learning loops.
The existence of other positive feedback learning loops and actors is open for further researches.
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