Firm heterogeneity in complex problem solving: A knowledge‐based look at invention

Academic Summary The knowledge based view suggests that complex problems are best solved under hierarchical (within firm) governance. We examined why firms assumed to be in general alignment with this theory might nonetheless produce solutions of varying usefulness. We theorize that a firm's internal knowledge variety (IKV) is associated with its capacity to support cross domain knowledge flows during search, and its ability to identify and explore promising areas on the solution landscape. We further theorize that partner knowledge in familiar (unfamiliar) domains can offset specific weaknesses in searching rugged landscapes, inherent with low or high (moderate) IKV. We find support for these ideas in the context of drug discovery, extending KBV’s focus on governance alignment to explain variation in problem solving effectiveness within hierarchy. Managerial Summary Firms that concentrate their inventive efforts in a few technological domains, but also dabble in several others, have problem solving advantages: they can better support knowledge transfer and recombination across domains. Firms that focus too narrowly or spread their inventive efforts thinly across many domains lose these advantages but might compensate through alliance partnerships. Our study of drug discovery shows that while firms with very low or high knowledge variety tend to produce weaker solutions than firms in the moderate range, their inventive performance improves when alliance partners afford them access to additional knowledge in familiar domains. We explain how the combination of firm and partner knowledge enables firms to better identify, evaluate, and implement alternative solutions to complex problems.