Incumbents Adaptation to Competence-Destroying Change: Role of Prior Experience and Knowledge Sourcing

For the past several decades, the topic of new technological developments has been of interest to strategy scholars (Ansoff and Stewart, 1967; Cooper and Schendel, 1976; Rosenbloom and Cusamano, 1987; Rothaermel, 2001a, 2001b; Tushman and Anderson, 1986). Scholars have repeatedly focused on this topic as innovation and new product development are critical for a firm's survival and growth (Penrose, 1995) and have stated that one of the core competencies needed to develop new technologies is the ability to assimilate and recombine knowledge in unique combinations (Rosenkopf and Nerkar, 2001). Simply put, successful innovation and new product development require the ability to create and use new knowledge to offer novel products or services to customers. Research indicates that firms who possess prior experience are in a better position to innovate (Carroll et al., 1996; Henderson and Cockburn, 1994; Klepper and Simons 2000; Nerkar and Roberts, 2004). Prior studies have also highlighted the importance of knowledge and experience in enabling firms to successfully adapt to changes in technology (Bartel and Lichtenberg, 1987, 1991; Siegel, 1999; Siegel et al., 1997). This stream of literature specifically states that a firm's technological and product-market experience enables it to "combine knowledge elements into valuable new products" (Nerkar and Roberts, 2004). Although this research stream makes valuable contributions to the innovation literature, it provides limited insights on the usefulness of prior experience during technological change, especially those which are competence-destroying in nature. Tushman and Anderson (1986) stated that competence-destroying technological change creates a new class of products which ". require new skills, abilities, and knowledge in both the development and production of the product. The hallmark of competence-destroying discontinuities is that mastery of the new technology fundamentally alters the set of relevant competences within a product class" (Tushman and Anderson, 1986: 442). In the event of competence-destroying change, the existing products are replaced by new products based on the new technologies. For example, the photography industry experienced competence-destroying change when the technology changed from chemical-based to digital technologies giving rise to new products (Tripsas and Gavetti, 2000). However, recent research finds that incumbent firms are not only capable of surviving competence-destroying changes but are also able to thrive under them (Tripsas, 1997; Rothaermel, 2001a, 2001b; Nicholls-Nixon and Woo, 2003). Traditionally, strategy scholars have traced the ability of firms to adapt and survive in changing environments to the capabilities and stocks of resources and knowledge endowed in the firms (Nicholls-Nixon and Woo, 2003; Tripsas, 1997) and their ability to collaborate with emerging technology firms (Rothaermel, 2001a, 2001b). For example, traditional pharmaceutical firms' distribution channels and manufacturing capabilities give them the ability to partner with biotechnology firms and learn the new technology. However, much of the literature on incumbent's adaptation to technological change primarily focuses on firm-level variables (e.g., alliances undertaken by a firm). While prior studies have explored relationships between prior competencies and research productivity (i.e., patents) (e.g., Henderson and Cockburn, 1994) and the influence of prior experience on product development (Marsh and Stock, 2006; Nerkar and Roberts, 2004), there is a dearth of studies investigating this relationship in the context of technological change (e.g., Sosa, 2009). This study seeks to fill the gap in the existing literature by examining pharmaceutical firms' adaptation to biotechnology at a firm-therapeutic level (e.g., Merck-Oncology). The next section briefly reviews the organizational learning literature and comments on how organizational learning enables incumbent firms to develop new capabilities needed to adapt to technological change. …