Absorptive Capacity and Enterprise Modular Reconstruction ——Perspectives Based on Open Innovation Ying-chun Song Business School of Shandong University No.180 West Culture Road Weihai, 264209,China (songyingchun@sdu.edu.cn) Abstract-Organizational structure is a key factor which determine absorptive capacity and thus influence open innovation, the late studies ignored this. Open innovation requires enterprises to reconstruct the traditional hierarchy organization, achieve the knowledge and decision-making powers match, create a good organizational base and enhance the absorption capacity. Enterprises modular reconstruction whose main content is competency element modular and organizational structure modular, not only can give full play to core competencies and absorptive capacity embedded in each module, effectively acquire, accumulate, absorb and integrate the internal and external innovative resources, and can form a modular innovation networks, and then become a effective platform for open innovation to enhance its efficient. Keywords-Absorptive Capacity; Open Organization Reconstruction; Modularity. I. Innovation; INTRODUCTION Organizational absorptive capacity is one of the research focuses in the study of open innovation. However, the existing studies have not seen the organizational foundation change brought about by the open innovation ignored enterprises organizational change function to their absorptive capacity. Based on the Elaboration which the absorptive capacity is the key factor the to the open innovation success. This paper claims that reform organization to match the knowledge and decision-making powers is the basic requirement to enhance the absorptive capacity. On this basis, this paper proposes some issues such as the organization modular reconstruction to achieve the knowledge and the decision-making power match, enhancing the absorptive capacity and improving the innovation efficiency. II. ABSORPTIVE CAPACITY: THE KEY TO THE OPEN INNOVATION SUCESS In a closed innovation model[1], the enterprises obtain technical advantages by independent research and development, build a rigorous technical barriers, and thus become a monopoly on the market. This innovative model emphasis too much on self research and development, which on one hand, leads the enterprises that cannot afford the R&D investment to losing its competitive advantage for barriers of new technology; on the other hand, a lot of technology cannot turn into the enterprises core profit because of over-exploitation or separation from market demand. In the open innovation model, enterprises treat external resources as important as internal resources, integrate resources in a larger range, constitute a new innovative ecosystem with their business environment, and greatly promote the innovation activities: (a) enterprises can introduce external new ideas to increase the innovation basic material; (b)outputting the creativity and innovation results is a good way to increase financial returns and keep creative capacities; (c)commercial development-oriented open innovation provide an efficient way for the company to measure the true value of innovation; (d) by constantly input and output creativity, enterprises identify their core competencies and make full use of their competitive advantage. The core idea of open innovation is to build a wide and solid association with both external and internal knowledge nodes and make full use of knowledge resources. Absorptive capacity of enterprises is an important factor to achieve this goal. Absorptive capacity is a dynamic capability that how the enterprises learn and use of external knowledge; absorptive capacity is a dynamic, continuous feedback process, including five aspects: value cognition, knowledge acquisition, digestion, integration, and knowledge utilization. The stronger is the absorptive capacity, the better for enterprises is to utilize external resources and conduct open innovation. Further, open innovation improves the absorptive capacity. Therefore, enhancing absorptive capacity becomes the key to the implementation of the open innovation. In addition to the accumulation of relative knowledge, the effort to develop absorptive capacity, the environment and other factors, the conditions of their own organizational structure and its position in the network organization are important factors to determine the absorptive capacity of enterprises. First, the basic structure of the enterprises whose main content is enterprises organization form can foster the contribution to the efficiency on the whole enterprise scale, promote collaboration between different functions in the pursuit of efficiency[2]. Second, if a business unit occupies a central position in enterprises internal business network, it is easier to contact and obtain the knowledge of other business units, and then its level of absorptive capacity is higher[3]. Finally, different alliance structures have different effect to the enterprises absorptive capacity: the horizontal complementary structure mainly helps to expand the range of knowledge, the vertical structure mainly helps to improve the depth of knowledge[4] . III. THE MATCH OF KNOWLEDGE AND DECISIION-MAKING POWER: ORGANIZATION BASIS TO ENHANCE ABSORPTIVE CAPACITY The traditional hierarchical organization is the product of the industrial revolution. In the knowledge economy age, the knowledge accumulation and innovation is the competition focus, the knowledge replace capital and energy become the primary wealth-creating assets, just as capital and energy replacing land and labor three hundred years ago. The hierarchical organization born in the industrial age is difficult to adapt to the requirements of innovation and competition in the knowledge economy age. First, knowledge is expressed as personal knowledge, especially for individuals, the majority of knowledge come into being under specific time and specific situation, has significant dependence on the situation. The situation is difficult to reproduce, so knowledge with dependence of the situation is difficult for others to understand and master[5].The effective flow of knowledge is difficult to achieve through commands, especially when the organization needs to acquire knowledge from the employees or groups at the forefront of the market to obtain advantages, the traditional hierarchical system is more powerless. Second, with the increasing of tacit knowledge, knowledge is more difficult to transfer, it is difficult to separate knowledge from its holders, while the knowledge workers scatter in various departments in the organization, these factors have led to the problem that the hierarchical organization of knowledge and power does not match even worse. There are two options to solve the mismatch of the knowledge and decision power. First is decentralization strategy, that is transferring decision-making power to the people who have knowledge. If we do it, we will face agency cost arising from the principal-agent relationship. Second is centralized strategy, that is transferring knowledge to the people with decision-making power, so we will face information cost caused by phenomena such as lack of information, poor information, information overloading and information delaying. Generally speaking, with the increasing degree of centralization, information cost increase while the agency cost decrease; with the increasing degree of decentralization, information cost decrease while agency cost increase. Information cost and agency cost constitute the total cost of organization. According to such as the size of organization, information technology, the speed of environmental changing, government regulations and control technology and other factors, enterprises should measure information cost and agency cost on the trade-off, and re-design the organizational structure [6]. In the knowledge economy and information economy era, decentralization strategy is more effective than centralized strategy. More companies choose to decentralize the traditional hierarchical system. In traditional hierarchical enterprises, the internal linear command limits the execution autonomy, meticulous division leads to workers having a narrow range of knowledge, the formal relationship limits communication between members. In order to facilitate and promote organizational learning and knowledge innovation, enterprise must transform the existing hierarchical organization with network structure, making grass-roots level organization into a node with considerable autonomy in the network[7]. Under the mission, these nodes independently choose the method of organizing activities and maintain all forms of contact, competition and cooperation with other nodes inside and outside the organization. In this network organization, levels support the orderly activities of organization, while the network promotes members of every node in the network on individual learning and sharing their knowledge that has been formed. To transform traditional hierarchical system with network structure requires enterprises to redefine their mission, make strategy, regard internal and external resources as the equality in its growth and development, carefully analyze the core advantage of each department and its contribution to the whole organization performance, redefine the roles, responsibilities, rights, and their mutual communication and coordination methods between each department. IV. ENTERPRISES MODULAR RECONSRUCTION: STRATEGY TO ENHANCE ABSORPTIVE CAPACITY A valuable organizational structure not only reduces and solves the interdependence problems, but also provide the chance for other organizations to contribute their professional knowledge for the system establishment; it is also able to create continuous opportunities and design a suitable value chain for the enterprise; allow enterprise compete with other enterprises in the eco-system as well as maintain cooperative relationships with each other [1]. Using a modularity approach to reconstruct enterprises network organization just fits this requirement. Modularity as an effective method to manage complex systems is applied in more and more occasions, to enhance the modularity of the system becomes a general strategy to manage complex things [8] . A. CAPCITY FACTOR MODULARITY The value chain is composed of many single capability factors. The factor that affects the enterprises’ success or not is their capacity factor and the state of their optimal combination, rather than a specific business unit. The advantage of business unit just is the result of the combined effect of capacity factor, not the real source of the enterprises value. Enterprises should pursuit the real source of value creation from the perspective of capacity factor and separate these elements from the value chain use a modularity method make they become self-organization business entities to maximize their core competencies, achieve customer service and upgrade enterprises value[9]. The main elements of the enterprises capabilities consist of product development, design, manufacture, distribution, market network management, modular processing to these capacity factors include: (a) focus on a single capacity factor to maximum excavate the potential value of the capacity factor through centralized strategy, make it modularity and independent, turn it into enterprises business element and commercialization; (b) through spin-off strategy, by outsourcing, strategic alliances or virtual enterprise and other forms of cooperation, operate in a market-oriented direction, acquire or combine some related capacity factors, rather than combine the entire enterprise, pursuit cooperation effect, improve the enterprises competitiveness. B. ORGANIZATION STRUCTURE MODULARITY Organizational structure modularity divides an organization into several relatively independent modular units, discards their original administrative relations, make market mechanism whose transaction relies on contract. If a module needs some kind of product or service, after the information given by the coordination center, many modular organization in the market will put forward their own bidding for its selection, based on their skills, transactions record, the difficult of the products or services to obtain, competitive dynamics and other factors. When a capacity factor module has no longer an advantage within the range of the organization's integrate resources, the organization will seek both inside and outside the enterprise for new module to replace it. In general, the organizational structure modularity contains horizontal modular (functional unit modularity) and vertical structure (business unit modularity). Functional unit modularity manage business functions activities through outsourcing and other means, which on the surface is a function recombinant, its deeper significance is the integration between the enterprise and market. Business unit modularity is to re-optimize and combine the gene of various capacity factors to form a capacity genome with strong competitive advantages, which will make the enterprises get more centralized and unique in the aspects as knowledge accumulation and innovation, resource aggregation, information processing, product production, customer service and value creation and thus redefine or innovate the business model. Completing organization structure modularity, dynamical adjustment on the capacity factor can be done the same as building-block, so that enterprises can focus on the business with great market potential, find profit leverage and come out the effective strategies to create more economic value. Meanwhile, the authority order coordination under the original hierarchical system is replaced by market mechanisms, the units within the enterprise transform from "was organized" to "self-organization", begin to dig and use their internal tacit knowledge, initiatively seek exchange and interaction knowledge and information with the outside, accumulate and innovate knowledge continuously. That is to say, each module manages as self-organizing, self-innovation and self-development need not external commands and becomes self-survival and self-evolution economic entities, an active promoter and practitioner of the open innovation. V. MODULARITY INNOVATION NETWORK: EFFECTIVE PLATFORM OF THE OPEN INNOVATION After have achieved capacity factor and organizational structure modularity, different enterprises begin to connect with each other, and gradually form an open inter-enterprise value and innovative modularity network. Based on modularity innovation network, the information exchanges and transfers become more smoothly in innovation activities, and knowledge sharing and innovation become more efficient and the enterprises absorption capacity will be greatly enhanced. First, each internal capability factor operate modularity, and then make their core competencies more refined, deeper, and stronger, and break the physical boundaries of space and enterprise organizations through communication with the external market, make full use of the core strengths of other modular units to expand and strengthen its core competencies. Second, the modularity network will help companies more efficiently capture external information, and it is an effective organization for enterprises acquire a variety of knowledge resources. With the support of modularity network, enterprises entire business originally done by a single enterprises is now divided into several parts which will be done by the modules in the network, since each modular having different core competencies directly face to market, it is very sensitive to variety of information relevant to its operations, the breadth and depth of information gathering are increased considerably, and can efficiently make accurate judgments on the source and processing methods of information. Third, the loosely coupled features of the modularity innovation network can effectively reduce the risk of opportunism, and realize the network overall performance under the conditions of ensuring all nodes interest, it can not only improves specific innovation system flexibility and scalability [10], but also upgrade the reusability of each innovation nodes, since as an independent node the modularity organization often can be embedded multiple open innovation network. VI. CONCLUSION The absorption capacity is the critical factor to success for the open innovation. To achieve the match of the knowledge and decision-making power is the organizational foundation to enhance the absorptive capacity. The enterprises make modular reconfiguration of the traditional hierarchical organizational structure whose main content is ability element and organization structure can realize the match of the knowledge and the decision-making power, enhance absorptive capacity and make full use of the core competencies embedded in each modularity, help enterprises to integrate into the open modular innovation network to improve the enterprises open innovation efficiency. ACKNOWLEDGMENT The writing of this paper got my husband Dr.Jun Liang's support, and the discussion with him let me got much inspirations, he helped me polish the words in the text, without his support, this paper could not be completed successfully. At the same time, I also got my graduate students Peng Jiang, Feng-qi Li and Na Zhou and other fellow students various forms of help and support, they are always well complete the work which I handed to them and their excellent make me feel very proud. I want o express my sincere gratitude to them. REFERENCES [1] Henry William Chesbrough,Open Innovation: the New for Creating and Profiting from Technology (Book style). Beijing: Tsinghua University Press, 2005, ch. 1, pp. 1–26. [2] Charles W.L.Hill, Garetch R. Jones, Chang-Hui Zhou,Strategic Management: Systems Thinking on the Creation of Enterprises Competitive Advantage (Book style), Beijing: China Market Press, 2007, ch. 7, pp. 228–257. [3]Tsai,Wenpin,“Knowledge Transfer in Intraorganizational Networks: Effects of Network Position and Absorptive Capacity on Business Unit Innovation and Performance”. The Academy of Management Journal, vol.44.no.5, pp. 996-1004,2001. 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