(Uzuegbunam & Nambisan, 2018) The Ties That Change - Open Innovation Strategies and Capability Reconfiguration Under Uncertainty

9.75x6.
5 b2593 Open Innovation, Ecosystems and Entrepreneurship
Chapter 8
The Ties that Change:

Open Innovation Strategies
World Scientific Reference on Innovation Downloaded from www.worldscientific.com
and Capability Reconfiguration Under

Uncertainty*
by LA TROBE UNIVERSITY on 05/27/18. For personal use only.
Ikenna Uzuegbunam
Assistant Professor of Strategy,
Entrepreneurship & International Business
Center for Entrepreneurship
College of Business, Ohio University
Copeland Hall, Athens, OH 45701, USA
uzuegbun@ohio.edu
Satish Nambisan
Nancy and Joseph Keithley Professor of Technology Management
Weatherhead School of Management
Case Western Reserve University
Cleveland, OH 44106-7235
satish.nambisan@case.edu
In this chapter, we examine open innovation (OI) strategies that incumbent

firms adopt to modify their capabilities in the face of technological change. We
introduce the notion of capability reconfiguration advantage and argue that the
* We thank Ajay Mehra, Saras Sarasvathy, Frank T. Rothaermel, Shaker Zahra, and Yin Chi Liao for
insightful suggestions. We also thank participants at the following seminars: Rensselaer-Lally
Doctoral Students Seminar Series, University of Kentucky, IfM–University of Cambridge Seminars,
Rochester Institute of Technology, Atlanta Competitive Advantage Conference and AOM Meeting.
195
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b2593 Open Innovation, Ecosystems and Entrepreneurship
196 I. Uzuegbunam and S. Nambisan
nature of ties that are involved in OI strategies with entrepreneurial firms and the
timing of the use of these ties underlie some of the heterogeneity in performance
outcomes among incumbent firms in times of uncertainty. Specifically, we show
that while OI strategies that are coupled via contractual ties are likely suited
for periods of state and response uncertainty, OI strategies that are coupled via
embedded ties are more suitable for periods of effect uncertainty. In essence,
the proposed framework provides a more nuanced view of the interface between
different OI strategic mechanisms and the nature of uncertainty perceived by
incumbent firm managers. We conclude with implications for future research
on OI.
Keywords: Open innovation, technological change, uncertainty, embedded ties,
entrepreneur.
1. Introduction
The general tendency for firms to search for and leverage the creativity of others
(i.e. open innovation (OI)) is gaining traction in a wide range of industries
(Chesbrough, 2003). Extant OI research has shown different ways that firms
leverage inbound knowledge from their ties with others to come up with innova-
tion offerings and to increase their performance (e.g. Ahuja, 2000; Chesbrough,
2003; Laursen and Salter, 2006; Powell et al., 1996). A recent stream of the OI
literature is beginning to shed some light on why certain firms are sometimes
willing to freely reveal their knowledge (or intellectual property, IP) to other
firms in the context of OI strategies (e.g. Henkel, 2006). Emerging from these
recent efforts is the insight that the character of OI strategies relating to knowl-
edge exchange is deeply affected by the nature of technological environment
(Alexy et al., 2009).
In this chapter, we focus our attention on the nature of ties in OI strategies with
entrepreneurial firms in these highly uncertain technological environments.
Specifically, we address the question: how does the type of ties between incum-
bent and entrepreneurial firms influence an incumbent firm’s reconfiguration of
its capabilities under uncertain technological regimes? In highly uncertain envi-
ronments, an underlying reason why firms engage in OI strategies is to gain access
to new knowledge or capabilities for innovation (Doz et al., 1989; Dushnitsky and
Lenox, 2005; Gulati, 1995; Mitchell and Singh, 1996; Rothaermel, 2001;
Rothaermel and Boeker, 2008; Stuart, 2000). Indeed, when incumbent firms open
their boundaries to other companies, they are able to leverage, and can often learn
“new” capabilities from their partners (Doz et al., 1989).
The process of learning new capabilities (or assessing whether to learn new
capabilities) is non-trivial, with different firms exhibiting varying degrees of
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9.75x6.5 b2593 Open Innovation, Ecosystems and Entrepreneurship
The Ties that Change197
success. Indeed, earlier accounts have noted that while many incumbent firms gain
access to information about disruptive technologies, only a few succeed in enact-
ing a timely and meaningful response to technological change (Henderson, 1993;
Lavie, 2006). The process of learning new capabilities involves first acquiring and
then integrating new capabilities into the existing organizational framework, with
the view of maintaining fit between organizational capabilities for innovation and
the external environment. The mechanisms that undergird incumbent firms’ ability
to integrate learned capabilities with existing capabilities are broadly referred to
as capability reconfiguration (Lavie, 2006; Teece, 2007; Teece et al., 1997).
Prior explanations for this heterogeneity in performance have accounted for:
the differences in incumbent firms’ existing complementary assets (Hill and

Rothaermel, 2003; Rothaermel, 2001; Tripsas, 1997), organizational competence
(Henderson, 2006), managerial competence (Christensen, 1997), absorptive
capacity (Cohen and Levinthal, 1990) and other types of firm-related dynamic
capabilities (Teece et al., 1997; Eisenhardt and Martin, 2000). Though prior
research has made notable strides towards explaining firm mechanisms that enable
incumbent firms renew their capabilities in the face of competence destroying
technological change (e.g. Eisenhardt and Martin, 2000; Lavie, 2006; Teece, 2007;
Teece et al., 1997), it is still unclear how the firm’s immediate social context could
enhance or impede capability reconfiguration advantages. Considering how often
incumbent firms engage with entrepreneurial firms in the process of OI (Alexy
et al., 2009; Dushnitsky and Lenox, 2005, 2006; Lavie, 2006; Rothaermel and
Boeker, 2008), this chapter provides a closer look at the tie choices involved in
these OI strategies.
By bridging social networks logic (specifically, the degree of embeddedness
of interfirm interactions in a dyad) and technology strategy logic (specifically,
technological uncertainty), we provide a novel framework of competitive advan-
tage in capability reconfiguration. We argue that an incumbent’s competitive
advantage in reconfiguring its capabilities during disruptive technological change
is a consequence of how it matches its OI ties of knowledge exchange with an
entrepreneurial firm to the nature of technological uncertainty it perceives. The
notion that firms can benefit from strategically selecting between tie choices has
recently received some attention in the literature (e.g. Hoetker and Mellewigt,
2009; Uzzi and Lancaster, 2004).
Two basic (but opposing) types of OI ties become central in the capability
reconfiguration problem. Whereas embedded ties tend to facilitate the exchange of
fine-grained information and mutual problem solving under uncertain conditions
(cf. Granovetter, 1985; Uzzi, 1997; Uzzi and Lancaster, 2004), contractual ties are
characterized by the exchange of information in the presence of strict appropria-
tion and contractual ordinances. In contractual arrangements, the contract is the
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primary mechanism of knowledge appropriation as opposed to embedded ties,

where trust is the primary mechanism of choice.
This article contributes to the literature in the following ways. First, while
prior studies investigate capability reconfiguration in a detailed manner as a
response mechanism (process) to technological change, we focus on successful
capability reconfiguration as a performance outcome that varies across incumbent
firms (i.e. the notion of competitive advantage in capability reconfiguration).
Capability reconfiguration advantage implies that an incumbent firm has chosen
an appropriate mechanism and timing for reconfiguration in a manner that is opti-
mal for its innovation outcomes. Please see Figure 1 for our conception of capabil-
ity reconfiguration mechanisms and timing, which draws upon Lavie’s (2006)
framework. As shown in Figures 1a and 1b, an incumbent firm effectively has
three simplified choices of capability reconfiguration mechanisms and timing,
based on prior literature.

Second, contrary to the received assumption in prior studies that disruptive
technological change is exogenous — suggesting an atomistic view of the firm as
opposed to an embedded view (Granovetter, 1985; Uzzi and Lancaster, 2004),
we consider that disruptive technological change can also be endogenous in a
knowledge spillover sense (c.f. Agarwal et al., 2007). For example, the incumbent
Substitution
Reconfigure Transformation
Choices in
reconfiguration
mechanism Evolution
Do not
Reconfigure
(a) Level of Reconfiguration
First-Mover
Non-
Delayed
Choices in Second-Mover
reconfiguration Delayed
timing
Bandwagon
(Follower)
Very delayed
(b) Timing of Reconfiguration
Figure 1. Capability reconfiguration (competitive advantage) and valid reconfiguration choices.
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firm’s immediate network often includes OI strategies with the entrepreneur-

ial firms that may have developed their innovations while working at an estab-
lished firm (c.f. Agarwal et al., 2004, 2007; Yang et al., 2009). This perspective is
crucial when accounting for why one specific firm could almost naturally be at an
advantage (through their prior ties with the source of innovation) over another but
could still fail to capitalize on this prior relationship.
The remainder of this chapter proceeds as follows. First, we reexamine critical
aspects of the received literature on creative destruction and the uncertainty asso-
ciated with this phenomenon. Following this, we consider the role of incumbent–
entrepreneurial firm OI strategies in this literature in terms of how they influence
capability reconfiguration. Then, we offer and discuss propositions that introduce

dyadic-type arguments into the phenomenon of incumbent reconfiguration advan-
tage under uncertainty. Finally, implications of this framework are discussed to the
extent that they may impact OI, technology strategy, and entrepreneurial manage-
ment theory and practice.
2. Creative Destruction and the Nature of Uncertainty

For decades, scholars have argued that the process of creative destruction is char-
acterized by competence destroying technologies (innovations) that can lead to the
substitution of incumbent firms with new entrants (e.g. Abernathy and Clark,
1985; Christensen, 1997; Hill and Rothaermel, 2003; Rothaermel, 2001;
Schumpeter, 1942; Tripsas, 1997). According to this literature, certain technologi-
cal innovations can destroy, disrupt, and make obsolete established competence,
while other types of innovations may refine or improve an existing competence
(Abernathy and Clark, 1985). Today, a substantial body of anecdotal and empirical
evidence documents the disruptive effects of entrepreneurial firm innovations on
established firms (Christensen, 1997; Lavie, 2006). Some of this evidence shows
the impact of disruptive technologies on product survival (e.g. de Figueiredo and
Kyle, 2006), on business unit survival (e.g. Mitchell and Singh, 1996) and on the
overall firm survival (e.g. Christensen, 1997; Suarez and Utterback, 1995).
A fundamental assumption among studies on technological change is that
incumbent firms face exogenous uncertainty about the prevailing new technologies
that may undermine their competitive advantage. That is, exogenous uncertainty
suggests that the focal incumbent firm played no direct or indirect role in the devel-
opment of the new technology. For example, it has been argued that many biotech-
nology entrepreneurs have developed innovations that can be considered competence
destroying to the established pharmaceutical industry firms because they build
upon new biological type of technologies as opposed to established pharmaceutical
industry technologies that rely on organic chemistry (Powell et al., 1996).
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Contrary to the exogenous view highlighted above, we argue that there is

benefit in considering how incumbent firms’ OI strategies with entrepreneurial
partners can influence the success of the focal incumbent alliance partner. The
added advantage of adopting this approach is twofold. First, we avoid a major
criticism of the work on disruptive technologies, which is that technologies are
neither, a priori nor universally disruptive (Danneels, 2004; the notion of
disruptive to whom?). Also, it permits for a nuanced account of how tie choices
in OI strategies with entrepreneurial firms’ matter, with the view to explicate the
influence of OI strategies that are tied via trust mechanisms (embedded ties) in
contrast to OI strategies tied strictly by contracts between an incumbent and an
entrepreneurial firm.
A key assumption in our study is that the nature of uncertainty associated
with technological change will certainly influence the choice of response mecha-
nisms (or lack thereof) adopted by the incumbent firm (Lavie, 2006; Milliken,
1987; Porter, 1985). Similar to Milliken (1987), we define uncertainty in our
context as a firm’s perceived inability to predict events accurately. The central
appeal of Milliken’s conceptualization is that it relegates uncertainty to a more
realistic conception of managers/firms “perceived uncertainty” regarding the
environment. In this way, uncertainty about the environment is subjective based
as opposed to an objective definition of environmental uncertainty. Thus, this
construction of uncertainty is also beneficial in the analysis of incumbent firm
capability reconfiguration advantage as it treats uncertainty as that which the
firm can manipulate based on its chosen strategy.1 Thus, uncertainty can be mul-
tiphased in terms of state, effect, or response uncertainty. While state uncertainty
refers to the inability of managers to predict the state of their external environ-
ment accurately, effect uncertainty refers to inability to accurately assess the
effect of known factors in the environment on the firm. Finally, response uncer-
tainty is associated with the inability of the firm to accurately forecast effective
responses to a known threat, with known effect. Critical in response uncertainty
is that firms may not be able to assess whether the need to respond at all to a
given event in the environment.
1
This characterization of perceived uncertainty is also similar to the distinction in the economics of
exogenous and endogenous uncertainty. Folta (1998) argues that in order to understand a firm’s deci-
sion to reconfigure its capabilities in knowledge-intensive industry, there is a need to distinguish
between exogenous and endogenous uncertainty. Whereas, endogenous uncertainty entails a situa-
tion where an incumbent firm is able to systematically reduce its knowledge gaps through its actions,
exogenous uncertainty usually involves a situation where the firm’s actions may not have any effect
at all on its perceived uncertainty.
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3. OI Strategies With Entrepreneurial Firms

When incumbent firms decide to pursue OI strategies with entrepreneurial firms,
they often have to make a choice on whether to use contractual or more embedded
ties with entrepreneurs. Overall, OI strategies between incumbent and entrepre-
neurial firms can manifest in many externally recognizable forms including indus-
try associations, joint ventures, alliances, corporate venture capital (CVC), etc.
(Dushnitsky and Lenox, 2005, 2006; Lavie, 2006). In terms of the nature of ties
underlying these OI approaches, some of these forms tend to produce more
embedded relationships than their counterparts (cf. Nohria and Garcia-Pont,
1991). For instance, joint ventures involve relatively frequent interactions between
alliance partners (working towards a common purpose), thereby leading to a

higher degree of embeddedness. This is contrary to a simple licensing agreement,
which can be interpreted as a contractual tie.

Furthermore, whereas some of these OI strategies are established in multipart-
ner firms (e.g. community-driven OI initiatives such as Wikipedia, Linux,
Chesbrough and Appleyard, 2007), a significant portion of the relationships that
are forged between incumbents and new technology firms for the purposes of
technology exploration are in bilateral arrangements. These bilateral ties can be
coupled using two opposing logics, those ties that tend towards relational (embed-
ded) mechanisms and those ties that are more formal, highly dependent on con-
tract mechanisms as a primary means of value creation and appropriation (Hoetker
and Mellewigt, 2009). In simple terms, embeddedness and contractual relation-
ships in the context of incumbent–entrepreneur partnerships can be construed as
opposite ends of the same continuum; whereas the embedded end of the contin-
uum is characterized by trustful interdependencies and beliefs of mutualism
between partners, the contractual end of the continuum is often characterized by
relational uncertainty and arms-length behaviors.
Thus, embeddedness in the context of our theoretical analysis refers to the
extent to which the incumbent firm and its entrepreneurial partner operate on
the basis of shared norms of cooperation, trustful interaction, and “untraded
interdependencies” as distinct from competitive, individualistic, “arm’s length
exchange” and hierarchical norms (Cooke, 2001). Trust often stems from
repeated interactions between firms, which reduces relational uncertainty, and
creates opportunities for the exchange of products, services, technologies
and knowledge that are difficult to price or enforce contractually (Uzzi, 1996,
1997). Embeddedness thus, entails that behavior and economic action of social
units and institutions are constrained by cognition, social structure, other insti-
tution and culture (Uzzi, 1997) and more broadly by ongoing social relations
(Granovetter, 1985). This suggests that the greater an incumbent firm is
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embedded with an entrepreneurial firm, the more detailed the knowledge it can
acquire from the entrepreneur.
In contrast to embedded ties, contractual ties suggest a heightened focus on
knowledge (and other resource) appropriation concerns. When firms form part-
nerships with other firms, resources are often exchanged or created in the process.
If one or both parties in the partnership believe that the other’s consumption of the
resources will limit their consumption of the same resource, they may be inclined
to take measures to circumvent this scenario. Therefore, some interfirm relation-
ships, ex ante tend to be governed strictly by contracts based on the belief that the
resources from the relationship are limited/scarce and that the continuity of this
relationship is bounded by time. In essence, a complicated contract (i.e. with many

contractual provisions and clauses) is used to limit the consumption of common
resource by an alliance partner since it is anchored upon specific clauses enforce-
able by the governing legal and intellectual property (IP) appropriability regime.
3.1. State uncertainty

Incumbent firms’ perceived uncertainty about new technologies can often be
related to the fact that they lack knowledge about the existence of potentially dis-
ruptive technologies in their competitive space. Thus, incumbent managers may
perceive environmental uncertainty, which is a type of uncertainty that is related
to the “state of the world out there” (Milliken, 1990). Managers that are faced with
this sort of uncertainty often recognize that their efforts at research and develop-
ment need to be complemented with external searches for breakthrough innova-
tions (Chesbrough, 2003; Cohen and Levinthal, 1990) in order to provide them
with a window on new technologies and practices (Dushnitsky and Lenox, 2006).
Having knowledge of the state of the external competitive space is critical for
incumbents especially if they are operating in high technology environments
where threats are likely to manifest more frequently than internal research and
development (R&D) can cope with.
As a result, incumbent firm managers often invest in relationships with entre-
preneurs who are at the frontier of new technologies. Entrepreneurs are also will-
ing to engage in these partnerships because they require complementary resources
and legitimacy from large, established firms in order to develop and commercial-
ize their technologies (Rothaermel, 2001; Rothaermel and Boeker, 2008; Stuart
et al., 1999; Tripsas, 1997). However, due to the entrepreneur’s initial feelings of
distrust of large established companies, the incumbent could be required to give
the entrepreneur “a free hand” at the initial stages of collaboration until a time
when the entrepreneur is able to trust the incumbent. Initiating any such relation-
ship with the entrepreneur (no matter how loosely coupled) would still allow the
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incumbent to (at least) distantly monitor the progress of the entrepreneur’s new
technology in a manner that will inform the incumbent when the new technology
starts to become a significant threat in the incumbent’s environment.
Furthermore, since the nature of perceived uncertainty experienced by incum-
bent managers at this stage is related to lack of awareness about the present state
of the world of technologies being developed by entrepreneurs, they are also more
likely to initiate and leverage many similar ties with different entrepreneurs. In so
doing, the incumbent firm forms a network of bilateral weak ties, which rely on
enforceable contractual mechanisms as a primary method of value appropriation.
These contractual positions often embody an element of equity, such as in the case
of CVC investments (Dushnitsky and Lenox, 2006). The logic of pursuing a weak
(contractual) tie in place of a strong (embedded) tie at this stage is based on effi-
ciency of information acquisition. That is, at this stage, the incumbent firm is
unable to interpret the environment, and will prefer to have many sources that will
provide it with strategic information related to the environment.
The incumbent’s problem at this stage of uncertainty is gaining preliminary
knowledge related to the progress of new technologies. Therefore, under state
uncertainty, value appropriated from the entrepreneur will essentially be in the
form of general information about the new technology since the entrepreneur may
be practicing selective revealing of information about their new technology.
Information shared here may include limited description about what the new tech-
nology will be used for. For instance, it may specify potential markets where this
technology can be applied without necessarily revealing any of the proprietary
information about this technology. It is also possible for the entrepreneur to share
information related to the stage of development of the new technology as well as
the nature of the actors involved in codevelopment, without being specific about
information that will compromise their competitive advantage. This contractual
relationship provides recourse for the entrepreneur in the event of a malfeasant
incumbent and vice versa.
Consider the Robert Kearns example from Gans and Stern (2003). Kearns
invented the intermittent windshield wipers in the 1960s but was unable to com-
mercialize this technology on his own. When Kearns attempted to license this tech-
nology to Ford Motor Company, he inadvertently revealed the operating principles
and functionality of his technology to Ford (Gans and Stern, 2003). While Ford
rejected the license, it still went ahead and commercialized a similar technology
while refusing to pay royalties to Kearns. Kearns was unable to extract any eco-
nomic returns from this invention until the 1990s (20 years after) when he success-
fully upheld his patent. This example highlights the reason why many entrepreneurs
would engage in selective revealing strategies with incumbents at the initial stages
of collaboration until a time when the entrepreneur is able to trust the incumbent.
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Hence, while these entrepreneurs may leverage OI platforms with established firms
in order to create a market for the idea, they are also aware of the perils of disclosing
too much information even in the presence of a strict and enforceable contract.
Furthermore, the entrepreneur’s unwillingness (or inability) to share detailed
information at this stage (when the incumbent faces state uncertainty) may also be
attributed to the progress of the technological opportunity itself. A good many
entrepreneurs often find that there is no readymade market for their ideas (Gans
and Stern, 2003). Put differently, when incumbent managers experience uncertainty
about the existence of a new technology, it suggests that the technology in question
could be at the initial stages of development. If a technology is at the initial (oppor-
tunity recognition) stage (Shane and Venkataraman, 2000), then further research is
often needed to be able obtain more concrete information (e.g. commercial value)
of the technological innovation. Therefore, whereas an embedded relationship with
the entrepreneur at this stage will entail significant investments and effort for the
incumbent, a contractual relationship will be comparatively inexpensive to the
incumbent, thereby permitting the incumbent firm to engage in many of such
“exploratory/search” ties with other entrepreneurs.
We suggest that a strictly contractual ties, which presumes the risk of oppor-
tunistic behavior and the rivalrousness of knowledge, becomes optimal at this
stage of uncertainty because it simultaneously permits the incumbent to gain pre-
liminary knowledge of a potential disruptive technology and it provides an incum-
bent with an easy exit if the technology fails to gain legitimacy. The fact that the
relationship is also strictly contractual helps ensure that the incumbent can gain
access to more generic information while permitting the entrepreneur to retain
highly proprietary information at these initial stages. Based on the incumbent’s
need for capability reconfiguration, the firm can match the contract with the entre-
preneur to serve its needs. If the needs are met, they can either terminate this
relationship almost in a costless and timely manner or advance this relationship in
order to gain more detailed information.
Proposition 1: Incumbent firms whose OI strategies involve contractual ties

instead of embedded ties with an entrepreneur during periods of state uncertainty
will experience greater competitive advantage in capability reconfiguration.
3.2. Effect uncertainty

If the incumbent firm overcomes state uncertainty and becomes aware of the
existence of a credible threat in their environment, it may now be faced with uncer-
tainty about the effect of this threat. Effect uncertainty about new technologies
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suggests that the incumbent firm is unable by itself to understand or interpret the
full ramifications of the technology on its competitive advantage. The incumbent
firm is essentially uncertain about the effect of this new technology on their exist-
ing capabilities, implicitly suggesting that the incumbent has gained knowledge
about the existence of the technology. Arguably, this stage of uncertainty is when
the incumbent firm managers are focused on gaining clarity on whether the tech-
nology in question is disruptive to their company or not.
For illustration, consider the following hypothetical scenario. An incumbent
software firm A, through prior OI strategies with a new venture, B is now aware
of a new technology (Z) that has the potential to be disruptive to the incumbent’s
competitive advantage in its product market. The only specific knowledge A has
about the new technology is that: (1) Z utilizes a significantly different type of
algorithm from the old technologies that A has developed over its lifetime, and
(2) Z is at a stage where it can be commercialized in a similar market as that of A.

The question therefore should be: is the new technology Z capable of disrupting
A’s competitive advantage when commercialized? Does A need to reconfigure part
or all of its capabilities to respond to this technological change? Furthermore,
considering that Z is developed by a new venture B, how should A structure its
relationship with B in order to understand the full effect of the new technology,
Z on A’s existing competitive advantage in the product market?
The scenario above depicts a situation where the incumbent firm needs to
find the optimal OI strategies with an entrepreneur, in order to understand the
effect of a newly identified technology on the incumbent’s competitive advan-
tage.2 A key aspect of this problem is that the incumbent may already have a
relationship with an entrepreneur that has proprietary knowledge of this technol-
ogy but may not yet have detailed information about the technology due to infor-
mation asymmetries between the entrepreneurial firm and the incumbent firm.
Another possibility is that the entrepreneurial firm in question may likely be
involved in OI strategies with other incumbent firms. Therefore, the focal incum-
bent firm will need to find a differentiating mechanism in order to gain detailed
2
It is important to clarify that the incumbent’s goal at this point is to understand the quality of
the new technology, not the quality of the entrepreneurial firm per se. While the quality of the
entrepreneurial firm is equally important for the incumbent’s competitive advantage, this analysis
views technology as the critical locus of incumbent’s uncertainty related to capability reconfigura-
tion. This suggests that entrepreneur in question may be dispensable when the incumbent truly
understands the implications of the new technology (e.g. the incumbent firm may decide to pursue
the new technologies on their own or decide to acquire a different company, which is a better fit for
their organizational culture). For an analysis of the influence of the quality of the entrepreneurial
firm, please see Stuart et al. (1999).
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information about the new technology relatively faster in order to enable it to

determine whether it should increase or decrease its commitment to the develop-
ment of this new technology.
If the incumbent firm chooses a strictly contractual relationship with the
entrepreneur, the entrepreneur will be less likely to share detailed information
because of the decreased likelihood of trust in this relationship. This sort of con-
tractual relationship may impel and induce the entrepreneur to reveal detailed
information and may thus expose the entrepreneur to misappropriation in weak IP
regimes (Dushnitsky and Lenox, 2005). At this stage, the entrepreneur is also
searching among its network of firms for the most probable firm that will provide
it with the greatest opportunity to thrive.

On the other hand, if the incumbent firm chooses a more embedded form of
cooperation with the entrepreneur, the incumbent could earn the trust of the
entrepreneur and will also be actively involved in enhancing the value proposi-
tion for the entrepreneur. This embedded relationship ensures that the incumbent
will gain better information or knowledge about the entrepreneur’s new technol-
ogy in comparison to its peers, thus giving the incumbent a competitive advan-
tage. If the technology shows significant potential, the incumbent firm may even
go as far as acquiring the new venture as a way of acquiring its capabilities
(Lavie, 2006).
Now consider an example of Yahoo’s alliance with and then acquisition of
Overture Services in the context of managing effect uncertainty in the Internet
search technology market. Yahoo was founded in 1994 on the principle of using
search directories (powered by human editors) for organizing a then disorganized
web of information. With the explosive growth of the Internet in the late 1990s,
these directories quickly became obsolete technology as they were becoming dis-
placed by algorithmic search technologies developed by companies such as
Inktomi and Google and sponsored search algorithm developed by Overture
Services (formerly Goto.com). Jupiter Media Metrix reported that while visitors
to Yahoo spent 106 minutes on average on the Yahoo site, Goto.com visitors spent
56 minutes on average, suggesting that consumers found what they wanted much
faster on Goto.com (Overture Services) (Ecommerce Times, 2001).
To most incumbents in the Internet search industry, Overture Services repre-
sented simultaneously a threat and an opportunity to improve their competitive
advantage. Both Yahoo and MSN Search (Microsoft’s search company) engaged in
early partnerships with Overture. And by 2002, Yahoo, MSN, and other Overture
partners were starting to profit from their relationships with Overture amidst the
uncertainty about the long-term effect of Overture’s new technology. To guarantee
capability substitution (at a competitive advantage) to sponsored search, Yahoo’s
relationship with Overture eventually became more embedded when Yahoo
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decided to acquire Overture in 2003. This strategic move enabled Yahoo to gain a
temporary advantage over MSN in the overall Internet search market.
Proposition 2: Incumbent firms whose OI strategies involve embedded ties instead

of contractual ties with an entrepreneur during periods of effect uncertainty will
experience greater competitive advantage in capability reconfiguration.
3.3. Response uncertainty

It is conceivable that incumbent managers may be able to overcome state and
effect uncertainties related to new technologies without resolving the issue of how
to respond to these technologies. In other words, as managers face the decision
on how to respond to the changes they have noticed, analyzed, and understood;
they may experience response uncertainty, which suggests a situation where the
incumbent manager is unsure about the response options or the efficacy of each
option (Milliken, 1987, 1990). Thus, the incumbent firm faces the dilemma of
how to alter its capabilities in response to a perceived disruptive technological
change. If they decide to change their capabilities, incumbent firms can opt for
capability substitution, transformation or evolution (Lavie, 2006). However,
incumbents may not be aware of the efficacy of either of these options in light of
information they have received from an entrepreneur related to the effect of the
new technology (at least not without due consideration of how their internal
capabilities can best match the new regime). Encapsulated in the uncertainty
about choices of reconfiguration mechanisms is also the uncertainty of timing of
capability reconfiguration.
For example, consider the example of Encyclopedia Britannica (EB)’s
response to emergence of CD-ROM and Internet technology as discussed by Lavie
(2006). With the emergence of these technologies in the 1990s, EB pursued capa-
bility evolution first before switching capability substitution (a more drastic
change in capabilities, which occurs at the portfolio of capabilities level), and
finally to a capability transformation mode, which is often considered an interme-
diary response (Lavie, 2006). The consequence of this response uncertainty is that
EB experienced significant losses and market share to competitors such as
Microsoft Encarta.
Furthermore, incumbents may also decide not to reconfigure at all, especially
if the incumbent managers believe that the costs of reconfiguration will outweigh
the benefit of doing so (Henderson, 1993, 2006). Determining how to reconfigure
the incumbent’s capabilities at this juncture becomes an artifact of the firm’s learn-
ing mechanisms or absorptive capacity (Cohen and Levinthal, 1990; Lavie, 2006;
Zollo and Winter, 2002). For example, Zollo and Winter (2002) argue that the
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9.75x6.5
firm’s ability to evolve its capabilities operates through a mechanism where learn-
ing enables the firm to develop dynamic capabilities such as process R&D,
restructuring and post-merger/acquisition integration.
Thus, whereas embedded partnerships will enable the incumbent firm to
understand fully the effects of the disruptive technology, the firm derives little or
no value from an embedded relationship in terms of how the firm chooses to
respond to the technological change except when it involves the incumbent
acquiring the entrepreneurial firm. The firm determines how to respond based on
the confluence of critical factors, namely (1) its learning/absorptive capacity for
capability development (Cohen and Levinthal, 1990; Winter, 2000), (2) the firm’s
assessment of how the acquisition of new capabilities will affect the fate of its
existing (thriving) businesses (Henderson, 1993, 2006), and (3) the firm’s percep-
tion of competitive forces that will propagate the progress of the disruptive
technology.
The latter factor is greatly influenced by incumbent’s knowledge of the (poten-
tial) adoption rates of this new technology by other incumbents and new entrants.
Incumbents can gain access to this sort of information through specific contracts
that control and limit the flow of resources from an alliance with an entrepre-
neurial firm. Furthermore, an incumbent many need to initiate many of these
contracts with different entrepreneurs in order to understand the extent of their
competition for this new technology. Thus, based on the above discussion, we offer
the following proposition.
Proposition 3: Incumbent firms whose OI strategies involve contractual ties instead

of embedded ties with an entrepreneur during periods of response uncertainty will
experience greater competitive advantage in capability reconfiguration.
The framework that we propose here (see Figure 2) shows a sinusoidal model
of incumbent firm’s competitive advantage in capability reconfiguration under
uncertainty based on the influence of its OI strategies with entrepreneurial
partner(s). In short, this framework suggests that incumbents will find embedded
ties with entrepreneurial firms most beneficial for capability reconfiguration
when they face uncertainty about the effects of new technologies. Understanding
the potential effects of new technologies requires more detailed and proprietary
information about the mechanisms of this technology. This sort of information can
only be obtained under conditions of trust, which is characteristic of embedded
exchanges (Uzzi, 1997).
On the other hand, if the incumbent firm’s uncertainty about new technologies
is related to generic “lack of awareness” of potential disruptive technologies or
due to “insufficient information on how best to reconfigure its capabilities”, we
b2593_Ch-08.indd 208 06-Mar-18 8:35:43 AM

Embedded
Embeddedness entails
fine-grained/proprietary
knowledge exchange
whereas contractual
entails “generic”
information exchange
Contract-
based
State Effect Response
NATURE OF UNCERTAINTY
Figure 2. The nature of uncertainty and the choice of open innovation ties.
p ropose that the incumbent should engage in a more contractual relationship with
entrepreneurial partners. Contractual-based OI strategies with entrepreneurs under
state/response of uncertainty are beneficial because they are relatively lower cost
and yield generic information relatively faster than embedded alliances.
Furthermore, entrepreneurs need not fear that the incumbent firm will misappro-
priate their invention under this sort of arrangement (Alexy et al., 2009).
4. Implications and Conclusion

The conceptual framework of this chapter builds upon some recent insights from
the relationship between technological change and perceived uncertainty (Milliken,
1987), and capability reconfiguration (e.g. Lavie, 2006; Teece, 2007). That is, we
extend Milliken’s theory of perceived uncertainty to the discussion of capability
reconfiguration via OI ties with entrepreneurial firms. Our conceptual framework
shows that beyond the role of perceived uncertainty in explaining entrepreneurial
action, that there is an additional role of perceived uncertainty in the competitive
advantage of established firms. In short, the framework identifies that the ability
of an incumbent firm to successfully reduce state, effect, and response uncertainty
as resting partly upon OI tie choices with entrepreneurial partners.
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9.75x6.5
Our study makes a few suggestions for future conceptual and empirical studies
at the intersection of OI, entrepreneurship, and technology strategy. First, research
on OI has focused on understanding the direct effects of external knowledge
sources on the firm’s innovation, paying less attention on the role of tie choices in
predicting innovation capabilities in recipient firms. We advance our understand-
ing of how firms leverage different types of ties with entrepreneurial firms to
make sense of the required level and timing of capability reconfiguration in the
firm (see Lavie, 2006). We propose that the fit between different regimes of tech-
nological uncertainty and the ties coupling entrepreneurial firms could lead to
superior outcomes for the recipient firms in these relationships. Thus, we extend
recent research that argues that a capability-based framework for OI is essential to

complement absorptive capacity of the firms involved in OI strategies. Research
in entrepreneurship will benefit from further intricate, theoretical, and empirical
examinations of the concept of entrepreneurial action and their effects in OI strate-

gies. For example, research expanding on how OI strategies with entrepreneurs
affects timing of reconfiguration efforts in incumbent firms would be very benefi-
cial, especially in the context of high velocity environments. These sorts of
research directions are beneficial because they will help reconcile the neoclassical
notion of the entrepreneurs as competence destroyers and their contemporary con-
ceptualization as competence builders in incumbent firm networks.
Our analysis also suggests that capability reconfiguration can be viewed as a
measure for incumbent firm competitive advantage. This article agrees with
Lavie’s (2006) recent thesis on the need to enrich technology strategy research
through empirical investigation of capability reconfiguration as a way of under-
standing the idiosyncrasies of incumbent’s responses to technological change.
Therefore, this paper also extends the long-standing literature on technological
change through a capabilities lens. We offer a network (dyadic)-based approach
for considering technological change in reference to the heterogeneity in firm
responses and performance during periods of disruptive technological change.
This paper makes a unifying contribution to the literature. By suggesting that
interfirm embeddedness, a sociological concept and interfirm contracting (an
economic concept) exist on a continuum, we provide an extension of prior studies
on the embeddedness of economic action (e.g. Granovetter, 1985; Uzzi, 1996,
1997). While previous studies treat embeddedness as a construct that is almost
dichotomous with transactional behavior, this study seeks to provide a link
between the two. This is because embeddedness assumes that one party’s con-
sumption of a public (alliance) good does not deplete the other’s benefits. This
belief of mutualism arises from a situation of trust among firms, which in turn is
a by-product of the exchange of fine-grained information. The opposite is the case
with contractual relationships. Partners in strict contractual relationships will limit
b2593_Ch-08.indd 210 06-Mar-18 8:35:43 AM

information sharing to generic, easily observable sorts of information in order to

retain their competitive advantage over their partners.
Furthermore, our research is meaningful on the basis of how it explores the
performance attributes of embeddedness, using the context of capability recon-
figuration. Our arguments support Uzzi’s (1997) notion that there are limitations
of embeddedness in terms of how it affects performance by limiting the flow of
diverse information. We suggest that these limitations also exist when the costs of
creating an embedded relationship with a specific entrepreneur far outweigh the
benefits of doing so.
In conclusion, the theoretical framework in this chapter suggests that incum-
bent firms need to develop a more sophisticated handle for their OI strategies with
entrepreneurial firms. Given the prevalence of misappropriation and information
asymmetry concerns in these relationships, incumbent firms may need to develop
a dynamic framework for managing their OI strategies between different regimes

of technological uncertainty. That is, the framework suggests that CVC invest-
ments in new firms may fit better with periods of state uncertainty, while joint
ventures may fit more with periods of effect uncertainty, when trust and collabora-
tive problem solving is essential. Ultimately, capability reconfiguration advantage
would entail a delicate balance between leveraging a firm’s internal mechanisms
for learning and managing the strength of ties in its OI strategies.
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5 b2593 Open Innovation, Ecosystems and Entrepreneurship

The Ties that Change:

and Capability Reconfiguration Under

In this chapter, we examine open innovation (OI) strategies that incumbent

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196 I. Uzuegbunam and S. Nambisan

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The Ties that Change197

the differences in incumbent firms’ existing complementary assets (Hill and

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198 I. Uzuegbunam and S. Nambisan

primary mechanism of knowledge appropriation as opposed to embedded ties,

based on prior literature.

(a) Level of Reconfiguration

(b) Timing of Reconfiguration

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The Ties that Change199

firm’s immediate network often includes OI strategies with the entrepreneur-

capability reconfiguration. Then, we offer and discuss propositions that introduce

2. Creative Destruction and the Nature of Uncertainty

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200 I. Uzuegbunam and S. Nambisan

Contrary to the exogenous view highlighted above, we argue that there is

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The Ties that Change201

3. OI Strategies With Entrepreneurial Firms

alliance partners (working towards a common purpose), thereby leading to a

which can be interpreted as a contractual tie.

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202 I. Uzuegbunam and S. Nambisan

relationship is bounded by time. In essence, a complicated contract (i.e. with many

3.1. State uncertainty

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The Ties that Change203

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204 I. Uzuegbunam and S. Nambisan

Proposition 1: Incumbent firms whose OI strategies involve contractual ties

3.2. Effect uncertainty

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The Ties that Change205

(2) Z is at a stage where it can be commercialized in a similar market as that of A.

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206 I. Uzuegbunam and S. Nambisan

information about the new technology relatively faster in order to enable it to

it with the greatest opportunity to thrive.

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The Ties that Change207

Proposition 2: Incumbent firms whose OI strategies involve embedded ties instead

3.3. Response uncertainty

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208 I. Uzuegbunam and S. Nambisan

Proposition 3: Incumbent firms whose OI strategies involve contractual ties instead

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The Ties that Change209

4. Implications and Conclusion

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210 I. Uzuegbunam and S. Nambisan

recent research that argues that a capability-based framework for OI is essential to

examinations of the concept of entrepreneurial action and their effects in OI strate-

b2593_Ch-08.indd 210 06-Mar-18 8:35:43 AM

The Ties that Change211

information sharing to generic, easily observable sorts of information in order to

5 b2593 Open Innovation, Ecosystems and Entrepreneurship

The Ties that Change197

The Ties that Change199

The Ties that Change201

The Ties that Change203

The Ties that Change205

The Ties that Change207

The Ties that Change209

The Ties that Change211

The Ties that Change213