Capability Interactions and Adaptation to Demand-Side Change

Abstract

Research summary. We examine how interactions among a firm’s capabilities influence the extent and direction of firm adaptation under conditions of demand-side change. Our empirical context is the U.S. defense industry, within which we study firms receiving defense-related Small Business Innovation Research (SBIR) awards around September 11, 2001, an event which constituted an exogenous demand-side shock in which technology-related preferences of customers were reshuffled. We find that under demand-side change, pre-existing customer relationships have a double-edged effect: they facilitate “extension-based” adaptation when interacted with technology capabilities experiencing a decline in customer preferences, and they hinder “novelty-based” adaptation when interacted with technology capabilities experiencing an increase in such preferences. We also find that both types of technological capabilities together facilitate adaptation along the extension and novelty paths.

Managerial summary. Demand-side change, in which customer preferences for particular technologies are reshuffled, occurs in many industry settings. A deeper understanding of the factors shaping firm adaptation under this form of change can influence managers’ decisions to implement strategies to plan for and react to such change. Using a sample of firms receiving defense-related Small Business Innovation Research (SBIR) awards around September 11, 2001, we show that the customer relationships a firm develops prior to demand-side change can have a double-edged effect on firm adaptation. Such relationships facilitate “extension-based” adaptation when combined with technology capabilities declining in customer preferences and hinder “novelty-based” adaptation when combined with technology capabilities increasing in customer preferences. In addition, the combination of the two technological capability types facilitates adaptation along both paths.