Simple rules, complex routines and dynamic capabilities

Even though complex routines and simple rules might be important for exploratory innovation, recent developments in research (Teece, 2012; Di Stefano et al., 2014;

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Sonenshein, 2016) have necessitated a debate regarding whether such a relationship is mediated by dynamic capabilities or is a direct one. Whereas dynamic capabilities scholars do not deny that complex routines and simple rules may matter for exploratory innovation (Helfat and Peteraf, 2009; Teece et al., 2016), their emphasis is somewhat different.

Dynamic capabilities scholars emphasize that well-functioning dynamic capabilities are valuable assets for enhancing competitiveness (Helfat et al., 2007; Teece, 2007) and distinguish these from routines. Helfat and Peteraf (2009) argue that dynamic capabilities utilize routines, but that it would be hard to claim that the two are the same, as routines would lack intent. Also, Teece (2012) argues that dynamic capabilities are more than just a collection of routines or guiding principles, as routines would not have a strategic component, hinting at the lack of purposeful asset-orchestrating acts.

Recently, Di Stefano et al. (2014) described dynamic capabilities as aligned bundles of complex routines and simple rules, which were argued to together drive key organizational activities. The aligning of these complex routines and simple rules is what Augier and Teece (2009) describe as “orchestrating necessary responses to technological and market changes”. For example, an organization might face severe competition and be in need of strategic action to enhance its competitive position. By means of simple rules for playing into visible actions of competitors (Greve, 1995), an organization might sense valuable opportunities for geographical expansion, for instance (Bingham and Eisenhardt, 2011; 2014). Complex routines for tapping into internal R&D sources, and for investing in and commercializing specific products, could enable the organization to seize these opportunities and reconfigure itself accordingly (Teece, 2007). A manager then could act as an orchestrator of both types of routines. Without such orchestration, simple rules and complex routines would not be able to transform an organization.

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Table 4.1: Research streams within the broader routines literature

Although complex routines can, as explained, also bring about changes in how an organization operates without being part of dynamic capabilities (e.g. Rerup and Feldman, 2011), by producing variations of themselves (Pentland et al., 2011) and through endogenous change (Berente et al., 2016), the purpose of these routines in such cases is not to produce variations of themselves or to change themselves. Nor is it to drive exploratory innovation.

Rather, complex routines serve their own specific functions, such as governing budgeting or hiring processes (Feldman and Pentland, 2003). Change that originates from the recurrence of complex routines is thus an unintended consequence of the enactment of those routines, which arises from the mindful actions of those who are carrying out the routines and act upon the imperfections that they encounter (Feldman, 2000). The change therefore lacks

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intent at the organizational level (Helfat and Peteraf, 2009) and is non-strategic (Teece, 2012), even though it is mindful and might be intentional at the individual level. Similarly, simple rules might steer managerial improvisation (Bingham and Eisenhardt, 2014) and lead to ‘familiar novelty’ (Sonenshein, 2016), for example, but their goal is not to produce exploratory innovations. Rather, it is to support managers in making decisions that require a greater level of improvisation, but these decisions may have nothing to do with exploratory innovation and thus might also lack the purpose of producing exploratory innovations in particular.

The absence of purpose in the change that might stem from complex routines and simple rules is an important point, as scholars have argued that change is different from innovation in that innovation requires purpose whereas change does not (Damanpour, 1991).

As Woodman et al. (1993) describe, ‘although organizational change can include innovation, much of organizational change is not innovation’. In this understanding, for routines to be direct antecedents of exploratory innovation, organizations would need purposeful exploratory innovation routines and rules However, Teece (2012) argues that change is difficult, if not impossible, to routinize intentionally, and indicates that many strategic actions and transformations are non-routine. At the same time, scholars suggest that dynamic capabilities are purposeful and are argued to be particularly important for innovation (Helfat et al., 2007; Helfat and Peteraf, 2009; Teece, 2012; Teece et al., 2016).

We argue that complex routines and simple rules are important for exploratory innovation by being utilized by dynamic capabilities (Helfat and Peteraf, 2009). In line with Di Stefano et al., (2014), we contend that dynamic capabilities add purpose to simple rules in the sense that they are directed towards facilitating decision-making with regard to exploratory innovations. Similarly, we argue that dynamic capabilities utilize complex routines by directing them towards the enabling of desired innovations. When effectively deployed[2], dynamic capabilities will ensure that an organization is able to sense new knowledge, seize the opportunities that come out of the sensing process and finally reconfigure its organizational assets in accordance with the opportunity that was seized. This way, dynamic capabilities can pave the way for the development of new products and services as they enable breaking free from past paths and processes (Teece, 2007). The

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composition of the routines that are utilized by dynamic capabilities will determine the way in which the deployment of dynamic capabilities will manifest itself (Di Stefano et al., 2014;

Eisenhardt and Martin, 2000). While complex routines will provide the reliability and detail that some aspects of dynamic capability deployment require, simple rules will facilitate the improvisation of managers, through which they can utilize past knowledge to develop new products and services (Bingham and Eisenhardt, 2014; Di Stefano et al., 2014; Eisenhardt and Martin, 2000). In the end, even though complex routines and simple rules are both important for exploratory innovation, we argue that their importance is contingent on being part of an overarching dynamic capability that utilizes them for exploratory innovations.

Hypothesis 2: The more an organization deploys dynamic capabilities, the higher the level of exploratory innovation

Hypothesis 3a: The positive relationship between the extent to which an organization relies on complex routines and its level of exploratory innovation is mediated by the deployment of dynamic capabilities within the firm.

Hypothesis 3b: The positive relationship between the extent to which an organization relies on simple routines and its level of exploratory innovation is mediated by the deployment of dynamic capabilities within the firm.

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Figure 4.1: Theoretical Framework