Repeating a familiar pattern in a new way: The effect of exploitation and exploration on knowledge leverage behaviors in technology acquisitions

• Author: Gerry McNamara,Seungho Choi
• Date: 01 February 2018
• DOI: http://doi.org/10.1002/smj.2677
• Published date: 01 February 2018

RESEARCH ARTICLE

Repeating a familiar pattern in a new way: The

effect of exploitation and exploration on knowledge

leverage behaviors in technology acquisitions

Seungho Choi

1

| Gerry McNamara

2

1

Department of Management, Ewha School of

Business, Ewha Womans University, Seoul, South

Korea

2

Department of Management, The Eli Broad

Graduate School of Management, Michigan State

University, East Lansing, Michigan

Correspondence

Seungho Choi, Department of Management, Ewha

School of Business, Ewha Womans University,

Seoul 03760, South Korea.

Email: choise@ewha.ac.kr

Funding information

National Research Foundation of Korea, Grant/

Award number: NRF-2017S1A5A8018959;

Ministry of Education of the Republic of Korea

Research Summary: We identify two types of knowledge

leverage behaviors undertaken by acquiring firms: inte-

grated and independent knowledge leverage. We address

how the prior exploitation or exploration orientation of

acquirers influence these two modes of knowledge lever-

age behaviors. The degree of exploitation of acquirers

promotes integrating their existing knowledge with

acquired knowledge in innovative actions. In contrast, the

degree of exploration of acquirers increases the likelihood

that new innovations will use acquired knowledge with-

out integrating it with their prior knowledge. In addition,

the firm’s prior acquisition rate moderates the relationship

between the acquiring firms’previous exploitation or

exploration orientation and their knowledge leverage

mode. The findings of this article suggest that pre-

acquisition innovation capabilities are distinct from but

influence the post-acquisition innovation actions.

Managerial Summary: Firms often undertake acquisi-

tions to gain access to new knowledge, but they can differ

dramatically in how they leverage acquired knowledge.

We show that the firm’s prior innovation patterns drive

this choice. Firms that have previously focused on incre-

mental innovations in their internal innovation efforts

tend to integrate acquired knowledge with their own prior

knowledge. In contrast, firms that have previously pur-

sued bold innovations tend to leverage acquired knowl-

edge alone in new innovations. Thus, we show that firms

use acquisitions as a means to extend their internal inno-

vation patterns—firms that have focused on incremental

innovations extend that with acquisitions by linking new

innovations to their prior knowledge while firms that

have pursued bold initiatives use acquired knowledge to

move in new technology directions.

Received: 25 August 2015 Revised: 10 May 2017 Accepted: 16 May 2017 Published on: 1 December 2017

DOI: 10.1002/smj.2677

356 Copyright © 2017 John Wiley & Sons, Ltd. wileyonlinelibrary.com/journal/smj Strat Mgmt J. 2018;39:356–378.

KEYWORDS

acquisition rate, exploitation and exploration,

knowledge leverage, pre-acquisition innovation, post-

acquisition innovation, technology acquisitions

1|INTRODUCTION

Obtaining knowledge from external partners by acquisitions has been identified as a key element of

competitive strategies (Ahuja & Katila, 2001; Granstrand & Sjoander, 1990). Technology acquisi-

tions, in which established firms acquire technology-based firms, are a common and important acti v-

ity for knowledge accumulation by firms in technology-driven markets (Ahuja & Katila, 2001;

Graebner, Eisenhardt, & Roundy, 2010; Puranam & Srikanth, 2007). Technology acquisitions pro-

vide opportunities to expand the acquirers’knowledge repository by absorbing the knowledge of tar-

get firms. Although firms might develop new knowledge and technology internally, Dierickx and

Cool (1989) described the difficulties of developing technology internally as time compression dis-

economies: Developing valued capabilities requires a depth of experience and cumulative knowl-

edge that cannot be quickly or easily nurtured internally. Furthermore, continuous dependence on

internal knowledge can also limit firms to incremental improvements and suboptimal solutions

(Levinthal & March, 1993). Building a new competitive capability via technology acquisitions is a

multi-stage process in which the acquisition itself is simply the first step. Acquiring firms obtain

valuable knowledge through acquisitions of target firms. Then, they must utilize the acquired knowl-

edge for their subsequent services or products. Otherwise, the acquired knowledge is simply hoarded

within the acquiring firms, and they fail to actualize the value of the acquired knowledge.

Most acquirers experience difficulty creating value by leveraging the knowledge of target firms

after acquisitions (Ranft, 2006). In an empirical study, King and his colleagues (2008) demonstrated

that technology acquisitions fail to lead to higher financial performance on average. In addition,

Capron and Mitchell (2012) reported that only 27% of executives in their survey had successfully

extracted the value of the target firms’resources. These studies indicated that it is critical to under-

stand how acquiring companies “leverage”the resources of the acquired firm after an acquisition to

create value. To contribute to our understanding about the post-acquisition leverage process, we

identify and discuss two distinct types of knowledge leverage behaviors undertaken by acquiring

firms: integrated and independent knowledge leverage. Furthermore, we examine how the prior

exploitation or exploration orientation of acquiring firms influences these two modes of knowledge

leverage behaviors.

Prior research has examined a range of post-acquisition changes firms take to effectively lever-

age the acquired resources of target firms. For example, studies have examined how changes in the

organizational structures (Paruchuri, Nerkar, & Hambrick, 2006; Puranam, Singh, & Zollo, 2006),

employees (Graebner, 2004), and resource redeployment (Capron, Dussauge, & Mitchell, 1998;

Karim, 2006; Karim & Mitchell, 2000) of the acquiring and target firms after acquisitions influence

post-acquisition performance and innovation. While these studies enhance our understanding of the

effect of post-acquisition changes on an acquiring firm’s ability to leverage acquired resources, they

have paid little attention to how pre-acquisition attributes affect acquiring firms’knowledge leverage

CHOI AND MCNAMARA 357