Create or Appropriate? Strategic Alignment Preference in Incumbent-New Venture Alliances and Innovation Outcomes

Incumbent inertia, defined as the inability to enact internal change in the face of significant external change (Ghemawat 1991; Gilbert 2005), leads to the downfall of incumbents in industries in which they once had a competitive stronghold. Incumbents that fail to enact internal change and innovate suffer from the capability-rigidity paradox (Leonard-Barton 1992; Atuahene-Gima 2005) in which more success leads to reinforcing commitment to a firm’s current course of action (Gilbert 2005). Firms are able to build competitive advantage via resource deployments and developing capabilities that allow them to outperform competitors (Day 1994), but capabilities that led to previous success may cause firms to become uncompetitive as the competitive landscape changes. Previous research suggests that firms are better able to overcome incumbent inertia by entering vertical alliances (i.e. different levels of the value chain). While the majority of horizontal alliance research focuses on firms that are similar in size and resources; in this study we suggest that the incumbent-new venture dyad is an exception to knowledge transfer and redundancy issues that plague horizontal partnerships. By entering into alliances with new ventures, incumbent firms can become more innovative and overcome incumbent inertia that affects firms entrenched in product and market positions. In a sample of 693 incumbent-new venture partnerships over a period of 4 years, this study investigates how the strategic emphasis of incumbents impacts the number of partnerships with new ventures and subsequently innovation outcomes. The results show that incumbent firms with a strategic emphasis on value creation enter more partnerships with new ventures to gain access to innovative ideas. In addition, an incumbent’s age and new venture’s legitimacy are investigated as to how they may impact the relationship between strategic emphasis and the number of partnerships with new ventures. As firms become older, the relationship between strategic emphasis and the number of partnerships with new ventures is strengthened. The results show that a new venture’s legitimacy has no impact on the relationship between strategic emphasis and number of partnerships. Finally, the results show that incumbents become more innovative when they enter into more partnerships with new ventures, a key to overcoming incumbent inertia.