Abstract
Previous studies have analyzed how incumbents may falter when they focus too narrowly on satisfying the needs of current customers at the expense of pursuing innovations that will ensure future market leadership. This paper examines this ‘dilemma’ faced by incumbents and considers cases where incumbents do spearhead innovation on the technology frontier thus enabling future product generations. In particular, we examine the case of the semiconductor industry confronting a technological discontinuity in the production of chips. In anticipation of a discontinuity in the lithography production module, leading firms in the semiconductor industry have initiated next‐generation lithography (NGL) projects. These projects have exhibited an unprecedented level of horizontal and vertical cooperation. Our research analyzes how such cooperative research and development (R&D) programs allow incumbent innovators to mitigate four areas of uncertainty—leadership, preemption, performance, and industry adoption. We adapt a Hotelling location model to demonstrate the tension between mitigating these uncertainties through interfirm cooperation and the possibility of increased downstream competition. Such tensions have influenced cooperation within and across the R&D consortia pursuing NGL led by IBM, Intel, and Bell Labs. Copyright © 2008 John Wiley & Sons, Ltd.