Dynamic or Static Capabilities? Process Management Practices and Response to Technological Change*

Whether and how organizations adapt to changes in their environments has been a prominent theme in organization and strategy research. Within this research, there is controversy about whether organizational routines hamper or facilitate adaptation. Organizational routines give rise to inertia but are also the vehicles for change in recent work on dynamic capabilities. This rising interest in routines in research coincides with an increase in management practices focused on organizational routines and processes. This study explores how the increasing use of process management practices affected organizational response to a major technological change through new product developments. The empirical setting is the photography industry over a decade, during the shift from silver‐halide chemistry to digital technology. The advent and rise of practices associated with the new ISO 9000 certification program in the 1990s coincided with increasing technological substitution in photography, allowing for assessing how increasing attention to routines through ISO 9000 practices over time affected ongoing responsiveness to the technological change. The study further compares the effects for the incumbent firms in the existing technology with nonincumbent firms entering from elsewhere. Relying on longitudinal panel data models as well as hazard models, findings show that greater process management practices dampened response to new generations of digital technology, but this effect differed for incumbents and nonincumbents. Increasing use of process management practices over time had a greater negative effect on incumbents' response to the rapid technological change. The study contributes to research in technological change by highlighting specific management practices that may create disconnects between firms' capabilities and changing environments and disadvantage incumbents in the face of radical technological change. This research also contributes to literature on organizational routines and capabilities. Studying the effects of increasing ISO 9000 practices undertaken in firms provides an opportunity to gauge the effects of systematic routinization of organizational activities and their effects on adaptation. This research also contributes to management practice. The promise of process management is to help firms adapt to changing environments, and, as such, managers facing technological change may adopt process management practices as a response to uncertainty and change. But managers must more fully understand the potential benefits and risks of process management to ensure these practices are used in the appropriate contexts.     

Alliance portfolio reconfiguration following a technological discontinuity

Research summary : We study how technological discontinuities generate first‐ and second‐order effects on alliance formation and termination, leading to reconfiguration of firms' alliance portfolios. Following technological shocks, we argue that firms often seek alliances that provide new resources while also having incentives to form alliances for reinforced and challenged resources that complement the new resources. In parallel, alliance terminations, even involving resources otherwise unaffected by the discontinuity, increase due to limits in firms' alliance carrying capacity. We study biopharmaceutical firms between 1990 and 2000, which faced a technological discontinuity in 1995 in the form of combinatorial chemistry and high‐throughput screening. We improve understanding of how technological discontinuities affect the value of resources and how firms reconfigure alliance portfolios in response. Managerial summary : When firms form alliances to gain new resources during technological discontinuities that disrupt their industry, they cannot consider only the focal new partnerships. Instead, new alliances create complementarity and substitution pressures that lead to broader reconfiguration of the firms' alliance portfolios: (1) complementarity creates incentives to also form alliances for resources that the technological discontinuity reinforces or challenges in order to improve the collective value of co‐specialized assets; (2) substitution creates incentives to terminate existing alliances, even if their value is otherwise unaffected by the discontinuity, in order to create carrying capacity for new alliances. Thus, one new alliance can generate a cascade of reconfiguration that challenges the balance between the benefits of stability and the need for change in an alliance portfolio. Copyright © 2016 John Wiley & Sons, Ltd.     

Firms' heterogeneity,relationship embeddedness,and innovation development in competitive alliances

Few studies have investigated the effects of firms' heterogeneity in the context of competitive alliances' innovation development efforts. Prior research has mainly focused on how relationship embeddedness facilitates innovation development, with little attention to heterogeneity among firms and the role it might play. We addressed this gap by examining the relationships among firms' heterogeneity, relationship embeddedness, and innovation development in competitive alliances. We distinguished three dimensions of firms' heterogeneity and collected data from 481 surveys. We demonstrated that heterogeneity with regard to operational routines and organizational responsiveness, heterogeneity was found to have positive direct effects on innovation development while also undermining relationship embeddedness. By contrast, technological heterogeneity had a positive effect on both innovation development and relationship embeddedness. Competitive-alliance firms are more sensitive to heterogeneity regarding operational routines than to organizational responsiveness. These findings highlight the importance of overcoming the adverse effects of firms' heterogeneity through several means, such as full interpretation, observation, and offsetting incongruence through intermediaries or brokers. This study contributes to the strategic management and embeddedness literature by examining the implications of firms' heterogeneity and identifying how these effects influence relationship embeddedness as antecedent factors.     

Alliance portfolios and firm performance: A study of value creation and appropriation in the U.S. software industry

This study reveals the multifaceted contribution of alliance portfolios to firms' market performance. Extending prior research that has stressed the value‐creation effect of network resources, it uncovers how prominent partners may undermine a firm's capacity to appropriate value from its alliance portfolio. Analysis of a comprehensive panel dataset of 367 software firms and their 20,779 alliances suggests that the contribution of network resources to value creation varies with the complementarity of those resources. Furthermore, the relative bargaining power of partners in the alliance portfolio constrains the firm's appropriation capacity, especially when many of these partners compete in the focal firm's industry. In turn, the firm's market performance improves with the intensity of competition among partners in its alliance portfolio. These findings advance network research by highlighting the trade‐offs that alliance portfolios impose on firms that seek to manage and leverage their alliances. Copyright © 2007 John Wiley & Sons, Ltd.     

The trade-off between institutionally proximal and distal markets: The impact of home market pressures on firms’ export market selection

This study uses an organizational change perspective to analyze firms' export market selection (EMS) to adapt to home country market pressures. We argue that firms' strategic objectives influence whether they will enter institutionally proximal or distal markets. A model with two curvilinear (U-shaped and inverted U-shaped) relationships is found by testing 1940 Taiwanese export firms based on two official datasets. The model shows that firms are more likely to increase their exports to institutionally proximal markets and to decrease their exports to institutionally distal markets if they have an increasing but still controllable degree of competitive and marketing pressures in the home country. This response represents an incremental change by exporting firms. However, firms increase their exports to institutionally distal markets while decreasing their exports to institutionally proximal markets if they have an excessively increasing degree of competitive and marketing pressures in the home country. This response represents a radical change by exporting firms. We find that export firms' strategic objectives in choosing different organizational change styles (incremental or radical) are highly related to this trade-off in their EMS decision making.     

Toward a capability‐based conceptualization of business model innovation: insights from an explorative study

Although business model innovation (BMI) is more and more being acknowledged as key strategic task, current research is missing a conceptualization of core elements and relevant organizational capabilities. These research gaps impede a full theoretical understanding and a systematic and purposeful managerial application. By drawing on dynamic capability literature, this study addresses the question of how firms systematically and purposefully pursue BMI. Empirical analysis is based on six case studies in the specialized publishing industry, in which technological change has triggered numerous opportunities for new business models. The findings demonstrate that BMI can be conceptualized as a distinct dynamic capability. This capability can be disaggregated into a firm's capacity to sense business model opportunities, seize them through the development of valuable and unique business models, and reconfigure the firms' competences and resources accordingly. The present study outlines how distinct organizational routines and processes undergird these capacities. A conceptualization as dynamic capability contributes to a theoretical underpinning of BMI by integrating previously discussed dimensions of this phenomenon. Moreover, managers can gain concrete guidelines about how to systematically and purposefully approach BMI.     

Why Do Firms Enter a New Product Market? A Two‐Dimensional Framework for Market Entry Motivation and Behavior

What are the energetic forces that induce established firms to enter new product markets? While most previous research has explained the economic profits expected from a new product market as firms' distinctive motivation for market entry, some recent studies also emphasize interfirm competition and benchmarking activities as another important factor that motivates firms' new market entry. To explain the established firms' diverse new product market entry behaviors, this study presents a two‐dimensional scheme of entry motivation in terms of the degrees of target market profit focus and competitor focus. The first dimension captures the economic motivation of firms' new market entry that ranges from focusing on the direct expected profits from the target market to considering more strategic/indirect benefit incentives. The second dimension captures the degree of firms' external motivation for entry affected by competitors that ranges from independent entry decisions to fully competitor‐oriented entry decisions. Using multiple‐industry survey data, the current study empirically verifies that these two entry motivation dimensions explain a great portion of actual firms' new product market entry behaviors and that they are independent of each other. Subsequently, this study validates that firms' operational size and their environmental factors like perceived technological uncertainty and competitive intensity upon new market entry affect the degrees of the two dimensions of firms' new product market entry motivation. More specifically, large firms less emphasize target‐market profits than small firms, and when perceived technological uncertainty is high, potential market entrants become less target market profit focused but more competitor focused. Under a highly competitive new market condition, firms focus on both target‐market profits and competitors. Based on the analysis of new market entry motivation dimensions, the current study proposes a new typology of established firms' market entry behaviors. The suggested typology represents the four different types of new product market entrants and examines specific characteristics and entry strategies for each type of potential entrants. This entry‐motivation framework should provide a deeper understanding of the backgrounds of entry behaviors and assist firms in developing appropriate entry strategies and in advantageously responding to rival firms' actions with regard to entry.     

Flexibility in internationalization: is it valuable during an economic crisis?

This study investigates the value of the strategic flexibility provided by firms' international investments during an economic crisis, defined here as an unanticipated significant downturn in the economy. To avoid below‐par performance, firms need to adapt quickly to this significant change in their environment, making real options very valuable to them. Although firms' international investments can potentially provide such flexibility, this issue has not been empirically examined in a context of such dramatic negative change. We consider two types of international investments by firms in this regard, foreign direct investments and export‐related international investments, developing two measures that directly assess the flexibility derived from each that are new to the literature. Based on these measures, we find evidence that both types of international investments provided valuable flexibility for Korean firms during the economic crisis conditions. This study contributes to the literature by showing that firms with real options investments in place have a greater ability to flexibly adapt their overall operations in line with unforeseen negative environmental change, in contrast to firms without such investments. Copyright © 2009 John Wiley & Sons, Ltd.     

Will firms go green if it pays? The impact of disruption,cost, and external factors on the adoption of environmental initiatives

Research summary : Research on the link between financial and environmental performance implicitly assumes that firms will pursue profitable environmental actions. Yet, clearly, factors beyond profitability influence firms' environmental choices. We treat these choices as organizational change decisions and hypothesize that adoption of environmental initiatives is influenced by a combination of profit, level of disruption caused, and external influences. We test our hypotheses by examining firms' choices regarding implementation of energy‐savings initiatives. We find that degree of disruption, number of prior local adopters, and strength of environmental norms affect the adoption decisions. In addition, the effect of disruption is amplified by the implementation costs, but is mitigated by the number of prior local adopters. Managerial summary : Often, in trying to improve firms' environmental performance, academics and stakeholders have focused on actions that simultaneously improve environmental and financial performance. This assumes that firms will undertake projects that offer such dual benefits. We consider what might prevent firms from pursuing such ‘win‐win’ initiatives. We focus on how the degree of disruption of an energy‐saving initiative affects its probability of adoption. We find that firms are significantly more likely to adopt moderately profitable, but easy initiatives than more profitable but disruptive ones. We also examine internal and external factors that moderate the effect of disruption. Our findings suggest that in order to incentivize firms to improve environmental performance, it might be more beneficial make these activities less disruptive than to make them more profitable. Copyright © 2016 John Wiley & Sons, Ltd.     

Alliance form: a test of the contractual and competence perspectives

This paper analyzes factors that influence firms' choice of the organizational form of strategic alliances. I consider arguments suggested by both the contractual and the competence perspectives. In order to distinguish empirically between them, I devote special attention to the role played by the similarity of partner firms' technological specialization. In the empirical section I consider a sample composed of 271 equity joint ventures, non‐equity bilateral and unilateral agreements established between each other in the period 1983–86 by 67 North American, European, and Japanese enterprises from the world's largest firms in information technology industries. I examine the effects on the choice of alliance form of a measure of firms' technological proximity based on patents count, while controlling for other variables that are usually considered in the empirical literature. The estimates of binomial and multinomial logit models support the competence‐based argument that in technological alliances divergence in partners' technological specialization results in a higher propensity to use equity forms. Overall, the findings suggest that both the contractual and competence perspectives provide valuable complementary insights into the determinants of alliance form. Copyright © 2003 John Wiley & Sons, Ltd.     

An inquiry on dimensions of external technology search and their influence on technological innovations: evidence from Chinese firms

A central part of technological innovation for industrial firms involves search for new external knowledge. A well‐established stream of literature on firms' external knowledge search has demonstrated that firms investing in broader search may have a great ability to innovate. In this paper, we explore the influences of technology search on firms' technological innovation performance along three distinctive dimensions: technical, geographic, and temporal dimensions, using a unique panel data set containing information on Chinese firms that were active in technology in‐licensing and patenting during the period 2000–2009. Our findings reveal that Chinese firms' technological innovation performances are related to external technology search in quite different ways from the ones suggested in the extant literature using evidence from developed countries. We find that Chinese firms searching ‘locally’ along the technical dimension have better technological innovation performance than those searching ‘distantly’. However, when a Chinese firm in‐license relatively old (mature) technologies or those from geographically nearby areas, it will be less bounded to searching familiar technical knowledge.     

High‐Reputation Firms and Their Differential Acquisition Behaviors

Research summary: E merging reputation research suggests that high‐reputation firms will act to maintain their reputations in the face of high expectations. Yet, this research remains unclear on how high‐reputation firms do so. We advance this research by exploring three questions related to high‐reputation firms' differential acquisition behaviors: Do high‐reputation firms make more acquisitions than similar firms without this distinction? What kind of acquisitions do they make? How do investors react to high‐reputation firms' differential acquisition behaviors? We find that high‐reputation firms make more acquisitions and more unrelated acquisitions than other firms. Yet, we also find that investors bid down high‐reputation firms' stock more than other firms' in response to acquisition announcements, suggesting that investors are skeptical of how high‐reputation firms maintain their reputations . Managerial summary: W e know that high‐reputation firms wish to maintain their elite standing in the face of high‐market expectations, but we know little about how they do so. We explore this puzzle by investigating how reputation maintenance influences high‐reputation firms' acquisition behaviors. We classify high‐reputation firms are those firms that make Fortune's M ost A dmired annual list, and we find that high‐reputation firms make more acquisitions and more unrelated ones than other firms. Surprisingly, we also find that the market tends to react negatively to these acquisitions. Thus, managers may want to reconsider their strategy of making acquisitions as a means to maintain their firms' high reputations . Copyright © 2017 John Wiley & Sons, Ltd.     

An Attention‐Based View of Family Firm Adaptation to Discontinuous Technological Change: Exploring the Role of Family CEOs' Noneconomic Goals

Recent studies show that managerial attention is a particularly important precursor of established firms' responses to discontinuous technological change. However, little is known about the factors that shape managerial attention‐response patterns. Our qualitative study investigates how the attention of family firm chief executive officers (CEOs) to discontinuous technological shifts, the interpretation and decision‐making processes associated with these changes, and ultimately organizations' responses are affected by CEOs' noneconomic goals. Based on seven longitudinal case studies in the German consumer goods industry, the paper induces a process model that extends the findings of the literature on the attention‐based view and helps to explain heterogeneity in family firms' adaptation to discontinuous technological change. This study shows that the family CEO's specific noneconomic goals—such as power and control, transgenerational value, the maintenance of family reputation, the continuance of personal ties, or personal affect associated with the family business—determine whether the CEO assesses an emerging technology as relevant enough to warrant a reaction from the firm. Moreover, the family CEO's noneconomic goals constrain the set of considered responses. The outcome of this sensemaking process determines the organization's response. For instance, in the specific context of this study, the goal of “family power and control” entailed an immediate interpretation of the focal trend as important for maintaining influence, and resulted in an unconstrained set of responses and, ultimately, high innovation in the new domain. Over time, family CEOs might reevaluate the emerging trend based on their goals and adapt organizational moves accordingly. The paper identifies and discusses how ambiguities and dilemmas may arise during this process. Our findings contribute to the literature on adaptation to discontinuous technological change and to family firm research.     

Appropriability and the retrieval of knowledge after spillovers

Research summary: Firms create and capture value through innovation. In technology‐driven firms, there has been an explicit emphasis on appropriability through imitation deterrence and cumulative inventions that build on prior firm innovation. We introduce systematic empirical evidence for a third mechanism of appropriability namely, knowledge retrieval, which is defined as the re‐absorption of previously spilled knowledge. We extend previous studies which consider technological complexity and organizational coupling as predictors of appropriability by examining their impact on knowledge retrieval. We find that technological complexity has a curvilinear relationship with retrieval while organizational coupling has a negative relationship. We discuss the implications of these findings for theories of absorptive capacity, organizational design and appropriability of innovation. Managerial summary: It is a widely held assumption that knowledge should be protected and held tightly within the firm to ensure value creation and value capture. The implicit recognition is that knowledge spillovers, or knowledge leakage, is detrimental to performance. By examining the patterns of citations among patents of 142 semiconductor firms, we study how organizational structure and technological complexity play a role. We find that moderate technological complexity improves appropriability. If imitation deterrence is paramount, then the optimal structure would be a tightly‐coupled organization. In other instances, loosely‐coupled organizations may be superior because they foster internal cumulative innovations and, if spillovers were to occur, they also maximize knowledge retrieval. Our findings suggest that all is not lost when spillovers occur and that firms can continue to benefit in downstream innovations. Copyright © 2015 John Wiley & Sons, Ltd.     

How exploitation impedes and impels exploration: Theory and evidence

Research summary : This study suggests that strategy and organizational scholars seeking to analyze the impact of exploitation on exploration would benefit by moving away from the generally assumed unitary perspective on exploitation. Specifically, we propose a multifaceted perspective on exploitation by theoretically and empirically distinguishing between repetitive exploitation versus incremental exploitation. We argue that repetitive exploitation can impede exploration and delay firms' responses to environmental changes, while incremental exploitation can impel exploration and accelerate firms' responses to environmental changes. We test our arguments using extensive longitudinal data from the hard disk drive (HDD) industry, and our supportive empirical findings highlight the relevance of our distinction between the two types of exploitation and their very different effects on exploration. Managerial summary : This study offers a solution to the puzzle of why many believe firms cannot excel at advancing existing practices and developing new initiatives, typically described as the trade‐off between exploitation and exploration. We introduce the distinction between repetitive and incremental exploitation and show that only the former type of innovation generates rigidity toward exploration, whereas the latter actually promotes exploration. More specifically, our evidence from the hard disk drive industry shows that those firms emphasizing incremental innovation (as opposed to repetition of their existing practices) were most likely to remain explorative over time, whereas firms emphasizing more repetitive innovation proved less open to changes. We discuss the implications of our findings as suggesting that firms seeking to optimize their innovativeness over the long term should strive to remain active in incrementally innovating their existing practices. Copyright © 2015 John Wiley & Sons, Ltd.     

Organizing Continuous Product Development and Commercialization: The Collaborative Community of Firms Model

The increased importance of knowledge creation and use to firms' global competitiveness has spawned considerable experimentation with organizational designs for product development and commercialization over the last three decades. This paper discusses innovation‐related organizational design developments during this period, showing how firms have moved from stand‐alone organizations to multifirm network organizations to community‐based organizational designs. The collaborative community of firms model, the most recent organizational design in this evolutionary process, is described in detail. Blade.org, a purposefully designed collaborative community of firms dedicated to the continuous development and commercialization of blade servers, a computer technology with large but unforeseeable market potential, is used as an illustrative case. Blade.org's organizational design combines a community “commons” for the collective development and sharing of knowledge among member firms with explicit institutional mechanisms for the support of direct intermember collaboration. These design elements are used to overcome the challenges associated with (1) concurrent technological and market experimentation and (2) the dynamic coordination of a complex emergent system of hardware, software, and services provided by otherwise independent firms. To date, Blade.org has developed more than 60 new products, providing strong evidence of the innovation prowess of the collaborative community of firms organizational model. Based on an analysis of the evolution of organizational designs and the case of Blade.org, implications for innovation management theory and practice are derived.     

Exploration and Resource Commitments in Unequal Partnerships: An Examination of Corporate Venture Capital Investments

While established firms' relationships with external ventures may have significant strategic benefits, the realization of such benefits is fraught with considerable uncertainty. The real options and interorganizational learning literatures present an interesting trade‐off for established firms regarding commitment of resources in a partnership. This study seeks to enhance our understanding of how firms manage these trade‐offs when committing resources to external venturing initiatives. We examine the magnitude of resources initially committed by an established firm to an external venturing partnership in the context of corporate venture capital (CVC) investments. While a real options approach suggests that resource commitments should be lowered in the presence of uncertainty regarding realization of benefits, the interorganizational literature emphasizes that resource commitments may be essential for building quality relationships that expedite learning. Corporate investors, who invest in new ventures in order to gain strategic benefits, face higher uncertainty when their investment objectives involve greater exploration. However, greater exploration also increases investors' need to learn from their portfolio ventures. We, therefore, predicted that the degree of exploration would have a U‐shaped relationship with the investor's resource commitment in a venture. We also expected that factors that serve to decrease the investor's uncertainty, i.e., investor experience diversity and venture affiliation to prominent venture capitalists, would moderate the U‐shaped relationship between exploration and resource commitment. The predictions of the study are tested on a sample of 248 initial investments in private ventures made by incumbent firms in the computer, semiconductor, and telecommunications industries between 1996 and 2000. We find some support for our hypotheses. This study contributes to the external venturing literature on CVC investments by examining the determinants of the magnitude of resource commitment to new ventures, and integrates real options perspective, which advocates low resource commitments under uncertainty, with the organizational learning literature, which argues for greater resource commitment to secure partner cooperation. The results of this study reveal interesting insights into how CVC investors manage individual investments to generate strategic benefits.     

Supportiveness of Organizational Climate, Market Orientation, and New Product Performance in Chinese Firms

Most knowledge development efforts in new product development have focused on Western economies and companies. However, due to its size, rapid growth rate, and market reforms, China has emerged as an important new context for new product development. Unfortunately, current understanding of the factors associated with new product success in China remains limited. We address this knowledge gap using mixed methods. First, we conducted 19 in‐depth interviews with managers involved in new product development in 11 different Chinese firms. The qualitative fieldwork indicated that firm behaviors and employee perceptions consistent with the phenomena of market orientation and the supportiveness of organizational climate both are viewed as important drivers of the new product performance of Chinese firms. Drawing on the marketing, management, and new product development literature this study develops a hypothetical model linking market orientation, supportiveness of organizational climate, and firms' new product performance. Direct relationships are hypothesized between both market orientation and supportiveness of organizational climate and firms' new product performance, as well as a relationship between supportiveness of organizational climate and market orientation. Data to test the hypothetical model were collected via an on‐site administered questionnaire from 110 manufacturing firms in China. The hypothesized relationships are tested using structural equation modeling. Results indicate a positive direct relationship of market orientation on firms' new product performance, with an indirect positive effect of supportiveness of organizational climate via its impact on market orientation. However, no support is found for a direct relationship between the supportiveness of a firm's organizational climate and its new product performance. These findings are consistent with resource‐based view theory propositions in the marketing literature indicating that market orientation is a valuable, nonsubstitutable, and inimitable resource and with similar propositions in the management literature concerning organizational culture. However, this study's findings also indicate that in contrast to a number of organizational culture theory propositions and empirical findings in some consumer service industries, the impact of organizational climate on firm performance in a new product context is indirect via the firm's generation, dissemination, and responsiveness to market intelligence. These results suggest that an effort to improve firms' new product performance by enhancing the flow and utilization of market intelligence is an appropriate allocation of resources. Further, this study's findings indicate that managers should direct at least some of their efforts to enhance a firm's market orientation at improving employee perceptions of the supportiveness of the firm's management and of their peers. This study indicates a need for further research concerning the role of different dimensions of organizational climate in firms' new product processes.     

Unravelling the internal and external drivers of digital servitization: A dynamic capabilities and contingency perspective on firm strategy

Despite the increased interest in using digital technologies for servitization purposes, little is known about what drives firms towards a digital servitization strategy. Using a dynamic capabilities lens, we look into the relationships between two organizational mechanisms – exploitation and exploration – and firms' orientation towards digitization, servitization and digital servitization. On top, we examine the influence of two environmental contingencies – technological turbulence and competitive intensity – as potential influencers of these relationships. We collected and analyzed data of 139 Belgian firms through hierarchical regressions. Exploitation and exploration are positively associated with digital servitization, but exploration trumps the effect of exploitation when firms do both. Technological turbulence is positively associated with digitization regardless of the firm's level of exploration or exploitation, and competitive intensity only relates positively with servitization when firms emphasize exploration. Theoretically, we contribute to the literature by unravelling the relationship between firms' dynamic capabilities and their environment. In order to fully understand firms' strategic transition towards digital servitization, both should be considered. As managerial implications, we suggest that firms pay close attention to adapting their strategy to fit an increasingly changing environment.     

RETRACTED: Integrated knowledge exploitation: The complementarity of product development and technology licensing

In light of increasing licensing, we challenge the common assumption that product development and technology licensing are substitutes. We develop a resource‐based framework, which distinguishes a firm's technological resource base and technology exploitation processes. We further combine survey, patent, and financial data of 228 medium‐sized and large industrial companies to examine the interactions of firms' product development processes and technology licensing processes in order to explain heterogeneity in new product revenues, licensing performance, and firm performance. The results underscore that product development, which indicates innovative capacity, and technology licensing, which indicates desorptive capacity, are complements rather than substitutes in integrated knowledge exploitation in medium‐sized and large firms. This complementarity is particularly pronounced in firms with an emphasis on cross‐licensing and with a strong patent portfolio. Copyright © 2012 John Wiley & Sons, Ltd.