Rapid changes in industry and technology are making it increasingly daunting for companies to develop new products internally. Often times, firms cannot generate the knowledge they need from internal sources alone. The essential question facing these firms is how can they most effectively assimilate new knowledge from external sources?
To answer this question we must first look at limits on absorptive capacity, the ability to absorb new knowledge, and how those limits can constrain the benefits of seeking alliances according to the study “Unpacking absorptive capacity: A study of Knowledge Utilization from Alliance Portfolios” by Jaideep Anand at The Ohio State University and Gurneeta Vasudeva at the University of Minnesota. The researchers studied data on alliances between firms engaged in fuel cell technology development. They studied the variations in alliance portfolios and the associated knowledge utilization outcomes among 120 publicly traded and private firms in 11 countries.
The study unpacks absorptive capacity into two parts: latitudinal and longitudinal absorptive capacity. Latitudinal absorptive capacity focuses on how companies process and use diverse knowledge, while longitudinal absorptive capacity focuses on distant or unfamiliar knowledge. Anand and Vasudeva found that a moderate burden on firms’ latitudinal absorptive capacity, corresponding to medium diversity in their portfolios, contributes to optimal knowledge utilization. However, increasing the demand on firms’ longitudinal absorptive capacity negatively affects this relationship.
Let’s take a closer look at latitudinal absorptive capacity and how it allows firms to use diverse knowledge to develop technological innovations. According to the study, an alliance between a company that concentrates on automotive technologies and a company that has technological capabilities in hydrogen conversion and storage technologies will aid the automotive company by providing a research alternative for automotive fuel technologies.
In contrast, longitudinal absorptive capacity is utilized by firms seeking knowledge distant from their primary technology. For example, an alliance between a firm that develops a phosphoric acid-based electrolyte and a firm that focuses on a hydrogen storage technology. This alliance provides the knowledge necessary to innovate and compete successfully outside of the firm’s area of expertise.
There are important trade-offs between the extent of learning related to the two types of absorptive capacity. The study found that knowledge utilization is optimized when the demands on firms’ latitudinal absorptive capacity are neither too high nor too low. It also finds that as firms venture into less familiar technological domains, their longitudinal absorptive capacity constraints inhibit knowledge utilization. Consequently, the level of latitudinal absorptive capacity constraint at which knowledge use peaks varies according to the demands on longitudinal absorptive capacity.
In conclusion, a firm’s knowledge can only be effectively expanded within the limits of their absorptive capacity. View the original research below to learn more of the implications of firms’ external knowledge and discover how external alliance portfolio-based capabilities can interact with firms’ absorptive capacity to determine their knowledge utilization.
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