While existing research suggests that firms create breakthrough innovations by acquiring external knowledge and applying it to their particular situation, it also underscores the difficulties in doing so. The question for managers is this: Does applying knowledge that has not been created by their organizations enhance or diminish a firm's performance? Managers whose firms make strategic decisions about their product portfolio will find helpful guidance in this article.
Managers trying to gauge the impact of applying external knowledge sources to their firms' innovations can draw on an existing body of research to help them in their task. However, there is very little research to help those same managers determine how that knowledge will impact their firm's performance. The difficulty of measuring this impact represents a particular challenge for managers, as many today believe that the acquisition and application of knowledge from external sources will clearly have a positive impact on firm performance.
Our purpose in writing this article is to assess, in general terms, just what impact the use of external knowledge has on firm performance. In the article we address this central question: Does the use of external knowledge actually deliver the competitive advantage that many think it does? In the article we highlight the costs of acquiring external knowledge and the risks of assimilating that knowledge either improperly or inadequately. We suggest that the benefits of using external knowledge sources may not be consistently positive, but rather that the benefits are dependent on a firm's strategies and capabilities. As we point out, the performance of firms that acquire a considerable amount of external knowledge without the ability to apply it effectively will decline when they enter multiple, new-product markets. On the other hand, firms with a well-developed capacity for assimilating knowledge acquired from external sources will likely improve their performance because they can manage the associated costs and risks and know how to deploy it effectively.
USING EXTERNAL SOURCES IN THE PROCESS OF CREATING KNOWLEDGE
The ability of organizations to create, transfer, assemble, integrate and leverage knowledge is fundamental to achieving competitive advantage. Creating new knowledge, however, often involves combining internal and external knowledge in a unique way. From our perspective, internal knowledge is all the knowledge that a firm has created within its boundaries, while external knowledge is the knowledge that other firms have created and is thus stored within those other firms' boundaries.
Firms rely on and acquire knowledge created by other firms for two primary reasons. First, creating knowledge typically involves enormous costs, costs that are often beyond the capacity of a single organization to incur. This is particularly true in knowledge-intensive industries, where standards and technologies change rapidly. Therefore, firms often form joint ventures, strategic alliances or networks so that they can pool their resources in their efforts to create new knowledge as a source of competitive advantage.
Second, the process of gathering or creating knowledge is never complete. Rather, it continues indefinitely through the continuing interactions between and among individuals and organizations. As a result, firms need to interact with and monitor the environment for sources of external knowledge to better understand and manage their knowledge-development process. In that spirit, firms often interact with suppliers, customers, competitors, industry associations and research communities.
It is definitely true that firms can benefit by using knowledge created by other firms to create new applications or new products. Often, such new applications and products tend to be novel and path breaking. However, novelty alone does not always guarantee commercial success. While firms may create better innovations by using external knowledge, those innovations may not necessarily result in improved firm performance because these firms may not be able to manage the costs and risks involved in acquiring and using external knowledge. …