Knowledge, firm boundaries, and Innovation: Mitigating the incumbent's curse during radical technological change

ArticleinStrategic Management Journal · April 2016with 480 Reads
Abstract
We explore the relationship between a firm's organization and its ability to face a radical technological change. We suggest that during such a change, the presence of both inhouse upstream knowledge and downstream market linkages, within a firm's boundary, has its advantages. We test our predictions in the context of the robotics industry where manufacturers of mechanically controlled “brawny” robots, that were valued mainly for their payload capacity, faced the advent of electrically controlled “brainy” robots that emphasized accuracy and repeatability. We find that “preadapted” firms—the ones with prior relevant technological knowledge and with access to internal users of “brainy” robots-- were the innovation leaders in the emerging new technology but were laggards in the old technology.

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  • Article
    Robotic-based automated systems has been expected to be re-established as some of the most effective productivity tools available to global manufacturers. Robots used in dangerous work environments will continue to see growth, while applications in heavy material handling and palletizing will continue to require automated systems to meet government regulations and protect operators. High-volume toy manufacturing is beginning to show economic growth, while in the medical and healthcare industries surgeon-assisted robotic systems have gained FDA approval for invasive surgical procedures. Traditional small-part assembly applications in electronics and automotive components are decreasing overall, but the requirement for higher-precision, cleanroom-compatible robots with integrated vision inspection is growing for the assembly of medical devices.
  • Article
    Business strategy is a complex subject and is usefully examined from several perspectives. This paper applies the lenses of governance and competence to the study of strategy. Both the governance and the competence perspectives have had the benefit of distinguished antecedents. They have also had to deal with tautological reputations. I begin with the governance perspective, with emphasis on the six key moves through which it has been operationalized. I then examine the competence perspective in these same six respects. Governance challenges the competence perspective to apply itself more assiduously to operationalization, including the need to choose and give definition to one or more units of analysis (of which the 'routine' is a promising candidate). The research challenges posed by competence to which governance can and should respond include dynamic transaction costs, learning, and the need to push beyond generic governance to address strategy issues faced by particular firms (with their distinctive strengths and disabilities). A lively research future for these two perspectives, individually and in combination, is projected.
  • Article
    The assumption that 'local search' constrains the direction of corporate R&D is central in evolutionary perspectives on technological change and competition. In this paper, we propose a network-analytic approach for identifying the evolution of firms' technological positions. The approach (I) permits graphical and quantitative assessments of the extent to which firms' search behavior is locally bounded, and (2) enables firms to be positioned and grouped according to the similarities in their innovative capabilities. The utility of the proposed framework is demonstrated by an analysis of strategic partnering and the evolution of the technological positions of the 10 largest Japanese semiconductor producers from 1982 to 1992.
  • Article
    Unstable market conditions caused by innovation and increasing intensity and diversity of competition have resulted in organizational capabilities rather than served markets becoming the primary basis upon which firms establish their long-term strategies. If the strategically most important resource of the firm is knowledge, and if knowledge resides in specialized form among individual organizational members, then the essence of organizational capability is the integration of individuals' specialized knowledge. This paper develops a knowledge-based theory of organizational capability, and draws upon research into competitive dynamics, the resource-based view of the firm, organizational capabilities, and organizational learning. Central to the theory is analysis of the mechanisms through which knowledge is integrated within firms in order to create capability. The theory is used to explore firms' potential for establishing competitive advantage in dynamic market settings, including the role of firm networks under conditions of unstable linkages between knowledge inputs and product outputs. The analysis points to the difficulties in creating the "dynamic" and "flexible-response capabilities" which have been deemed critical to success in hypercompetitive markets.
  • Article
    Full-text available
    We propose that searching for and transferring knowledge across divisions in a diversified firm can cultivate innovation. Using a sample of 211,636 patents from 1,644 companies during the period 1985-96, we find that the use of interdivisional knowledge positively affects the impact of an invention on subsequent technological developments. Furthermore, the positive effect of the use of interdivisional knowledge on the impact of an invention is stronger than the effect of using knowledge from within divisional boundaries or from outside firm boundaries. Our empirical findings have significant implications for the management of knowledge in diversified firms.
  • Article
    This paper examines the probability and timing of entry by industry incumbents into emerging technical subfields. When a new technical subfield of an industry emerges, an industry incumbent faces opposing entry incentives, either to wait until technical and market uncertainties subside or to stake out a strong position early. This paper argues that an incumbent is likely to enter a new subfield if the firm's core products are threatened or if it possesses industry-specialized supporting assets. The greater the competitive threat, the less likely an incumbent is to enter but the earlier it will do so. The predictions are supported with analysis of 30 years of entry data from five subfields of the American medical diagnostic imaging industry.
  • Article
    This study shows the changes that are taking place in attitudes to "Made in U. S. A." compared with similar attitudes toward German, English, and French products.
  • Article
    Building on transaction cost economics and the knowledge-based theory of the firm, I argue that, following a technological change that is competence-destroying to firms and their suppliers, firms that are integrated vertically into the new technology will perform better than those that are not. At the same time, firms that had been vertically integrated into the old technology will perform worse than those that had not been. This argument suggests that the efficient boundaries of a firm are dynamic. I used the adoption of reduced instruction set computer (RISC) technology by makers of computer workstations to explore the hypotheses.
  • Article
    Over the past ten years, significant progress has been made in the market orientation area. Scholarly attention has focused on the definition, measurement, and impact of a market orientation. Attention has also focused on organizational drivers of market orientation and its enhancement. Despite progress, several research challenges remain and rich opportunities exist for further work in the area. This paper critically reviews the ``state-of-the-art'' and offers a roadmap for future work in the area. The review primarily focuses on (1) the meaning of market orientation, (2) its relationship with several emerging topics/themes in the literature (e.g., market information processing, organizational learning, knowledge use, industry foresight and driving markets), (3) the quality of market-oriented behaviors, (4) impact of market orientation, and (5) issues in enhancing market orientation. We conclude with a conceptual synthesis and methodological suggestions.
  • Article
    The creative destruction literature has argued that differences in R&D performance of incumbent vs. entrant firms can be explained through organizational change theories about established vs. de novo firms. A disconnect exists between these theories and the available empirical evidence because often the best performing firms are established firms as well. I propose to resolve this disconnect by distinguishing between market incumbency (presence in a market prior to a discontinuity) and organizational prehistory (organizational experience prior to a transition, whether between technologies or between markets). Doing so allows me to contrast incumbent vs. entrant and de alio vs. de novo studies, and to suggest more robust future research designs. I illustrate my proposition using qualitative data from the anticancer and AIDS-treatment drug markets.
  • Article
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    This paper develops and tests a multilevel organizational contingency theory for designing headquarters—subsidiary relations. We use frontier analysis to overcome problems that have hampered advancements in organizational contingency theory in general and headquarters—subsidiary relationships in particular. Based on a longitudinal study of a large medical group practice of 32 local community clinics, we compute the relative distance of clinics from a best-performance frontier, determine what proportions of changes in clinic performance are due to factors that are endogenous or exogenous to the clinics, and examine the organizational factors that may explain these performance changes. We find that uniform headquarters policies have differing effects on the performance of subsidiary units, benefiting some and hindering others through no fault of their own. We also find significant performance volatility with different types of unit designs, suggesting the need to examine the risks of changing organization designs.
  • Article
    A number of proposals have been advanced in recent years for the development of “general systems theory” which, abstracting from properties peculiar to physical, biological, or social systems, would be applicable to all of them. We might well feel that, while the goal is laudable, systems of such diverse kinds could hardly be expected to have any nontrivial properties in common. Metaphor and analogy can be helpful, or they can be misleading. All depends on whether the similarities the metaphor captures are significant or superficial.
  • Article
    The world's largest, technologically active firms are more diversified in their technological competencies than in their product range, and this diversity is increasing over time. These firms invest beyond their distinctive core technological competencies in order to manage and co-ordinate technical change with their suppliers of components, equipment, and materials as well as to explore and assess the major new opportunities emerging from the knowledge base. A firm's technological competencies are "distributed" among technological fields, among different parts of the corporation, and among different corporate objectives. As a consequence, corporate policies that apply to products do not apply to technological competencies. Corporate performance can be significantly improved with increasing technological diversity.
  • Article
    Scholars have advanced various theories to explain the common failure of market leaders in the face of revolutionary technological change. The history of NCR Corporation provides an instructive exception to that general pattern. This paper examines how NCR addressed the introduction of electronics to the field of business equipment and the advent of digital computers to widespread use. It describes NCR's entry into the computer industry in the 1950s and its commitment to evolutionary adaptation of its core products. It shows how persistence in old modes of practice led eventually to a crisis, which was resolved favorably when new management and fundamental organizational transformations reversed adverse trends and restored robust profitability.While established academic theories can help to explain aspects of the story, no single theoretical perspective is sufficient to explain the path of NCR's behavior. NCR survived, we conclude, because new leadership provided the impetus to actualize latent dynamic capabilities. Copyright © 2000 John Wiley & Sons, Ltd.
  • Article
    The U.S. television receiver industry evolved to be an oligopoly dominated by firms that produced radios prior to TVs. Data an the experience of all U.S. radio manufacturers and on the length of survival and rate of innovation of all U.S. TV entrants are collected to analyze how radio experience influenced entry, firm performance, and the evolution of market structure in the TV industry. Consistent with a model of the evolution of an oligopolistic industry, more experienced radio firms were more likely to enter TV manufacturing, had higher innovation rates, and in turn had greater marker shares and longer survival, suggesting that firm capabilities and the evolution of the TV industry's market structure were critically shaped by firms' experience prior to entry. Copyright (C) 2000 John Wiley & Sons, Ltd.
  • Article
    There is empirical evidence that established firms often have difficulty adapting to radical technological change. Although prior work in the evolutionary tradition emphasizes the inertial forces associated with the local nature of learning processes, little theoretical attention has been devoted in this tradition to understanding how managerial cognition affects the adaptive intelligence of organizations. Through an in-depth case study of the response of the Polaroid Corporation to the ongoing shift from analog to digital imaging, we expand upon this work by examining the relationship between managers' understanding of the world and the accumu- lation of organizational capabilities. The Polaroid story clearly illustrates the importance of managerial cognitive representations in directing search processes in a new learning environ- ment, the evolutionary trajectory of organizational capabilities, and ultimately processes of organizational adaptation. Copyright © 2000 John Wiley & Sons, Ltd.
  • Article
    To have the incentive to undertake research and development, a firm must be able to appropriate returns sufficient to make the investment worthwhile. The benefits consumers derive from an innovation, however, are increased if competitors can imitate and improve on the innovation to ensure its availability on favorable terms. Patent law seeks to resolve this tension between incentives for innovation and widespread diffusion of benefits. A patent confers, in theory, perfect appropriability (monopoly of the invention) for a limited time in return for a public disclosure that ensures, again in theory, widespread diffusion of benefits when the patent expires.
  • Article
    Full-text available
    An evolutionary model of technological change is proposed in which a technological breakthrough, or discontinuity, initiates an era of intense technical variation and selection, culminating in a single dominant design. This era of ferment is followed by a period of incremental technical progress, which may be broken by a subsequent technological discontinuity. A longitudinal study of the cement (1888-1980), glass (1893-1980), and minicomputer (1958-1982) industries indicates that when patents are not a significant factor, a technological discontinuity is generally followed by a single standard. Across these diverse product classes, sales always peak after a dominant design emerges. Discontinuities never become dominant designs, and dominant designs lag behind the industry's technical frontier. Both the length of the era of ferment and the type of firm inaugurating a standard are contingent on how the discontinuity affects existing competences. Eras of ferment account for the majority of observed technical progress across these three industries.
  • Article
    This paper explores the implications of the learning curve for competitive strategy under a range of assumptions regarding competition and the nature of the learning process. A game-theoretic model is used to examine how the learning rate and information diffusion affect entry barriers, profits, and price dynamics.
  • Article
    Full-text available
    This paper uses an analysis of developments in aircraft engine control systems to explore the implications of specialization in knowledge production for the organization and the boundaries of the firm. We argue that the definition of boundaries of the firm in terms of the activities performed in house does not take into account that decisions to outsource production and other functions are different from decisions to outsource technological knowledge. We show that multitechnology firms need to have knowledge in excess of what they need for what they make, to cope with imbalances caused by uneven rates of development in the technologies on which they rely and with unpredictable product-level interdependencies. By knowing more, multitechnology firms can coordinate loosely coupled networks of suppliers of equipment, components, and specialized knowledge and maintain a capability for systems integration. Networks enable them to benefit from the advantages of both integration and specialization. Examples from other industries extend to other contexts the model we develop.
  • Article
    Full-text available
    This paper investigates interrelationships of product design, organization design, processes for learning and managing knowledge, and competitive strategy. This paper uses the principles of nearly decomposable systems to investigate the ability of standardized interfaces between components in a product design to embed coordination of product development processes. Embedded coordination creates ‘hierarchical coordination’ without the need to continually exercise authority—enabling effective coordination of processes without the tight coupling of organizational structures. We develop concepts of modularity in product and organization designs based on standardized component and organization interfaces. Modular product architectures create information structures that provide the ‘glue’ that holds together the loosely coupled parts of a modular organization design. By facilitating loose coupling, modularity can also reduce the cost and difficulty of adaptive coordination, thereby increasing the strategic flexibility of firms to respond to environmental change. Modularity in product and organization designs therefore enables a new strategic approach to the management of knowledge based on an intentional, carefully managed loose coupling of a firm's learning processes at architectural and component levels of product creation processes.
  • Article
    Full-text available
    Unstable market conditions caused by innovation and increasing intensity and diversity of competition have resulted in organizational capabilities rather than served markets becoming the primary basis upon which firms establish their long-term strategies. If the strategically most important resource of the firm is knowledge, and if knowledge resides in specialized form among individual organizational members, then the essence of organizational capability is the integration of individuals' specialized knowledge. This paper develops a knowledge-based theory of organizational capability, and draws upon research into competitive dynamics, the resource-based view of the firm, organizational capabilities, and organizational learning. Central to the theory is analysis of the mechanisms through which knowledge is integrated within firms in order to create capability. The theory is used to explore firms' potential for establishing competitive advantage in dynamic market settings, including the role of firm networks under conditions of unstable linkages between knowledge inputs and product outputs. The analysis points to the difficulties in creating the ''dynamic'' and ''flexible-response capabilities'' which have been deemed critical to success in hypercompetitive markets.
  • Book
    It is management, and particularly managers' willingness to learn and change -- not unfair competition or unsupportive economic policies -- that is at the heart of America's manufacturing crisis, contend Robert Hayes, Steven Wheelwright, and Kim Clark. These world-renowned authorities on manufacturing and technology base their conclusion on studies of hundreds of American and foreign firms. Writing for general managers in this long-awaited successor to their award-winning Restoring Our Competitive Edge, the authors go beyond the structural decisions -- the "bricks and mortar" of facilities and equipment -- to the infrastructure of a manufacturing company: the management policies, systems, and practices that must be at the core of a world-class organization. Most importantly, they address the difficulty of creating that infrastructure, emphasizing the management leadership and vision that are required. This thorough and comprehensive volume points out the weaknesses of traditional management practices, which are built into authoritarian, hierarchical organizations. The authors show dramatically how many companies today are breaking out of this "command and control" mentality and creating a whole new set of relationships involving workers and managers, engineering, marketing and manufacturing, and suppliers and customers, which is giving them a competitive advantage in the international marketplace. Comparing the companies that are winning with those that are losing market position, Hayes, Wheelwright, and Clark conclude that the key differences are that the winners focus on creating value for customers, continual improvement, quick adaptability to change, and extracting the full potential of their human resources. They constantly strive to be better, placing great emphasis on experimentation, integration, training, and the building of critical organizational capabilities. They are, in short, "learning" organizations. Dynamic Manufacturing explores in depth such key infrastructure issues as capital budgeting, performance measurement, organizational structure, and human resource management, demonstrating how they interact to foster productivity growth, new product development, and competitive advantage. The book shows today's managers how to implement the changes that must be made if they want to create a truly superior manufacturing company. Taking concerned, committed managers step-by-step on the path toward better products, lower costs, and increased profits, this seminal work provides a road map for manufacturing firms seeking to build a competitive advantage through manufacturing excellence.
  • Article
    Our understanding of Japanese supply relationships comes primarily from studying the automobile industry. This paper identifies three elements of the automobile industry that, although generally assumed to be widespread, are largely absent in the notebook computer industry, leading to a different pattern of supply relationships: a sizable pool of external suppliers; the feasibility of shukko and cross-shareholding to strengthen supply relationships; and the adequacy of these means to manage external supply relationships. This finding debunks the myth of a monolithic model of “Japanese-style” supply relationships and illustrates the importance of idiosyncratic elements of an industry’s environment on its supply relationships.
  • Article
    Develops a model of organizational evolution based on a simultaneous consideration of forces for stability, forces for fundamental change, and the role of executive leadership in mediating between these contrasting forces. This punctuated equilibrium model of organization evolution focuses on both continuities and discontinuities in the lives of organizations and assigns a vital role for greater understanding of organizational periods, environmental discontinuities, the impact of organizational history on current behavior, and the paradoxical role of executive leadership. (6½ p ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
  • Article
    Full-text available
    We examine how firms search, or solve problems, to create new products. According to organizational learning research, firms position themselves in a unidimensional search space that spans a spectrum from local to distant search. Our findings in the global robotics industry suggest that firms' search efforts actually vary across two distinct dimensions: search depth, or how frequently the firm reuses its existing knowledge, and search scope, or how widely the firm explores new knowledge. In this study, we examined how firms search, or solve problems (Nelson & Winter, 1982), to create new products. The ability to create new products is an important component of firm innovative capa-bilities. New products are a central mechanism whereby organizations diversify, adapt, and rein-vent themselves in changing market and technical conditions (Schoonhoven, Eisenhardt, & Lyman, 1990). Research has also demonstrated how new products improve the market share, market value, and survival of firms (Banbury & Mitchell, 1995; Chaney & Devinney, 1992). Yet, despite the attrac-tiveness, firms find it difficult to create new prod-ucts. Here, we explain a firm's performance in cre-ating products as a function of its search behavior. Organizational learning researchers have some-times argued that in their search for solutions to problems, firms position themselves in a unidi-mensional search space that spans the spectrum from exploitation to exploration (March, 1991). We suggest that firms' search, or problem-solving ef-We thank for comments and discussions on the earlier versions of this work. We are also grateful to a number of experts and researchers in the robotics indus-try for their time, insights, and suggestions. We espe-cially thank Risto Miikkulainen for assistance in writing the programs that were used to combine and analyze the patent and product data.
  • Article
    This paper examines how the knowledge-based view (KBV) can be applied to firm boundary decisions and the performance implications of those decisions. At the center of the paper is a theoretical and empirical examination of how firms most efficiently organize for technological development. We find that distinct organization approaches are advantaged in the speed of technological development depending on the structure of technological development problems and the depth of firms' technological area experience. We make theoretical and empirical contributions to KBV research that examines knowledge development and transfer. Drug development in the pharmaceutical industry serves as our empirical setting.
  • Article
    We analyze how transaction cost economics and competence arguments determine vertical organization boundaries when firms react to innovation. Existing perspectives and empirical evidence have been ambiguous because of conflicting tensions between the two frameworks and simplistic views of innovation. Using Henderson and Clark's (1990) innovation categories and a careful review of both theories, we show that it is possible to reach a consistent set of predictions on vertical integration and to reconcile apparently conflicting empirical results.
  • Article
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    The challenge of organizational adaptation is often presented in terms of the tension between the exploration of new possibilities and the exploitation of existing accomplishments. Whether framed in the language of invention versus refi nement or local search versus long jumps, the spirit of the argument is of an explicit trade-off that resource-constrained organizations must make to secure their survival and success. While we do not dispute the fundamental truth that underlies this tension, we do believe this dominant characterization of the process of explora-tion may be masking key drivers of this tension and potential paths towards its resolution. We argue that, from the perspective of an actor, all activities are inherently exploitative in their nature, in the sense that they are undertaken with the explicit expectation that they may achieve meaningful progress on some dimension of performance. The key distinction regards the extent to which the dimension of performance is recognized and legitimated from the perspective of the organizational context in which the actor is operating. Acts perceived as 'exploratory' are, thus, more accurately characterized as acts of exploitation directed along new performance dimensions. We consider the organizational challenges that such explor-atory action poses and the implications for entrepreneurial initiatives. From the perspective of the focal actor engaged in the exploratory initiative, the challenge is to identify 'projections' of the payoff of the initiative they are pursuing, either onto those dimensions of performance that are of interest to the organization, or onto more concrete measures of product-market acceptance and fi nancial return. Low-dimensional representations of the business landscape are an inevitable by-product of bounded rationality and the need for organizations and their strategies to coordinate and direct collective action. In this regard, the most powerful form of entrepreneurship may be the initiation of the cognitive shifts that offer a different topology of the competitive landscape. Copyright © 2008 Strategic Management Society.