TOPIC : STRATEGIC FLEXIBILITY AND PERFORMANCE:

EFFECTS OF POTENTIAL AND REALIZED ABSORPTIVE

CAPACITY
SUBMITTED BY-
Name: Shriyansh Gupta
Roll no. : F018
SAP id: 81022100360
Course: BBA LLB (hons.)

SUBMITTED TO –
Dr. Karishma Desai
NMIMS KPMSOL
 ABSTRACT

New empirical studies that explain how business organisations could better
respond to emerging external conditions ought to be seen as essential in light of
the socio-economic damage caused by the COVID-19 pandemic. In light of this,
the purpose of this study is to investigate novel organisational antecedents of
strategic flexibility so as to assist in the achievement of this objective.
Researchers have recognised the effect that strategic flexibility has on a variety
of outcomes, including corporate success, while studying the function that
strategic flexibility plays in organisations. Previous research has also identified
a few major antecedents of strategic flexibility, thereby acknowledging the
importance of elements such as a particular configuration of internal resources,
internal processes, and organisational architecture, as well as organisational
culture. In previous researches, absorptive ability was characterised as an
organization's capacity to recognise value, assimilate, and utilise new
information signalling external events in the marketplace.

INTRODUCTION

In light of the fact that business model innovation (BMI) is a consistent driver
of value creation in the digital economy, the authors investigate the interplay
between absorptive capacity and strategic flexibility, as well as the influence
these factors have on BMI. We suggest that in order for businesses to expand
their strategic flexibility and innovate their business models, they need to
develop not just their realised absorptive capacity but also their potential
absorptive capacity (which refers to the acquisition and assimilation of
knowledge) (transformation and exploitation of knowledge). Realized
absorptive capacity, on the other hand, contributes to a rise in a company's
strategic flexibility. Potential absorptive capacity is responsible for both BMI
and strategic flexibility. According to the findings of our investigation of 282
Italian small and medium-sized businesses, there is also a connection between
realised absorptive capacity and BMI; however, this connection is only present
when environmental uncertainty is present. In recent years, a significant amount
of attention has been paid to the concept of absorptive capacity, primarily with
regard to the effect that the transfer of technology from industrialised to
developing countries has on the latter. On the other hand, there is a dearth of
theoretical investigation and directional advice on the utilisation of absorptive
capacity by companies in emerging economies (EEFs). The purpose of this
research is to investigate the mechanism and effect of absorptive capacity on
sustainable competitive advantage, paying particular attention to the roles that
strategic flexibility and innovation performance play in moderating those
relationships, as well as the roles that environmental uncertainty plays in
mediating those relationships. The study found that potential absorptive
capacity has a significant and positive effect on sustainable competitive
advantage, but realised absorptive capacity does not; as mediators, strategic
flexibility and innovation performance can influence the impact of absorptive
capacity on sustainable competitive advantage; as a moderator, environmental
uncertainty play a significant role in the relationship between absorptive
capacity and sustainable competitive advantage; and finally, the study found
that potential absorptive capacity has a significant and positive effect on
sustainable competitive advantage In addition to establishing a novel theoretical
basis for EEFs, the results prove the mechanism of absorptive capacity on
durable competitive advantages, expand the application areas of absorptive
capacity, and deepen the meaning of internationalisation theory.
 RESEARCH QUESTIONS

 Could absorptive capacity support the development of strategic

flexibility that leads to better business performance?

 What leads to hypothesis development?

 What are the author’s recommendations for future research and

practices?

RESEARCH OBJECTIVES

 To analyse the features of real and absorptive capacity.

 To form analysis of the relationships among the constructs, which

leads to the hypothesis development.

 To present recommendations for future research and practices.

RESEARCH METHODOLOGY

The study uses survey data collected from owners of several small businesses in
India and follows the linear regression method to establish the link between
strategic flexibility and firm performance. It hypothesizes that the strategic
flexibility of a small firm impacts entrepreneurial orientation, and subsequently
its performance, while absorptive capacity further enhances this relationship.
 HYPOTHESIS

H1 - There is a significant effect of potential and realized absorptive capacity on

strategic flexibility and performance

H0 - There is no significant effect of potential and realized absorptive capacity

on strategic flexibility and performance

HYPOTHESIS BASED LITERATURE REVIEW

Zahra and George (2002) suggested a high degree of interdependence

between absorptive capacity and strategic flexibility. Moreover, the authors
explained that the development of strategic flexibility may require strong
support from the absorptive capacity.

strategic flexibility should be recognised as a firm’s dynamic capabilities that

support a continuous process of updating organisational routines and practices
(Johnson et al., 2003).

Santos-Vijande et al. (2012) suggested the effect of a firm’s learning orientation

that may reduce internal barriers, thereby enabling an internal adjustment to
exogenous challenges.

Nowak (2020) pointed out a key association between PACAP and cognitive
diversity, and the relationship between RACAP and group cohesiveness.
 DISCUSSION

Past research has advocated for additional empirical investigations to find novel
antecedents of strategic flexibility and to clarify how strategic flexibility
operates within the "black box" of an organisation. In addition, new research
has uncovered the necessity to identify when (under what organisational
settings) strategic flexibility will result in improved corporate success
(Herhausen et al., 2021). In response to such requests, this work enhances
previous research by offering novel answers to these two problems. First, the
study contributes to the existing knowledge on the relationship between
strategic flexibility and performance. In his seminal study, Barney (1991)
argued that strategic flexibility is a crucial feature that enables a company to
preserve its competitive edge. Subsequent research has offered abundant
evidence that strategic flexibility should significantly impact performance in a
range of contexts (e.g., Hamlin et al., 2012; Nadkarni and Herrmann, 2010).
However, more recent research indicates that the impact of strategic flexibility
on performance may become small (or even negative) due to the higher
expenses involved with the creation of internal resource flexibility (Herhausen
et al., 2021). In turn, previous research prompted scientists to study this crucial
relationship further. Therefore, the present work complements to prior research
by elucidating when (under what organisational settings) strategic flexibility
may actually result in improved performance - this beneficial effect of
flexibility on performance may be contingent on degrees of absorptive capacity.
Management should also acknowledge that the creation of flexible internal
resources may be contingent on the high quality of human capital — the
knowledge, skills, and vital competences that managers and employees bring to
the table. Therefore, specific managerial actions should be suggested. The
development of a more flexible workforce may necessitate major modifications
to the employee selection procedure, which should emphasise the significance
of strategically crucial individual attributes (e.g., flexibility, openness to new
experience, leadership). Such a procedure could facilitate the influx of human
capital, which could have a good impact on both the level of absorptive ability
and strategic flexibility. In addition, the creation of flexible resources may
necessitate large investments in staff training programmes, which should
continuously convey the influx of new business-critical information pertinent to
the external market (e.g., technological developments, legal changes, or
emerging societal trends). Cumulatively, these managerial activities may have a
good influence on the degree of a company's absorptive capacity, hence
enhancing strategic flexibility. Despite the fact that this study identifies the new
individual and joint effects of prospective and realised absorptive capacity on
strategic flexibility and performance, our understanding of which organisational
resources could help the development of strategic flexibility is still inadequate.
Therefore, it is recommended that future empirical investigations concentrate on
identifying additional organisational elements that could further explain the
important dependency of a company's flexible resources. Future research could
examine the effects of group-level variables such as organisational processes
and policy (e.g., talent mobility, selection pro-cess, or rewards and incentives).
This research could assist build new boundary conditions that promote the
sharing of information and dissemination of knowledge across organisational
borders, hence aiding in the elucidation of the distinct roles played by PACAP,
RACAP, and strategic flexibility. In addition, earlier research on organisational
behaviour has identified the influence of numerous individual-level predictors
on group-level outcomes (e.g., the personality qualities of executives).
Therefore, future empirical studies in strategic management should study the
significance of these micro-level elements. Examining such individual-level
antecedents could elucidate the function of key persons in the context of
absorptive capacity and strategic flexibility. In addition, future empirical
research could examine the impact of external contextual factors (e.g., industry
effects, national culture, and government regulations) on the development of a
firm's strategic flexibility, enabling scholars to better explain why and how
strategic flexibility could improve business performance.

Therefore, a research design that includes multiple industries, as well as a

comparative international analysis in the future, could reveal new and valuable
insights regarding how environmental factors (such as industries, markets, and
country-level regulations) could have an effect on the proposed model.
Furthermore, the data that were used in this study were collected in the
healthcare industry in the United States. The healthcare industry in the United
States has been experiencing an unusually high degree of uncertainty and
turbulence, and these particular environmental conditions could have also
affected the generalizability of the study's findings across different industries. In
addition, it is important to note that the data that were utilised in the
examination of the hypothesised model were cross-sectional. As a result, there
is no way to establish a connection between the two events. The use of cross-
sectional data may also lead to the production of biassed inferences (Bowen and
Wiersema, 1999). As a result, the use of a longitudinal study design in the
future may be able to assist in more accurately estimating the causal influences
that exist between the various constructs that are incorporated into the proposed
model. One other significant drawback could be connected to CMB.
Nonetheless, in order to lessen the possible impact of this bias, the researchers
behind this study followed the recommended strategy that was outlined in
earlier studies (Podsakoff et al., 2003). Last but not least, a sample size that is
considered to be on the smaller side could be cited. Despite this, it is important
to acknowledge that the sample size requirements that were established by
previous research are satisfied by the current study (MacCallum et al., 1999;
Comfrey and Lee, 1992).
Future research and limitations

Although this study identifies the new individual and joint effects of potential
and realised absorptive capacity on strategic flexibility and performance,
nonetheless, our understanding of what specific organisational resources
could support the development of strategic flexibility is still lacking.
Consequently, it should be recommended that future empirical studies focus on
identifying other organisational factors that could further explain the critical
interdependence among a firm’s flexible resources. Future studies could
investigate the effects of group-level factors such as organisational
processes and policy (e.g., talent mobility, selection pro-cess, or rewards
and incentives). This research could help establish new boundary
conditions that facilitate information sharing and knowledge dissemination
across organisational boundaries, thereby helping clarify the individual
functions fulfilled by PACAP, RACAP, and strategic flexibility. Additionally,
past research on organisational behaviour has recognised the effects of
many individual-level predictors on group-level outcomes (e.g., executive’s
personality traits). Future empirical studies in strategic management should
therefore investigate the role of such micro-level factors. Examining such
individual-level antecedents could further clarify our understanding of the role
played by key individuals in the context of absorptive capacity and strategic
flexibility. Finally, further empirical studies could also consider the
examination of the impact of external contextual factors (e.g., industry
effects, national culture, governmental regulations) on the development of a
firm’s strategic flexibility, thus allowing scholars to better explain why and how
strategic flexibility could benefit business performance. As in the case of all
empirical studies, some critical research limitations should be also pointed
out. First, all empirical tests were done using the dataset that was
collected only in one industry and one country, which could affect the
generalisability of the findings. Therefore, a cross-industry research design, as
well as a comparative international analysis in the future could reveal new
valuable insights pertaining to how environmental factors (e.g., industry,
markets, country-level regulations) could impact the proposed model.
Furthermore, the data used in this study were collected in the healthcare
industry in the United States, this industry has been experiencing an unusually
high degree of uncertainty and turbulence — these specific environmental
conditions could have also affected the generalisability of the study’s
findings across industries. Moreover, it should be mentioned that the data used
to test the theorised model were cross-sectional. Therefore, no claims of
causality can be made. Cross-sectional data could also produce biased
inferences (Bowen and Wiersema, 1999), consequently, a longitudinal
study design in the future could help more accurately estimate causal influences
among the constructs included in the proposed model. Another import-ant
limitation could be related to CMB. However, to reduce the potential impact of
this bias, this study followed the recommended procedure described in
past research (Podsakoff et al., 2003). Finally, a relatively small sample
size could be also mentioned. However, it should be recognised that this study
meets the sample size requirement that was identified in prior literature
(MacCallum et al., 1999; Comfrey and Lee, 1992.

LIMITATIONS OF STUDY

The empirical findings of the study are limited to small firms from the
automotive service industry.
CONCLUSION

Since both strategic flexibility and absorptive capacity are acknowledged in the
existing body of research as being essential in the context of a company's
responsiveness to new exogenous developments, the purpose of this study is to
analyse the relationship between the two concepts. The purpose of this study is
to empirically evaluate a series of novel hypotheses that theorise the individual
and the joint effects of two dimensions of absorptive capacity — PACAP and
RACAP — on strategic flexibility in the context of business success. As a
result, this study makes a contribution to the work that has been done in the past
by presenting the new discoveries that follow. To begin, PACAP has the
potential to foster the growth of strategic flexibility by increasing a company's
capacity to recognise the significance of important exogenous events. This, in
turn, can help a company respond more effectively to changing market
conditions. Second, RACAP has the potential to positively reinforce the primary
effect that PACAP has on strategic flexibility. This is possible due to the fact
that RACAP makes it possible to identify appropriate alternative choices that a
company could use to reorganise its internal resources in response to such new
events. Last but not least, strategic flexibility can have a favourable impact on
company performance when it acts as a mediator between the direct influence of
absorptive capacity and the performance of the organisation. In this sense, the
findings of the study place a significant focus on how important it is to have
both strategic flexibility and absorptive ability in order to successfully navigate
unstable external markets.

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