CHAPTER 9

New Knowledge Acquisition

Knowledge

A key driving force influencing activities of entrepreneurs is the discovery and application of new knowledge that can provide the basis for innovation in existing industries and the creation of totally new industries. The issue facing senior managers is the degree to which their organization can rely on exploiting the existing knowledge versus new knowledge to support innovation. Existing knowledge tends to be widely available within an industrial sector, and hence, is rarely able to support any really radical, innovative ideas. As a consequence, entrepreneurial organizations have long understood the critical importance of sustaining their competence through the exploitation of new knowledge (Day and Schoemaker 2005).

Reliance upon the exploitation of existing knowledge will usually only permit the organization to sustain current business strategies, and in some cases, identify opportunities to utilize existing knowledge as the basis for product or market diversification. This does not mean, however, that organizations orientated toward implementing entrepreneurial strategies should ignore existing knowledge. In most cases, existing knowledge can provide a much lower risk source of future business revenue than is available from exploiting new knowledge. Hence, even entrepreneurial firms should seek to achieve an appropriate balance over the degree with which different sources of knowledge are to be utilized in relation to deciding about the involvement in low-versus high-risk propositions (Chaston 2004).

When new knowledge emerges, sometimes there may be no obvious immediate commercial applications. For example, when first invented, the laser was described as a “solution looking for a problem” ( Shimizu 2010). The important issue in such cases is for the organization to permit a certain proportion of resources to be applied at looking for new application opportunities. One company that has excelled at applying this philosophy is 3M Corporation. Such was the case with the Post It note where a new glue formulation was developed, which exhibited poor adhesive properties. Subsequently, another 3M innovator sought just these qualities to develop a system for temporarily attaching a piece of paper to another surface without causing any damage to that surface (Garner 2005).

Entrepreneurs tend to be attracted to a leading-edge technology. This is important because this technology can provide the basis for above-average business performance through the creation of new products and new industries. In terms of analyzing future opportunities and threats, it is necessary to assess how new knowledge can be amplified by combining new knowledge with the current leading-edge technology. Organizations need to be aware that the interaction between new knowledge and a leading-edge core technology is a dynamic process (Chaston 2015). Firms engaged in the provision of professional services, such as accountancy practices, are continually seeking ways of replacing extremely expensive individual staff with machine-based solutions. This means an entrepreneurial organization must continually strive to identify and exploit new approaches for combining the latest advances in knowledge and IT to further enhance organizational performance.

Open Innovation

The traditional approach to innovation is this occurs inside the firm with no interaction with external sources. This “closed innovation” philosophy usually reflects management concerns over confidentiality and seeking to avoid pre-emptive actions by competition. In the face of increasing technological complexity and the need to optimize the acquisition of new knowledge, some organizations are engaging in “open innovation” involving collaboration with external parties (Chesbrough 2003).

Open innovation creates value by leveraging many more ideas from a variety of external sources and allows greater value capture in the utilization of the firm’s existing assets. Lichtenthaler (2009) proposed open innovation is very useful when an organization is seeking to accelerate market acceptance for a new technology or new market standard. Lazzarotti, Manzini, and Pellegrini (2010) posited that, as firms increase their R&D activities, this will accompanied by more involvement in forming collaborative links with other organizations.

The risk facing firms is that a company relying too heavily on closed innovation may miss new market opportunities. This is because many new opportunities may fall outside of the organization’s current business activities and technological competence or can only be exploited by working with other organizations. To avoid this outcome, the management needs to recognize that the boundary between a firm and the surrounding environment must be porous, thereby enabling the development of a collaborative approach to knowledge exploitation. Some hightech firms are exploiting social media platforms to create open innovation approaches that can provide access a wider source of new knowledge and ideas. Known as “crowd sourcing,” one of the leading players is the American corporation, Cisco (Ebner, Leimester, and Krcmar 2009).

Chesbrough and Crowther (2006) noted that low-tech and mature firms mainly use open innovation to in-source relevant knowledge and technologies, whereas outbound open innovation is far less widespread among these types of firms. Inbound sourcing methods include information transfer from informal networks, R&D collaboration, and technology acquisition. Simard and West (2006) distinguished between deep ties, which enable a firm to capitalize on existing knowledge and resources, and wide ties, which are more appropriate for locating new technological and market opportunities. Collaborations can have an explorative or exploitative purposes, and these will tend to be reflected in the type of actors in an innovation network.

Networks

Modern technologies are often multitechnological in nature, demanding much higher levels of knowledge. This significantly complicates the innovation process (Narula 2004). Examples include industries such as automotive, aircraft, telecommunication, electrical equipment, computers, biotechnology, and new materials. Successful innovation usually requires a firm to complement their customer orientation with a distinct technology orientation that enables them to develop new solutions for already identified customer needs and to create forms of new customer demand. Narula posited that the multitechnological nature of complex innovation demands that, in addition to existing technological core competences, new complementary competences in other areas of science or technology are often required. However, due to the increased amount of knowledge required for complex innovations, these often have to be generated from many different sources. This usually requires access to a dense network of connections between institutions such universities, research institutes, suppliers, customers, and other partners. Exploitation of complementary competences within a network permits each organization to focus on optimization of the use of their respective core capabilities (De Liu, Gautam, and Andrew 2010).

Tell (2000) concluded that participation in innovation networks has several implications on the growth orientation of member companies. First, companies can expand their exploitation of the complementary knowledge of the partners in the network. Second, involvement allows a sharing of ideas by network partners such that, should an idea not fit with a company’s strategy, other members of the network may progress the idea. Third, network membership can serve to broaden a firm’s strategic perspective as a consequence access knowledge assets located in different organizations, which often have different innovation priorities and strategies. Ahuja, Galletta, and Carley (2000) defined network structure as existing in three dimensions, namely (i) the number of direct ties a focal actor has to partners, (ii) the number of indirect ties the actor has to the partners of other partners, and (iii) concerns about the ties between the focal actor’s partners and the extent to which they are bound to one another.

Open innovation, therefore, cannot be regarded as the product of a single company, but as the product of interaction between two or more actors in a network. Technical solutions generated by one actor may be usable by another actor in another area. New ideas can, thus, be developed by combining the experience of various actors. Technological innovation often requires various forms of knowledge be combined or complimentary. Knowledge may be codified or noncodified. Less complex knowledge can usually be codified, whereas more complex knowledge often cannot. Noncodified knowledge is tacit knowledge such as know-how or unique experiences. Tacit knowledge can only be disseminated or transferred when the actors involved meet and interact (Rost 2011).

Alliances

Acceleration of R&D efforts and the development of internal capabilities are no longer sufficient to cope with the increasing cost, speed, and complexity of developments in high-tech industries. Even the largest companies are obliged to access external sources of new knowledge through activities such as licensing, alliances, or mergers and acquisitions (M&As) (Babarinsa 2011). A major catalyst is increased global competition and advances in technology, which have altered the environment in which organizations compete. This has led to an increase in alliances or mergers between organizations with similar products or services, but dissimilar or complementary characteristics in other areas. Technological discontinuities can cause enormous difficulties for mature organizations. This is largely because radical innovation requires a large amount of resources and new knowledge. Taking advantage of complementarities in key knowledge areas through collaboration has been specifically important for innovation in sectors with high levels of complexity, such as biotechnology (Blomqvist and Levy 2006).

Rothaermel (2002) posited that alliances are increasingly preferred over mergers, acquisitions, or internal development. This is because of urgency or industry uncertainty and the need to respond to shorter product life cycles. Alliances allow organizations that lack key technologies to leverage partners’ capabilities to accelerate new product development. In contrast, a merger or acquisition may face the risk of a lack of synergy emerging between the two organizations. Furthermore, an acquisition may be more costly because the acquiring organization may end up purchasing technology that is of little use. An alliance, on the other hand, allows an organization to avoid acquiring only that which is needed.

Lambe and Spekman (1997) posited that more alliances are established when urgency and uncertainty are high. Once product or market uncertainty begins to lessen, alliances may become less critical because the ongoing activity is further improved in the dominant design. At this stage, once the path of technological discontinuity ceases to be important, organizations may opt for investing in internal development. Major players may then begin to build their own vertically integrated facilities and dissolve their alliance (den Uijl and de Vries 2013).

During the mature phase of the technology life cycle, acquisitions or mergers may be more attractive than alliance because the partners may be competitors and have equal access to the technology (Briggs and Watt 2001). During the discontinuation phase, current technology may be obsoleted by new technology At this juncture, markets are often usually volatile, as innovations and next-generation products destroy the demand for prior-generation goods. New organizations may appear, and as the nature of emerging new technology becomes uncertain, the number of new alliances tends to increase. As understanding grows concerning the potential and implications associated with a new the technology, some organizations will begin to consider the creation of new alliances (Agarwal, Sarkar, and Echambadi 2002).

Purchasing Knowledge

The conventional philosophy behind M&As is one or both parties perceive the investment will provide financial benefits from the purchase price being lower than the actual company value, improving profitability through implementing postpurchase cost-cutting restructuring or exploiting economies of scale. In recent years, however, the logic behind many high-tech M&As has been to acquire new knowledge or permit access to new market sectors. Brueller, Carmeli, and Drori (2014) defined this latter approach as a “bolt-on acquisition” to support either a product or market extension into an adjacent product-market category. Other acquisitions by high-technology incumbents can be described as “technology-grafting” where the focus is on accessing capabilities in the areas of new products or technologies.

In bolt-on acquisitions, the acquirer gains important new operational process experience. This is because the main purpose of these acquisitions is to complement internal R&D efforts and allow acquirers to quickly respond to shorter product life cycles, where time-to-market is of paramount importance. One example of this strategy is provided by Facebook. In 2009, the company acquired the social media real-time news aggregator. In 2010, the Malaysian contact-importing start-up Octazen Solutions and the photo-sharing service called Divvyshot. This was followed by Facebook purchasing the photo-sharing service Instagram for approximately $1 billion and subsequently WhatsApp Inc, a smartphone instant messaging application for $19 billion (Bercovici 2014).

Carmeli and Azerual (2009) noted that, upon the implementation of an acquisition, both organizations need to develop knowledge-combination capabilities plus the ability to absorb, integrate, and exchange information. These researchers concluded that, in the context of M&As, knowledge flows enable the parties to access each other’s knowledge base, but in order to promote strategic agility, they need to develop the capacity to exploit the knowledge that has been exchanged and transferred.