Absorptive capacity is a method by which an organization processes new information and translates it for its own commercial benefit. This includes determining which new information is useful and then applying it to the organization so that it will produce tangible results. The term also refers to the amount of new information an organization is able to manage in a productive way.
The concept was created by professors Wesley Cohen and Daniel Levinthal in 1990. One of its primary goals was to encourage organizations to improve their prospects by pursuing their own customized research and development (R&D) instead of purchasing more general information. In addition to acquiring information from outside the organization, the method requires that knowledge already possessed by the entity be integrated into any action inspired by new data.
Absorptive capacity is meant to be an ongoing process for any organization that adopts its ideas. It requires constant engagement with changes in the economy, specific markets, and the business of competitors. The process also involves integrating information that is not currently a part of an organization’s operations so that they are relevant and useful.
In the years since its introduction, the definition of absorptive capacity has been expanded 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 both evaluate what an organization has done with new information and to strategize how to use new data more efficiently in the future.
The Zahra and George theory also considered four more elements of absorptive capacity in addition to the two overarching categories. These are acquisition, assimilation, transformation, and exploitation. The creation of these categories improved the process of evaluating the business throughout the major steps of the process. Zahra and George also provided categories to which specific benchmarks could be assigned in order to make it easier to troubleshoot any weaknesses in an organization's absorptive capacity program.
While absorptive capacity can help an organization use information in a more effective way, it is also inherently limited. Its usefulness depends upon the ability and resourcefulness of the employees who use the method. While the results are more tailored to specific needs, employees can only get a limited view of the operations as a whole.