Absorptive capacity is a method for organizations to process new information and apply it to their benefit. It was created to encourage personalized R&D and has since been broadened to include realized and potential absorptive capacity, as well as acquisition, assimilation, transformation, and exploitation. However, its usefulness is limited by the ability and resourcefulness of employees.
Absorptive capacity is a method by which an organization processes new information and translates it to its own business benefit. This includes determining what new information is useful and then applying it to the organization so that it produces tangible results. The term also refers to the amount of new information that an organization is able to manage productively.
The concept was created by professors Wesley Cohen and Daniel Levinthal in 1990. One of its main objectives was to encourage organizations to improve their perspectives by pursuing their own personalized research and development (R&D) rather than acquiring more general information. In addition to acquiring information from outside the organization, the method requires that the knowledge already possessed by the entity be integrated into any action inspired by new data.
Absorptive capacity should be an ongoing process for any organization that adopts your ideas. It requires constant engagement with changes in the economy, specific markets, and competitors’ businesses. The process also involves integrating information that is not currently part of an organization’s operations so that it is relevant and useful.
In the years since its introduction, the definition of absorptive capacity has broadened to take into account real-world applications. One of the most widely adopted adjustments was created in 2002, when Professors Shaker Zahra and Gerry George added the idea that the method was realistically composed of two concepts: realized absorptive capacity (RACAP) and potential absorptive capacity (PACAP). This new point of view makes it easier to assess what an organization has done with new information and to strategize how to use new data more effectively in the future.
Zahra and George’s theory also considered four more elements of absorptive capacity in addition to the two broad categories. They are acquisition, assimilation, transformation and exploitation. The creation of these categories improved the business evaluation process at key stages of the process. Zahra and George also provided categories to which specific benchmarks could be assigned to facilitate troubleshooting of weaknesses in an organization’s absorptive capacity program.
While absorptive capacity can help an organization use information more effectively, it is also inherently limited. Its usefulness depends on the ability and resourcefulness of the employees using the method. While the results are more tailored to specific needs, employees can only have a limited view of operations as a whole.
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