The Structure of Absorptive Capacity in Three Product Development Strategies

• Author: Ednilson Bernardes,Mei Li,Steven A. Creek,Paul F. Skilton
• DOI: http://doi.org/10.1111/jscm.12223
• Date: 01 July 2020
• Published date: 01 July 2020

THE STRUCTURE OF ABSORPTIVE CAPACITY IN THREE

PRODUCT DEVELOPMENT STRATEGIES

PAUL F. SKILTON

1

Washington State University

EDNILSON BERNARDES

1

West Virginia University Morgantown

MEI LI

1

Michigan State University East Lansing

STEVEN A. CREEK

Appalachian State University Boone

This study develops and tests theory about different forms of absorptive

capacity that support radical, differentiation and imitation product devel-

opment strategies. Absorptive capacity theory provides a generalized expla-

nation for how firms exploit their embeddedness in relationships with

buyers and suppliers. We develop and test theory that relates combinations

of four components of absorptive capacity (R&D capability, product devel-

opment capability, cooperative embeddedness, and competitive embedded-

ness) to success rates in three product development strategies. We used

data from the American pharmaceutical industry to estimate generalized

linear mixed models. Our results confirm known relationships between

R&D capability, alliance network position, and the development of radi-

cally new products, but reveal different sets of factors that influence differ-

entiation and imitation. We describe a previously undetected influence of

competitive embeddedness on the development of radically new products,

a contrasting absorptive capacity structure for generic product develop-

ment, and a mixed structure for differentiated product development.

Keywords: new product development; partnering (alliances); strategy development

INTRODUCTION

New product development (NPD) has long been rec-

ognized as a key driver of competitive advantage

(Bowen, Clark, Holloway, & Wheelwright, 1994; Brown

& Eisenhardt, 1995; Machado, Ericsson, & Verghese,

2014). The quest for advantage through NPD is

accompanied by high levels of risk (LaMattina, 2018).

In the pharmaceutical industry, the average cost of

bringing a new drug to market is estimated at $2.7 bil-

lion (Aitken, Kleinrock, Simorellis, & Nass, 2019). The

average new drug entering clinical testing has over 70

percent likelihood of failing to reach the market. Abb-

Vie recently announced its termination of its Rova-T

development program, writing off $5.8 billion in devel-

opment costs (Keown, 2019). Rova-T was projected to

have annual “peak sales” of over $5 billion, justifying

the cost if the product had survived clinical trials.

The high risk and high sales potential for NPD cre-

ate tremendous pressure to succeed. Among the fac-

tors that account for success in product development

We are grateful to our colleagues, Clark Kogan of CISER at

Washington State University, Druuv Sharma, Zhaohui Wu, Tom

Choi, Kevin Dooley, Craig Crossland, and Jennifer Sexton for

their insightful comments on earlier versions of this paper.

1

Members of the Complex Adaptive Supply Networks Research

Accelerator, Arizona State University.

July 2020 47

Journal of Supply Chain Management

2020, 56(3), 47–65

©2020 Wiley Periodicals, Inc.

are technological competence (Acur, Kandemir, De

Weerd-Nederhof, & Song, 2010) and a profound

understanding of unmet customer’s needs (Bhuiyan,

2011). As such, embeddedness in an environment

that creates access to external knowledge (Barney,

2012; Choi & Krause, 2006; Zhang, Zhao, & Lyles,

2018), and capabilities for assimilating and applying

knowledge (Defee & Fugate, 2010; Dobrzykowski,

Leuschner, Hong, & Roh, 2015) are paramount, not

only in the pharmaceutical, but also across many con-

temporary industries. Those aspects constitute compo-

nents of a firm’s absorptive capacity (Cohen &

Levinthal, 1990).

Zahra and George (2002) define absorptive capacity

as “a set of routines through which firms acquire,

assimilate, transform, and exploit knowledge” (p.

186). This formulation of the theory implies that the

details of absorptive capacity should differ according

to context. As a dynamic capability, absorptive capac-

ity results from bundles of resources and behaviors

that can be reconfigured to function in different set-

tings or to achieve different outcomes (Barney, 2012;

Blome, Schoenherr, & Rexhausen, 2013; Eisenhardt &

Martin, 2000; Pisano, 2017; Sirmon, Hitt, & Ireland,

2007; Teece, 2017; Winter, 2003). Tsai (2001)

extended the theory by discussing absorptive capacity

as a function of network position which he treated as

giving access to knowledge developed elsewhere. This

creates a link to contemporary supply chain manage-

ment theory, which understands firms as embedded

in networks of relationships (Autry & Griffith, 2008;

Bellamy, Ghosh, & Hora, 2014; Gomes-Casseres,

2015; Narasimhan & Narayanan, 2013; Skilton, 2014;

Wagner, 2012). Absorptive capacity can draw on dif-

ferent kinds of external knowledge, acquired through

different forms of embeddedness, assimilated in differ-

ent ways, and converted into products or actions

through different means. Given the role of external

firms as sources of knowledge in the process, supply

managers and supply chain management scholars

must understand product development strategies vis-

a-

vis a firm’s absorptive capacity.

We extend this concept by arguing that while coop-

erative relationships contribute to absorptive capacity

and facilitate NPD (Calantone, Cavusgil, & Zhao,

2002; Carnovale & Yeniyurt, 2015; Menguc, Auh, &

Yannopoulos, 2014; Petersen, Handfield, & Ragatz,

2003), firms also learn by competing with each other.

Just as outcomes can be improved by cooperative

access to external knowledge and capabilities, out-

comes can be enhanced by knowledge and other

resources accessed through competitive positions

(Gao, Xie, & Zhou, 2015; Kristal, Huang, & Roth,

2010; Pisano, 2017; Skilton & Bernardes, 2015). Ask-

ing how much each kind of embeddedness matters in

each context opens the door to a new synthesis of

absorptive capacity that may generalize to many areas

of supply chain research.

We use a spectrum of product development strate-

gies to provide context for theory about configurations

of absorptive capacity. The spectrum ranges from imi-

tation, which copies products already on the market,

to innovation, which brings radically new products to

the world (Abernathy & Utterback, 1978; Henderson

& Clark, 1990). In the midrange, differentiation pro-

duces many new products that combine old and new

features and appeal to new segments of markets. Imi-

tation and differentiation should benefit from an

awareness of competitor products and capabilities for

recombination, but these may matter less when inno-

vative products will be new to the world. Knowledge

flowing from partners about new ideas and technolo-

gies, and capabilities for developing new processes

may be critical for developing innovative products but

less useful for imitation. Our research question fol-

lows from this: how do alternative configurations of

internal capabilities, cooperative embeddedness, and

competitive embeddedness support firms’ performance

in different product development strategies?

We develop and test theory to answer this question

using data from the global pharmaceutical industry.

This industry is highly competitive but frequently uses

alliances to innovate (Guedri & McGuire, 2011; Hess

& Rothaermel, 2011; Schilling, 2015). New-to-world

products, differentiated products, and generic products

are tested and approved under the guidance of regula-

tory agencies like the United States Food and Drug

Administration (FDA). The FDA plays a critical role in

the global pharmaceutical industry because it rou-

tinely grants periods of U.S. market exclusivity to new

and differentiated products. Many new-to-world drugs

introduced by global competitors are approved and

patented in the United States. These protections limit

global competition and facilitate approval in other

markets. Under U.S. law, protections expire from 3 to

20 years after approval, after which competitors are

free to produce approved generic versions (Grabowski

& Kyle, 2007). The U.S. regulatory system enables the

three product development strategies (Morton, 1999)

and thus sets the stage for variations in absorptive

capacity.

Our primary contribution is to develop and test the-

ory about the different forms of absorptive capacity

that contribute to different product development

strategies, and what that means for supply chain man-

agement. We explain how the number of products

introduced using each strategy during an outcome per-

iod is related to measures of internal capability, coop-

erative embeddedness, and competitive embeddedness

from a leading period. As part of this contribution,

we develop and test a new measure of competitive

embeddedness.

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