Knowledge sourcing by multidivisional firms
Description
While the real options perspective recognizes that firms are complex, non-monolithic entities, its application to the study of R&D investments under uncertainty has largely been at the firm level. This study examines how the internal distribution of capabilities across divisions influences the knowledge-sourcing strategies of multidivisional firms. Our formal model shows that under low uncertainty, firms allocate resources to stronger divisions to maximize returns. Under high uncertainty, however, firms invest more in weaker divisions to avoid overlooking potential high performers. These choices are interdependent, as higher returns from a revealed winner during late-stage knowledge sourcing (low uncertainty) create an incentive for firms to cast a wider net during the early stage (high uncertainty). Consequently, at the firm level, a more unequal distribution of capabilities across divisions leads to increased early-stage sourcing but reduced late-stage sourcing. We find empirical support for these predictions using data on knowledge-sourcing activities of large pharmaceutical companies. This study extends the real options literature by demonstrating that the capabilities of a firm’s constituent units influence strategy beyond aggregate firm-level capabilities. Thus, accounting for heterogeneity across divisions helps explain variations in knowledge-sourcing strategies across firms.
Copyright Date
January 2016
Publication Date
1-1-2016
Keywords
Corporate strategy, Knowledge sourcing, Market dynamics, Multidivisional firms, Specialized knowledge
Conference
Strategic Management Society Annual Conference, 17-20, September, 2016, Berlin, Germany
