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Entrepreneurship in global innovation ecosystems

Article

Abstract

Established companies in countless industries have recognized the need to access globally dispersed knowledge networks to develop and acquire innovations necessary to better serve their customers. To maximize and coordinate their access to this diverse knowledge, some incumbents have developed innovation platforms whereby new ventures and smaller companies contribute their discoveries and innovations. These platforms allow incumbents to shape and control their ecosystems. These ecosystems have been fertile grounds for the creation of new ventures of different types. In this article, we explore the role of innovation ecosystems in birthing and supporting new ventures and inducing heterogeneity among them; discuss how these ventures’ entrepreneurial activities within these innovation ecosystems are likely to vary from those in other contexts; and consider the implications of such ecosystems for the strategic shifts that new ventures might experience in the course of their evolution. We pay special attention to the managerial challenges new ventures may encounter in developing, leveraging, and balancing their technological and marketing capabilities.

Keywords

Innovation Ecosystem Entrepreneurship Value creation Global Knowledge 

In recent years, innovation platforms have come to dominate many industries’ landscape. A platform typically involves a central actor (the platform leader or hub firm) that orchestrates value creation and value appropriation by inviting other companies or even individuals to innovate on that platform (Gawer and Cusumano 2002; Iansiti and Levien 2004). A popular example is the iPhone, where Apple serves the role of the hub firm and offers its partners a platform for value creation (iPhone/iPod/iPad) as well as a marketplace (iTunes) for value appropriation. This platform has also spawned hundreds of startups seeking to develop and market applications to consumers around the globe, creating wealth. Platform members develop these innovative applications to enhance the global reach and functionality of Apple’s new products. These innovations also enable Apple to develop and shape its ecosystem to its advantage.

Focus, objective and contributions

Innovation platforms provide a fertile ground for new firm creation. However, the success and survival of these new ventures depend greatly on their ability to serve the needs of their platform leader (e.g., Apple and its iPhone). This raises a question: How can new ventures exploit the valuable opportunities offered by innovation platforms without curtailing their own future prospects for continued innovation and growth? We argue that such platforms offer an important arena for the creation and growth of new ventures of different types. Specifically, we suggest that these ventures play three important and often complementary roles that keep the platform vibrant and competitive: breeder, feeder, and niche player. By playing these different roles, new ventures find their place within a dynamic ecosystem that allows them to evolve and even morph from one role to another. Thus, these roles define the different types of value creation opportunities that might exist within an ecosystem (Teece 2009). They also define the capabilities that new ventures need to build and leverage in creating value. Consequently, our discussion focuses on issues related to technology development and innovation (e.g., investing in exploiting opportunities within the platform versus exploring opportunities outside the ecosystem); relationship management (with the platform leader and other partners in the broader ecosystem); value appropriation and marketing (e.g., leveraging the infrastructure offered by the platform leader and adapting to the platform leader’s marketing decisions); and knowledge management (e.g., sharing knowledge and managing knowledge spillovers). Our discussion also captures the variety of entrepreneurial activities that arise in innovation ecosystems, potentially helping the leadership of new ventures address the key issues related to managing their companies within the confines of innovation platforms. Consequently, we pay special attention to the intertwining of new ventures’ innovation and collaboration strategies, marketing strategies, and knowledge management strategies.

In this article, we add to the literature in four ways. First, we examine the contribution of network-centric innovation to a firm’s success in today’s markets. In using innovation platforms, Apple and other companies are responding to changes in the realities of the global marketplace. The worldwide trend toward open innovation has encouraged many companies to augment their internal R&D and innovation efforts with technologies and discoveries made elsewhere. Concurrently, the trend toward co-specialization has heightened the need to access the knowledge, skills (e.g., marketing), and resources (e.g., human capital) necessary for innovation but are dispersed globally. Specialization, in turn, has facilitated the emergence of network-centric innovation (Nambisan and Sawhney 2007; Nambisan and Sawhney in press); i.e., innovation and value creation centered on a network of entities that has created a plentiful set of rich opportunities for entrepreneurs.

In almost every sector of the economy, especially in technology-based industries, network-centric innovation has become an integral part of the landscape. Value creation in this setting requires developing, managing, and protecting the firm’s ecosystem. This task is best accomplished by collaborating with diverse stakeholders. Probably because the size of opportunities is small, many of the emerging ecosystems are typically occupied by new ventures and small companies. Increasingly, networks are a key source of knowledge that fuels innovation and sparks entrepreneurship that spawns the creation of new firms (Hansen and Birkinshaw 2007). Yet, little attempt has been made to systematically capture the contributions of these networks.

Second, we discuss the key contributions that new firms make to innovation platforms, such as those involved in the development and introduction of the iPhone. Participation in these platforms usually stimulates these ventures’ learning and fuels entrepreneurial activities of different types. New ventures are contributors to the viability of these platforms and beneficiaries of the knowledge, resources, connections, and expertise that exist in them. Consequently, we focus on the diverse entrepreneurship opportunities that exist in global innovation ecosystems. These ecosystems tend to be global, providing rich opportunities to gain access to diverse types of knowledge. Yet, gaining knowledge from these distant and diverse global knowledge networks raises important organizational and strategic challenges for new ventures; these challenges have not been systematically analyzed in the literature. Therefore, we examine some critical challenges that new ventures face in exploiting these opportunities.

Third, the preponderance of new ventures in today’s innovation ecosystems also underscores the growing co-specialization in the global marketplace. As sources of innovation become globally dispersed (von Hippel 2005), technologies proliferate and their associated knowledge becomes more complex and diverse, companies have become more specialized and focused on building distinct competencies in niche areas while relying on their partnerships to address changing market needs (Luksha 2008). Co-specialization appears to extend well beyond immediate innovation networks to cover global supply chains as well (Adner and Kapoor 2010; Almirall and Casadesus-Masanell 2010; Dhanaraj and Parkhe 2006; Gray and Meister 2004). These trends have increased the number of technology development and commercialization alliances between new ventures and well established companies seeking to stay current and competitive. Licensing agreements that allow incumbents to gain access to the technologies and discoveries of new ventures have also increased (Alvarez et al. 2006). Thus, we examine how new ventures assemble their capabilities and position themselves to succeed in a fiercely competitive global marketplace (Teece 2009).

Fourth and finally, we believe that entrepreneurship in an ecosystem may be different from that in other contexts. As a result, promoting and sustaining entrepreneurship in global innovation ecosystems involve a unique set of managerial issues and challenges that reflect entrepreneurs’ desire to manage their new ventures while keeping in view different sets of potentially conflicting forces in their ecosystems (Moore 1993). For example, can entrepreneurs discover and create opportunities (Alvarez and Barney 2007; Sarasvathy and Dew 2005; Zahra 2008) by working within the vision, goals, and structures set forth by the platform leader? If so, how can entrepreneurs ensure that their ventures’ objectives and strategies align well with those of the ecosystem leader and other partners? Still, entrepreneurs also have to ensure sufficient differentiation and independence for their companies, and pursue a unique value proposition that would sustain their ventures even if the particular innovation platform declines (Moore 1993). Prior research on innovation ecosystems has taken the perspective of the platform leader and there has been limited focus on the issues and challenges that new ventures face in this setting. The entrepreneurship literature has also overlooked examining innovation ecosystems and how they may foster new venture creation, survival, evolution, and growth (Birley 1985; De Carolis et al. 2009; Teece 2009). Our discussion highlights these issues and how entrepreneurs may address them differently by creating companies that play very different roles within their ecosystems.

In the next section, we examine some of the key characteristics of innovation ecosystems and then discuss the relevance of new ventures in these ecosystems. Next, we identify three roles for new ventures to play in innovation ecosystems—breeder, feeder, and niche player—and discuss the associated marketing, organizational, and managerial capabilities. We conclude with a discussion of the implications for entrepreneurs and for future research in this area.

Innovation ecosystems

A firm’s ecosystem refers to “the community of organizations, institutions, and individuals that impact the enterprise and the enterprise’s customers and suppliers” (Teece 2009: 16). The concept of business ecosystems, and more specifically, innovation ecosystems, refers to a loosely interconnected network of companies that co-evolve capabilities around a new innovation or platform and thus depend on one another for their overall effectiveness and survival (Almirall and Casadesus-Masanell 2010; Iansiti and Levien 2004; Moore 1993). Ecosystem members usually work cooperatively and competitively to develop new products and services based on a shared set of technologies, knowledge, or skills (e.g., marketing) that comprise a platform. Thus, the platform becomes a vehicle for ecosystem partners to leverage one another’s capabilities as well as to enhance their individual innovation and financial performance.

Innovation ecosystems have been in existence for years. Examples include Intel’s microprocessor ecosystem that was established in the early 1980s and IBM’s Power Architecture ecosystem that was created in the 1990s. However, two key features of innovation ecosystems have become more prominent in recent years, leading to a rapid increase in their numbers. First, platform-based innovation ecosystems are no longer restricted to high technology sectors such as microprocessors and computers. Innovation platforms have become widespread in other sectors including consumer electronics (e.g., mobile phones, electronic toys), household appliances, automobiles, and entertainment/publishing. These ecosystems have opened up a broader set of opportunities for entrepreneurs to exploit.

The growth of innovation ecosystems is due primarily to the gradual increase in the digital content of products and services (or “liquification”—Normann 2001) and the resulting increase in the number of digital innovations comprising physical (tangible) and digital (intangible) components (Yoo et al. 2010). For example, automobile manufacturers have begun integrating various forms of computing capabilities into existing automobile platforms—capabilities that offer telematics services, entertainment services, maintenance/safety services, etc.—fundamentally altering consumers’ experience with automobiles (Henfridsson and Lindgren 2005). The gradual expansion of such digital innovation opportunities has redefined the innovation ecosystems in various sectors and markets (including non-tech markets) and has led to the participation of new ventures not traditionally associated with the industry.

Second, in recent years larger technology companies focused on creating and maintaining innovation platforms (Almirall and Casadesus-Masanell 2010; Boudreau and Lakhani 2009) and then these companies invited new ventures and smaller companies worldwide with strong niche competencies to contribute to their platforms (Birkinshaw et al. 2007; Hansen 2002; Hansen and Birkinshaw 2007). For example, in the case of companies such as Apple and Salesforce.com, new ventures often develop complementary products and services (apps in the iPhone case and enterprise software modules in the Salesforce.com case) that seek to extend the reach and range of a platform. Other technology companies encourage their ecosystem partners to apply their expertise to customize existing technology platforms (or products) to suit nascent or new markets (for example, IBM’s approach toward extending its Power Architecture platform to the consumer electronics market). Further, in the pharmaceutical industry, large companies typically offer testing and commercialization platforms, allowing new ventures to discover or invent new drugs that could be developed further and then commercialized using their platforms. These arrangements have enabled new ventures to deepen their specialization while offsetting their production, marketing, and distribution capabilities. Being connected to a powerful platform leader has also helped some ventures overcome some of the liabilities arising from their newness and inexperience. In global innovation ecosystems, incumbents have been able to focus on shaping their ecosystems by setting and enforcing technological and marketing standards, thus gaining considerable efficiency and expediting their product development cycles (Fleming and Waguespack 2007; von Hippel 2005).

The growing openness of innovation platforms has enabled a diverse set of companies around the world to participate in associated innovation and value creation opportunities (Boudreau and Lakhani 2009; Nambisan and Sawhney 2007). This openness reflects the emergence of open technology standards that have lowered the barriers to ecosystem participation for entrepreneurs with limited resources and capabilities. The reach of partners in various parts of the world to these platforms as well as the ease of interaction and collaboration has become easier because of advanced information technologies. As a result, physical proximity is no longer a criterion for ecosystem membership. These changes have led to a new breed of innovation ecosystems where non-traditional partners (including smaller, new ventures) assume prominence. The need for different types of new ventures’ specialized knowledge has also increased their bargaining power and strengthened their positions within evolving ecosystems. We discuss these issues next.

Knowledge characteristics of innovation ecosystems

In an innovation ecosystem there is one dominant company—typically referred to as the hub firm, incumbent, network orchestrator, or keystone—that assumes responsibility for establishing, maintaining, and providing access to the platform for the benefit of the entire membership (Iansiti and Levien 2004; Nambisan and Sawhney 2007, in press). This company also assumes leadership in constantly renewing the platform to ensure its market relevance while offering a compelling vision for the future in order to attract and retain a rich and diverse set of members. Indeed, the overall health and success of the innovation ecosystem depends on the richness of the opportunities that exist within that ecosystem. These opportunities multiply as existing members innovate, often building on each others’ discoveries. Opportunities also multiply when new firms are born within the ecosystem and when new companies join the system. Consequently, platforms offer a range of niche market opportunities for their partners (Iansiti and Levien 2004).

To better understand these niche creation opportunities and the associated relevance of the ecosystems for new ventures, we need to consider some of the knowledge-related characteristics of the ecosystem. Three characteristics in particular are salient: (a) knowledge dispersion and the associated need for a broad set of participants in the ecosystems; (b) knowledge diversity and the perspective of entrepreneurship as a combinative process; and (c) knowledge contextuality and the associated opportunity for knowledge brokering. We provide a discussion of each in greater detail.

Dispersion of knowledge

In a flat world, the need to compete for knowledge exists around the globe, reflecting the growing participation of different countries in the global economy (Dhanaraj and Parkhe 2006; Gibbons et al. 1994; Hansen and Birkinshaw 2007). Countries vary in their systems of innovation and the institutions where knowledge is created (Nelson 1993). Countries seeking to advance technologically have built world class universities, supported R&D, and given their companies incentives to invest heavily in knowledge-creating activities. Gaining access to this globally dispersed knowledge often requires developing long-term relationships with a broad set of resident participants in those countries.

However, knowledge dispersion is not simply a matter of geography. Dispersion arises from the different systems of organizations as well as differing frames of references and paradigms that attract groups of researchers and companies to a particular domain or set of applications. Clusters, for example, attract researchers with an interest in a given phenomenon or new scientific advances (Osterwalder and Pigneur 2009). Thus, they provide a critical mass to tackle difficult knowledge production and exploitation issues. For example, many new ventures have been created in India in the last several years specializing in analysis of data from clinical drug trials. Large pharmaceutical companies have incorporated these new ventures as part of their innovation ecosystem, thereby leveraging their specialized capabilities and accelerating their drug development projects. Similarly, when Sun Microsystems (now owned by Oracle Corp) established its OpenSPARC ecosystem in 2006 to advance its SPARC microprocessor platform, one set of participants consisted of new Italian ventures that had developed specialized knowledge related to the design of systems-on-a-chip and networks-on-a-chip.

Diversity of knowledge

Entrepreneurship thrives on combining different types of knowledge and using them to create new firms and develop new products, services, or processes. Combinative knowledge is useful also in designing innovative business models that redefine industry boundaries and change the rules of competition (Boudreau and Lakhani 2009; Zahra 2008). This combinative knowledge is at the core of radical innovation that leads to game change, ushering in a new system of competitive dynamics. Schumpeterian innovation, where new ventures combine existing knowledge and other resources, thrives on this combinative knowledge (Galunic and Rodan 1998; Kogut and Zander 1992). Entrepreneurs are especially adept at combining different types of knowledge that offer greater value to current and new customers, slowly substituting and eventually displacing existing rivals.

Opportunities for entrepreneurship abound also at the intersection of these diverse bodies of knowledge or the synthetic knowledge created by integrating different strands of knowledge (Baron 2006; Kressel and Lento 2007; Livingston 2007). Nowhere is this more illustrated than in the Web services market that emerged around 2005. With a wide array of information sources available on the Web (e.g., Google Maps, Flickr, Zillow, YouTube, etc.), a new class of ventures emerged focusing on mixing and matching data and presentation elements from these popular information sources by offering innovative services (“mashups”) to consumers.

Diversity of knowledge can thus enhance new venture formation and subsequent survival and growth. But integrating diverse knowledge could also be challenging to entrepreneurs who need the absorptive capacity to appreciate, value, gain, process, assimilate, and use different types of knowledge. Few new ventures possess such absorptive capacity, potentially handicapping their ability to integrate and combine knowledge. Further, in present innovation ecosystems, knowledge embodies different codes and heuristics that are hard for others to decipher. This can turn the diversity of knowledge into a liability, where entrepreneurs become paralyzed by the sheer volume and variety of knowledge they receive. Paradoxically, new ventures’ continuing participation in ecosystems depends largely on their ability to create and share new knowledge while taking advantage of the knowledge that exists in their networks.

Researchers have catalogued a host of problems entrepreneurs encounter as they assemble and integrate different types of knowledge and then seek to communicate it to potentially interested parties that do not fully comprehend the resultant new knowledge (Boland et al. 2007; Carlile 2002, 2004). They suggest that “interactional expertise,” learning to master the lexicon of different users and how they interpret knowledge, is an essential first step (Collins 2004). Zahra et al. (2007) have also shown that knowledge conversion is much more than an intellectual exercise. This process requires visioning, offering potential users a world view about the strategic importance of the knowledge and the applications on which they are based. This might require new ventures to prototype potential applications as demonstration devices to persuade the platform leader and other members of the ecosystem not only of the importance of their discoveries but also how they might fit with different parts introduced by others in the ecosystem. Building these conceptual connections sets the stage for the adoption of new ventures’ innovations within an ecosystem. It also opens the door for others to conceive ways in which they can apply or embody these innovations or even improve on them, perpetuating the innovation cycle within an ecosystem.

Interactions between the new venture and other companies (young and old) can further stimulate entrepreneurs’ learning about the socio-cognitive dynamics that pervade their ecosystem and what bonds members to one another (Tripsas 1997). Frequently new ventures have distinct advantages when it comes to learning, primarily because of the absence of structural, political, and cognitive barriers (Autio et al. 2000; Zahra 2005). The fact that founders are typically at the helm of these firms also facilitates the acquisition and assimilation of externally generated knowledge. This becomes even more important as founders build connections to different types of organizations in their ecosystems. These connections serve as an important means of funneling external knowledge into these young ventures, further stimulating and fueling their innovativeness.

Contextuality of knowledge

A serious challenge that some ventures might encounter is the contextuality of the external knowledge to which they are exposed. Knowledge takes shape and meaning in a particular setting and may lose its meaning and value when removed from the original setting (Nonaka and Takeuchi 1995; Szulanski 1996). This movement, however, facilitates the deployment of that knowledge to create different applications, products, systems, and processes. This movement also enables venture managers and entrepreneurs to weigh the strategic merits of that knowledge and decide how easy or difficult it is to convert it to specific applications. Conversion allows entrepreneurs to conceive of different ways to use knowledge, a factor that enhances the variety of products and goods developed based on the same piece of knowledge. Entrepreneurs vary in their cognitions, training, and experiences. As a result, they are likely to conceive of very different applications for a given piece of knowledge (Shane 2000; Zahra et al. 2007). Some of the most fundamental discoveries in biology and information systems have inspired the creation of different types of new ventures that use the same science base in pursuit of very different uses.

With the focus shifting from product/service attributes to customers’ experience with the offering or “value-in-use” (Vargo and Lusch 2004), there is greater awareness and recognition that innovation requires pulling together highly contextualized knowledge; i.e., knowledge tied to the customers’ usage context. This opens up opportunities for knowledge brokering, moving knowledge from one context to another. The process of knowledge brokering (Hargadon 2002) can be challenging because of the stickiness of knowledge; knowledge and its meaning are socially constructed and thus might be lost as the movement of knowledge occurs. Some pieces of knowledge are indivisible and lose its meaning when dissected. Owners of the knowledge may not want to share their trade secrets, thus making interpretations of this knowledge difficult. Still, despite structural and interpretive barriers, brokering enables capturing knowledge and converting it into value-creating applications (Hargadon 2002; Hargadon and Douglas 2001).

Platform leaders’ desire to gain access to diverse knowledge often leads them to connect with new ventures that typically have special connections to other niche markets and have first-hand knowledge of customer needs. For example, when IBM sought to enhance the reach of its Power Architecture platform to consumer markets, it looked for partners that had knowledge and experience in the target markets. Most new partners who joined IBM’s ecosystem to port (i.e., convert) IBM’s Power Architecture platform to markets in the consumer electronics sector were new ventures in India and China. By gaining access to the knowledge, these firms required building connections grounded in mutual benefit and trust (Burt 1992; Coleman 1988). Relationships, therefore, become an essential means by which IBM and others gain access to new knowledge, understand its strategic relevance, and convert it into applications that create value. In essence, these relationships have been useful in overcoming some of the problems associated with knowledge contextuality.

Entrepreneurship and evolving innovation ecosystems

Having discussed global innovation ecosystems and platforms, it is logical to ask: How is entrepreneurship in these settings different from that in other contexts? One obvious difference lies in new ventures’ capacity to create and reshape the ecosystem. While most entrepreneurship research examines the external environment as an antecedent of entrepreneurship or moderator of the payoffs from entrepreneurship, this effect appears to be more complex and is reciprocal within global innovation ecosystems. These ecosystems and how they are organized give birth to new ventures and stimulate different entrepreneurial activities. Concurrently, these ventures create, redefine, and reshape their ecosystems. Some new ventures provide the intellectual fuel that ignites fundamental changes in the existing ecosystem, altering it in profound ways. Moves by other companies within the ecosystem can also alter the dynamics of collaboration and competition. Perhaps the ultimate contribution of these companies is to inspire the creation of a new ecosystem and new species of firms based on radical innovation.

The reciprocal relationships among the ecosystem, new venture creation, and innovation perpetuate the dynamism of an ecosystem. These relationships induce innovation that breeds variety in terms of the new ventures that come into existence, what they offer, and the relationships they develop with each other and with platform leaders. This variety is the source of continuous innovation that drives the evolution of the ecosystem, determining its viability and staying power. Thus, through the weaving and integration of different types of knowledge, a process of “creative construction” persists wherein old knowledge is reused along with the new to create new products and applications that keep the innovation platform functioning (Agarwal et al. 2007). There is creative destruction, of course, where some firms fail to develop and grow new knowledge or fail to grasp changing paradigms that under gird the functioning of the ecosystem. Sometimes, the process of creative construction requires abandoning the knowledge currently shared and understood and then replacing it with different knowledge. This shift can alter the nature of the innovation platform and even the ecosystem itself.

Creative construction can lead to the fragmentation of the prevalent ecosystem, giving way to new niches or even industries. Fragmentation might occur as a result of excessive and dysfunctional rivalries, compelling some to seek ways to avoid working in this setting. It might also occur because of serendipitous discoveries that do not fall neatly into what members of the ecosystem do. Fragmentation is also a part of the normal process of an ecosystem’s evolution. As such, it could be natural and beneficial in order to give birth to a new ecosystem that develops on its own right.

As with biological ecosystems, relationships among new ventures and other companies are complex, ranging from complete interdependency to predatory practices. New ventures often compete with each other as they struggle to build their positions in emerging or existing networks. Some ventures acquire other new companies to achieve scale and scope. New ventures might also collaborate with incumbent companies as they squeeze other ventures out of existence or simply preempt them from setting a new industry standard. Incumbents also collaborate and compete with new ventures, creating a constant adjustment challenge for new firms. With their fortunes so closely tied to platform leaders, new ventures have to be alert to changes in their leader’s strategies. Platform leaders might also wish to reduce their dependence on new ventures for innovations and applications. As a result, they might internalize some of their key functions by developing their own units or they may acquire these ventures. When they see a threat to their market position, some established leaders might also sabotage the efforts of new ventures to bring new technologies and/or applications, thereby thwarting their efforts to successfully commercialize their radically new technologies.

Entrepreneurship in an ecosystem takes forms that include creating new companies, establishing new divisions that capitalize on technological change, and introducing radically new products and business models. Companies also create new organizational forms, new ways of transacting and operating, and new ways of navigating through their competitive landscapes. New ventures sometimes create their own networks that work to alter the rules of competition and counter balance the effects of dominant players in the industry. Some of these newly born networks grow to become powerful forces in the industry and may eventually replace traditional players and their networks.

Roles new ventures play in innovation ecosystems

As noted, most of the niche creation opportunities presented by innovation platforms appeal more to small companies and new ventures than larger firms because of the size and scale of the associated value appropriation. Further, the challenges posed by knowledge dispersion, knowledge contextualization, and knowledge diversity for ecosystem leaders can best be resolved by partnering with new ventures with specialized expertise or knowledge.

Still, new ventures are frequently lopsided in their capabilities. Many of these ventures have more technology-related capabilities that are not supported by strong marketing and distribution or commercialization capabilities. These ventures’ supply chains might also be constrained because of their limited resources, lack of connections, and/or inexperience. This implies that participation in the ecosystem would be critical for new ventures to appropriate value from their assets; i.e., it increases these ventures’ dependence on the platform leader in gaining access to such resources and capabilities.

Paradoxically, the dispersion, diversity, and contextuality of knowledge needed for today’s complex products, technologies, and innovations generate abundant opportunities that give birth to very different types of new ventures. These ventures vary considerably in their market definition, resource bases, and business models. They also differ in their ability to build relationships with other new ventures and incumbent companies. The heterogeneity of new ventures would suggest that they might occupy different market spaces and positions within an ecosystem, further accentuating the differences that already exist among these ventures. In turn, this raises two related questions: What are the different roles that new ventures could play in these ecosystems? Further, if these firms learn, adapt, and evolve, could they move or progress from one role to another over time?

In this section we will address these two related questions. We should note that economic (e.g., the types and amounts of resources available or that could be assembled) and non-economic factors (e.g., founders’ goals, ambitions, and experiences) determine these ventures’ choices. In particular, much depends on the goals the founders have for their ventures, their resourcefulness in positioning their young companies, the ability to learn and make sense of success and failure, and the competence in managing their intellectual, social, and financial capital. Defining the identity and mission of these budding companies is not a one-time task. It is an iterative process by which the founder and other venture leaders gain experience and insights into where and how to best position their ventures to ensure wealth and value creation.

In an innovation ecosystem, it is relatively easy to recognize the existence of three different new venture types: (a) breeders, new ventures that create new ideas that radically transform the knowledge base of an ecosystem; (b) feeders, new ventures that carry out a disproportionate rate of invention and discovery in the ecosystem; and (c) niche players, specialized new ventures that carve out a niche within an ecosystem and develop it. These venture types are connected to the ecosystem leader(s) and help them to address market needs, adapt, and quickly respond to the challenges of technological, market, and other changes. Clearly, these ventures do not present an exhaustive list of all the new ventures that could exist in an ecosystem; rather, they illustrate the potential variety of these ventures. Other hybrid types might emerge, occupying their own space in the ecosystem. Below, we will sketch out the key features of each of these three venture types along multiple dimensions, aiming to delineate their different missions, foci, and roles within an ecosystem. Table 1 summarizes key differences among these ventures.
Table 1

Types of new ventures in innovation ecosystems

 

New Venture Types

Breeder

Feeder

Niche Leader

Primary function

Create radically new ideas/knowledge that transform or create ecosystems

Discover & innovate within existing ecosystem knowledge base

Innovate and dominate a well-defined market niche in existing ecosystem

Core characteristics

Thinking, “Intelligent” organizations that lack applied imagination

Application-oriented, disciplined organizations with limited or no commercialization skills

Niche-focused (market, technology, & geography) organizations with well-developed knowledge about the market

Technological capabilities

Deep science-based expertise; relatively well developed R&D skills (although more of ‘R’ than ‘D’)

Application oriented expertise; considerable knowledge conversion capabilities

Extensive and highly specialized expertise in a narrowly defined area

Marketing capabilities

Very limited

Limited to identifying and/or evaluating market potential of new technology/knowledge in existing ecosystem

Highly niche-centric (i.e. close ties to customers and other key stakeholders in the niche market area)

Relational capabilities

Very limited; some ties with ecosystem leader

Well developed; extensive ties with ecosystem leader and members of the ecosystem

Relatively well-developed but limited to those members who are part of or adjacent to its particular niche area

Role in theInnovation Ecosystem

Explore, expand frontiers of knowledge underlying an ecosystem

Transform invention to innovation within ecosystem boundaries

Enhance the reach and range of innovation platform

Unique skills that allow them to play That role

R&D

Social Capital, combined with applied R&D

Technical competence, strong market orientation

Breeders

As Table 1 would suggest, breeder ventures are the quintessential change makers. They value original research that unleashes new technological paradigms or alter the knowledge base of an industry or niches within it. In some cases, they do this by discovering novel connections among existing but disparate technologies/knowledge within an industry and then quickly proceed to combine them. In other cases, they may bring innovations from other industries and combine them with what exists in an industry, or perform original research that focuses on changing the industry’s fundamentals. Either way, their entrepreneurial activities that center on knowledge production and creation tend to radically transform the course or shape of an existing ecosystem (i.e., redefine the scope of innovation activities in a platform) or enable the creation of an entirely new ecosystem (i.e., serve as agent of disruptive innovation). Either activity will foster the creation of new industry niches and markets to be exploited for growth. Research boutiques that are common in the biotechnology and biopharma industries are a good example of these breeder firms.

Breeders typically exist on the fringes of an existing ecosystem (or sometimes even outside it) and often have weak ties with the ecosystem leader and other member companies. They give special attention to the basic knowledge or technologies that underlie the industry. Thus, while they may hold some type of relationship with the leading companies in the industry (including ecosystem leaders), they are unlikely to play the role of a “platform follower” in any of those ecosystems. Rather, they focus on surveillance and learning; i.e., they maintain awareness of the technological changes occurring in different segments of existing ecosystems. However, once they successfully develop some radically new technology or knowledge, their relationship with an ecosystem leader may change to that of collaborator.

Breeders are “thinking organizations” and therefore are a great source of innovation and discovery. Their leaders, however, often lack the applied imagination to foresee the sea of change their discoveries are likely to unleash, including the creation of entirely new ecosystems. While strong in R&D, their ability to commercialize is limited because of the lack of complementary assets (e.g., marketing, distribution, and product design) and their obsession with the technology itself. While it is possible for these new ventures to leverage their discoveries and gain these complementary assets through alliances and joint ventures, their founders’ cognitive biases favoring a smaller, technologically advanced group of customers might stand in the way of accumulating necessary resources. Breeders’ fate could also be undermined by their narrow focus and parochial views of the technological innovations they develop. As the industry (or niche) develops, these ventures’ fail to conceptualize the practical implications of their new knowledge or build the requisite scale or scope that might make them attractive targets for acquisitions or takeovers.

Typically, two broad avenues of value appropriation may exist for breeders. If the nature of a discovery is such that it transforms the industry and has the potential to launch a new ecosystem, then incumbents may acquire the breeder (or seek out and form a strategic alliance with it) and thereby become key partners in the ecosystem. Conversely, if the discovery promises to change the offerings within an existing ecosystem, breeders may acquire necessary complementary assets by collaborating with other new ventures or the platform leader and then proceed to conceive and develop new products. The adeptness and speed of breeders in making these connections with different members of the platforms and the hub leader can perpetuate staying powers. In this context, entrepreneurship among breeders centers on overcoming the limitations of their resources and experiences by locating companies that are interested in and committed to transforming their discoveries into viable innovations. Further, with experience and market exposure, some breeders may develop skills in independently commercializing their innovations; i.e., evolve into feeders or even niche players. Building such a market focus is likely to be time consuming, expensive, and difficult because of breeders’ over-emphasis on technological excellence above other capabilities.

To summarize, as Table 1 shows, overall three key characteristics describe breeder new ventures: an extreme focus on technology/knowledge discovery; a weak focus on markets and commercialization; and limited collaboration and relational capabilities. These present important challenges to breeder ventures. Specifically, given their relatively weak market knowledge, breeders are likely to have limited understanding of how their discoveries map onto existing (or potential) ecosystems. As such, a key challenge relates to evaluating partnership opportunities presented by ecosystem leaders or other major companies. However, once they join an ecosystem (new or existing), breeders may find it difficult to determine their continued role in that system given their primary focus on R&D. Ecosystem leaders may seek to influence breeders’ R&D plans and decisions once they become members of the platform, and this may conflict with the breeders’ history as ventures pursuing radically new innovations.

Feeders

These new ventures excel in “converting” inventions into innovations that add significant market value to an existing innovation platform and ecosystem (Table 1). For example, feeders are usually able to transform the original ideas developed by breeder ventures into more concrete innovations with a clear market focus. Thus, their entrepreneurial activities in the ecosystem tend to combine two key firm attributes: a strong applied or market focus and significant “social” or relational skills, and a focus on exploiting linkages in the value network in terms of commercializing innovative ideas within the framework offered by the ecosystem.

Feeders are the “linking pins” that connect breeders with the diverse players that exist in the ecosystem. These connections are crucial to defining the multitude of applications that could be developed based on the same piece of knowledge or an innovation. To do so, feeders bring their considerable knowledge of the market as well as their relationships with different members in the platform, including the leader firm. As a result, feeders succeed by exploiting their skills in commercializing their innovations while finding new market spaces that they can occupy. These spaces can emerge from the natural evolution of feeders or niche players as well as from envisioning the market anew and introducing novel business models that transform inter-firm relationships within an ecosystem.

Over time, some feeders learn and develop new skills that transform them into viable niche players. This transition occurs when feeders become more dedicated to developing their own products that they market within the innovation platform. Some feeders develop strong market organizations and thus reach different parts of the platform while retaining strong ties to the dominant leader. Marketing capabilities that center on co-development and joint distribution are especially valuable to making these relationships work well. Feeders also focus on commercializing their products, a process that entails considerable learning about customers and building social capital as well as relationship-marketing.

Niche players

Niche players are specialized companies that develop one or more parts of the foundational technology/platform, or products/services that complement the platform, or carry out one or more innovation processes in the ecosystem. They do this either independently or by collaborating with others (including the dominant player). Niche players apply their specialized expertise to create value in the ecosystem (in terms of complementary products/services or enhancing the innovation processes). As such, they develop niche expertise based on specific technological, market, or production knowledge. While this niche expertise forms the launching point for many new ventures, their ability to find a “fit” with the innovation platform established by the hub firm in the ecosystem is equally important.

A prerequisite for most niche players’ success is gaining a deep understanding of the innovation platform and the broader objectives of the ecosystem. This also implies that there is considerable knowledge about the market and the customers that firms within the ecosystem target. Niche players typically devote extensive resources to learn about their customers. Hence, their marketing skills have to be significantly better developed than that of either breeder or feeder firms. However, they do not have to be as broad or deep as those of the platform leader.

Market learning by niche players may include experimentation, R&D, and product development. This learning improves the absorptive capacity of niche player ventures, thus permitting them to acquire, process, and exploit knowledge developed by breeder and feeder firms as well as by other companies. Given their extensive social and business relationships, knowledge flows to niche players from with and outside their ecosystems. These knowledge flows keep niche players’ knowledge base current, thus facilitating their ability to innovate.

Niche players’ decisions to join an ecosystem may go beyond just the technological or market fit with the innovation platform. Their decisions are also likely to be influenced by the strategies adopted by the platform leader regarding the commercialization platform itself. For example, in some ecosystems, niche players get free access to the commercialization platform. In others, they may need to share their profits with the leader. The leader may also place a number of marketing constraints on niche players, ranging from the prices and discounts of their products/services to the ways in which they can connect with the customers of the innovation platform. Similarly, the leader may offer co-marketing and other facilities that enhance the reach of the niche players. The marketing and commercialization strategies that the platform leader adopts critically shape niche players’ decisions to join as well as to maintain their membership in the ecosystem.

A key task for niche players therefore is to ensure that their technology development continues to align well with the technology trajectory of the innovation platform (selected by the platform leader). Still, sometimes the platform leader may define standards and other technological constraints that force or critically shape niche players’ technology development plans. In other ecosystems, niche players may have greater leeway in this area. At the same time, niche players may need to ensure that their technology decisions do not render them too dependent on the platform leader and the ecosystem. As such, a serious challenge for the niche player is to devise their technology development plans in such a way that facilitates both technology exploitation (reinforcing their role in the ecosystem) and exploration (opening up opportunities outside the ecosystem). This is particularly troublesome for niche players because of the constraints on their internal resources and capabilities.

Many niche players remain committed to their role in the ecosystem by redefining their ability to innovate and connecting with others in the ecosystem. However, some may change their strategy and broaden their market definition and scope. In this process, they may position themselves more as a competitor to the ecosystem leader instead of a platform follower. In most cases, this occurs when niche players perceive the ecosystem leader encroaching into their domain and excessively reducing their degrees of freedom. Given that defection is costly, niche players re-orient their strategies by changing their patterns of resource allocations and strategic priorities as well as repositioning themselves.

As summarized in Table 1, overall three characteristics describe niche players: deep expertise in a well-defined area that ties in well with one or more existing ecosystems; relatively well-developed marketing capabilities (or market knowledge) that enable them to position their offerings vis-à-vis the target market of an ecosystem; and lack of independent commercialization capabilities and hence a reliance on the commercialization platform offered by the ecosystem leader. These characteristics also indicate three considerable challenges for niche player ventures. First, they need to make judicious decisions on their technology development so as to enhance their positions within the ecosystem as well as ensure their relevance in the broader market/industry. Second, niche players need to negotiate and retain an acceptable share of the value appropriated from their offerings via the commercialization infrastructure owned by the ecosystem leader. Third, they also need to leverage the innovation assets offered by the ecosystem leader while enhancing their own innovative productivity.

Discussion

Competing in today’s fast-paced markets demands ingenuity, innovativeness, and speed. Succeeding in rapidly growing global innovation ecosystems requires building connections by exploiting social capital to offset the limitations of existing capabilities, set standards, and establish leadership. Companies of all sizes have learned that success also rests in developing and managing their ecosystem in ways that allow them to quickly introduce and successfully commercialize their products as well as innovative business models. As a result, some companies have taken advantage of the growing use of open innovation, gaining access to the discoveries of their suppliers and competitors (Adner and Kapoor 2010; Dyer et al. 2009; Chesbrough 2003; Nambisan and Sawhney 2007; Nohria and Ghoshal 1997). Companies have also worked jointly with their customers to develop innovative products (Felin et al. 2009; Shah and Tripsas 2007). Successful innovation within innovation ecosystems therefore depends on the depth of a firm’s network, the reach of inter-organizational relationships, and the linkages with other networks in and outside its major industry.

Our article contributes to the literature by recognizing the heterogeneity of entrepreneurial activities that can thrive in an ecosystem. We have noted that many of the occupants of an ecosystem are new ventures and younger, smaller companies that find their place (opportunities) within innovation platforms. Understanding the knowledge-based foundations of these opportunities is an important issue in the literature (Aldrich and Ruef 2006; Arend 1999; Audretsch 1995; Baron 2006; Klein 2008). Further, there is interest in identifying the different types of new ventures that are likely to emerge in a given setting and the sources of heterogeneity among them (Aldrich and Ruef 2006). Consequently, we have shown how breeder, feeder, and niche player new ventures co-habit the same ecosystem, working independently and jointly to exploit opportunities. These firms collaborate and compete, thus perpetuating the creative tensions in their innovation platforms. These tensions keep these platforms dynamic, innovative, competitive, and vibrant. Our discussion adds to growing research on the strategic choices and actions of new firms and how they determine firm success and failure (Baker and Nelson 2005; Brown and Eisenhardt 1997; Catmull 2008; Luksha 2008; Tripsas and Gavetti 2000).

We have also underscored the dynamism that characterizes an ecosystem where a dominant innovation platform exists. This dynamism arises from entry and exit by new members that bring new knowledge and innovations to the platform. These members also learn by doing as well as vicariously, analyzing the nature of competition in the ecosystem. Such learning about the market and technology and analyzing market feedback and inter-organizational relationships provide important conduits for the flow of new knowledge that experienced and nascent entrepreneurs can profitably exploit. These members are able to define new opportunities, locate new market spaces, and conceive of new business models that can alter the fabric of their ecosystems (Boudreau and Lakhani 2009; Zahra et al. 2007).

A key insight from our research is that new ventures’ dependencies with the ecosystem leader (and other participants in the ecosystem (Moore 1993)) define the nature and extent of entrepreneurship within innovation ecosystems, differentiating it from other contexts. When they operate in an innovation ecosystem, entrepreneurs have to manage two roles: (a) being a creative follower of the platform leader, and (b) leading their independent companies that have their own goals and priorities. As platform followers, entrepreneurs have to subscribe to the norms, values, and policies prescribed by the platform leader for the entire ecosystem. Yet, entrepreneurs may desire to maintain their ventures’ unique set of values and norms, a goal that sometime conflicts with the objectives of the platform leader. Similarly, entrepreneurs have to select their ventures’ products and technologies based on market and technology trajectories projected or identified by the platform leader. New ventures’ offerings have to adhere to technological and market guidelines prescribed by the platform leader while minimizing any potential overlaps with those products of the platform leader and other partners. This can constrain the choices entrepreneurs are able to make.

In global innovation ecosystems, entrepreneurs are also under pressure to ensure that their product/service decisions maximize the value derived from their own firms’ unique internal assets and resources while ensuring the continued relevance and viability of the company within the ecosystem. Many new ventures find that balancing these forces is hard to achieve. These ventures need also to assemble complementary assets to develop their products and retain their currency. Many of these components are available to these ventures as part of the overall ecosystem infrastructure. This creates additional types of dependencies that these ventures may have to manage.

As a platform member, new ventures sometimes have to assume higher levels of risk—in terms of adopting new technologies promoted by their leader as well as pursuing new and unproven value creation opportunities within the ecosystem. Yet, given these ventures’ limited size and resources, entrepreneurs may need to lower their risk propensity and redefine the specific areas where they could assume risks that are likely to solidify their ventures’ market positions.

Dependencies within an ecosystem also extend to the way success is defined or interpreted by a new venture (Moore 1993). As a platform follower, a new venture’s success is primarily defined in terms of the success of the platform itself (e.g., value contributed to the platform by the venture’s offerings, rate of market growth of the platform, adherence to membership rules and policies, etc.). However, a venture’s success would also be reflected by its growth in sales and profits, number of new offerings, increase in number of employees, etc. Understandably, these two sets of success markers could conflict. For instance, the platform leader may emphasize platform market growth over profit and force ecosystem members to sacrifice their immediate profits to ensure long-term stability of the platform. Thus, while entrepreneurs have to operate under a number of constraints (e.g., those imposed by the platform leader as well as venture capitalists), the nature of these constraints are still bounded only by the general market conditions, the venture’s resource limitations, and the benefits that the venture seeks to achieve. Yet, in an innovation ecosystem, constraints may be unrelated to the venture’s particular resources or capabilities and may be enforced for the benefit of the broader ecosystem and its leader and not that of the new venture.

Practical implications

The roles that new ventures play in global innovation ecosystems and platforms highlight a need to study how entrepreneurs scan their environment and assemble their resources to offer a winning value proposition. Entrepreneurs are apt to scan globally dispersed innovation networks to acquire the knowledge needed to develop their products. Environmental scanning is more than tracking changing trends; it demands thoughtful analyses and interpretations of these trends and how they might influence the ecosystem in which the new venture exists.

New ventures also need to use the knowledge gathered from widely diverse and distant places, highlighting the need for integration. Integration begins with a notion or a vision for a new product or application and then multiple, relevant strands of knowledge are interwoven to translate this vision into coherent designs or prototypes. Developing this integrative skill is time-consuming because the process entails considerable learning about the technology, the market, and the organization’s (and sometimes national) culture.

Working with other companies associated with an innovation platform can give new ventures an opportunity to learn multiple skills about product development, marketing, and distribution. Venture managers need to capture this learning and use the insights gleaned from this process to improve the mix of capabilities they have, thus improving their capacity to innovate. Learning requires new ventures to develop the requisite absorptive capacity—defined as the ability to recognize, value, capture, assimilate and use knowledge developed elsewhere (Cohen and Levinthal 1990; Zahra and George 2002). The greater the absorptive capacity, the more likely the venture will learn and develop new products or services. Learning about markets, customers, competition, and the dynamics that govern the evolution of an ecosystem can also help to position new ventures as they build and hone their skills and capabilities.

Marketing remains an important capability in an ecosystem. The ecosystem leader needs to position its products and various applications in a fiercely competitive global marketplace. Competition has evolved, encompassing integrated sets of competitors who marshal their global networks to position their products. Traditional marketing skills remain valuable but the ability to integrate and leverage these capabilities can make the difference in determining success and failure. Leveraging relationships and other intangibles is particularly crucial. The fact that the ecosystem leader assumes greater responsibilities for production, distribution, and marketing does not mean that new ventures should not develop their own capabilities. New ventures have to position themselves and thus products and services within the ecosystem, build relationships, and innovate. Marketing, in particular, creates opportunities for learning and innovating. It keeps these ventures viable and alert to market dynamics.

Implications for theory and future research

Our discussion suggests that innovation ecosystems are becoming more prevalent in diverse industry settings. Consequently, it is important to track the emergence and evolution of different ecosystems and the forces that shape them over time. How these changes in an ecosystem are likely to influence the composition of its members (and vice versa) is an issue that is worthy of study. Future analysis can also better clarify the impetus for and manifestations of entrepreneurship within these ecosystems and the changes that might occur over time.

A related issue that requires attention is the ability of an ecosystem’s members to address the challenges of the changes that occur within and outside their ecosystems. With their lots closely tied to a given ecosystem, members need to dedicate their energy and resources to learn to adapt to the changes within their ecosystem. But rival technological paradigms or changes in marketing strategies or business models could create fundamental challenges to an ecosystem and its members. New ways of competing might alter the nature and scope of the competitive landscape (e.g., iPhone unifying multiple technologies that hitherto have been marketed and managed individually). The social and business relationships that exist within an ecosystem, combined with sunk costs and severe penalties for defection from a platform, might also slow down an agile response to emerging opportunities and threats.

New ventures usually learn as they go, both experientially and vicariously. Research that clarifies how new ventures learn within an innovation ecosystem is needed. How different is learning in this setting from others? How does market learning influence technological learning and new product development? When and how is this learning shared with other companies within the same innovation ecosystem? Our discussion of the potential transition from one new venture type to another (Table 1) helps to draw attention to the need to identify the mechanisms by which these ventures learn, develop capabilities, achieve market success, and evolve over time.

Conclusion

The emergence of global innovation ecosystems has created opportunities for new firms and their founders. The innovation platforms that populate these ecosystems are usually occupied by new ventures that play different roles in serving the needs of these platforms’ leaders and members. In playing these roles, new ventures use their diverse resources, skills, and capabilities to differentiate themselves from others while building enduring marketing relationships that give them their unique market space as well as allow them to evolve as their markets and capabilities change.

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Copyright information

© Academy of Marketing Science 2011

Authors and Affiliations

  1. 1.Department of Strategy and Organization & Gary S. Holmes Center for Entrepreneurship CenterCarlson School of Management, University of MinnesotaMinneapolisUSA
  2. 2.Lally School of Management & TechnologyRensselaer Polytechnic InstituteTroyUSA

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