Essec Business School

With ESSEC Knowledge Editor-in-chief

This summer saw Virgin Galactic “win” the billionaire space race, with Unity 22 launching Richard Branson and the passengers and crew into suborbital space. But before this success, there was a catastrophic failure: on October 31st, 2014, the VSS Enterprise suffered a fatal crash during a test flight. Sen Chai (ESSEC Business School), Anil R. Doshi (UCL School of Management) and Luciana Silvestri (Harvard Business School) studied how this catastrophic innovation failure impacted the perceived legitimacy of Virgin Galactic and of the commercial space industry, finding that industry members tend to either challenge or maintain the firm’s legitimacy, all the while supporting the legitimacy of the industry itself. 

One small step for man… 

Innovation is necessary for humankind’s advancement: it impacts the economy, changes how we interact with our world and each other, and gives rise to new opportunities and even new industries. These new industries, and the firms that operate within them, need to establish their legitimacy, given their unfamiliarity to investors, regulatory agencies, clients, and other stakeholders. As a result, firms will cooperate to establish both their own legitimacy and that of the industry as a whole. These efforts will often focus on making the firms seem knowledgeable, with sound practices and technologies, and by making their innovations seem beneficial to society. As the industry develops, firms will also seek to establish their own distinct identity to differentiate themselves from their competitors. 

Yet since the innovation in question is so new and uncertain, these firms are vulnerable to failure. This includes small-scale failure, such as those that occur at the prototype stage and are a fairly normal part of the process, but also catastrophic innovation failure: a major failure that happens in the public eye, unexpected, costly, or is some combination of the three (Vaughan 1990).  Dr. Chai and her colleagues were interested in how exactly this kind of failure impacted organizational and industry legitimacy in new sectors, in this case the space industry, positing that it can cause a legitimacy jolt. They studied one case in particular: the aforementioned 2014 crash of Virgin Galactic’s SpaceShipTwo, which killed one pilot, injured a second, and resulted in the loss of technology. Virgin Galactic is a major player in the nascent commercial space industry and specifically in space tourism, meaning it aims to send people to space for recreational purposes. In doing so, it’s engaging in radical innovation, as past space races have focused on sending professional astronauts to space with technology produced by government agencies like NASA in the United States rather than by private companies. The commercial space industry also includes for-profit activities such as sending satellites into space and space mining, with other major players being SpaceX (founded by Tesla’s Elon Musk) and Blue Origin (founded by Amazon’s Jeff Bezos).

A study of failure

To examine how this kind of catastrophic event impacts how industry participants see the legitimacy of the firm and the industry, the researchers built a qualitative archival data set using sources that discussed the crash, such as tweets from Virgin Galactic, Richard Branson, and clients, blog posts from Richard Branson, corporate website content, press releases, media articles, and government publications. This database included data from before and after the crash, featuring information on what was said before and after the crash. It included content from a diverse array of participants, including investors, Virgin Galactic executives, space experts, the press, and government representatives. 

They found that while people interpreted the event in different ways, participants all still maintained the legitimacy of the industry itself- even if Virgin Galactic’s legitimacy took a blow in their eyes. There were two major camps of reactions: detractors and supporters of the firm.

The first camp, the detractors, felt Virgin Galactic lost legitimacy in the wake of the crash and perceived the firm as an outsider or an illegitimate interloper. Some of them attributed the failure to flawed firm practices and poor technology. These people isolate the firm based on its perceived technological failings. Others saw the product category itself - space tourism - as the reason for the failure, believing it to be a frivolous, expensive, dangerous endeavor with little social value. They also tend to believe that the practice is not economically viable, and that participants incur significant risks. They differentiate the firm from the space industry as a whole due to its perceived lack of social value. Overall, the detractors isolate the firm, or its product category, from the industry in general.

The second camp is the supporters and the firm itself: they see their endeavors as both technologically solid and socially valuable, believing in the legitimacy of the firm and the industry alike. In reacting to the failure, they often characterized it as the result of the challenging innovation process in the commercial space industry, in a way symbolically attributing the failure to the industry as a whole and VG as a rightful member. They also likened the failure to early failures in other nascent industries, like aviation accidents and Thomas Edison’s repeated efforts to create the lightbulb. They have two primary tactics for maintaining the firm’s legitimacy. The first is the use of commentary by the National Transportation Safety Board on the causes of the failure, i.e. human error, which offset attacks on the firm’s technology and practices. The second is to align the firm’s identity with the identity of the industry itself to assert itself as an approved industry member. The supporters aim to maintain that the firm is a legitimate member of the industry.

From these findings, we see that stakeholders interpret failure in different ways. In the aftermath of a catastrophic innovation failure, stakeholders tend to maintain the legitimacy of the industry itself, but not everyone will continue to see the implicated firm as legitimate. Additionally, while the firm may have previously sought to set itself apart from its industry peers, it may revert to an image more aligned with the general industry identity to reassert its legitimacy. 

Ad astra per aspera: a rough road leads to the stars?

While radical innovation is necessary for human progress, its very nature means it is vulnerable to failures, ranging from small failures to catastrophic ones like the Virgin Galactic crash. Dr. Chai and her fellow researchers found that the aftermath of this catastrophic innovation failure will cause a legitimacy jolt:  both detractors and supporters of the firm and the product will emerge, with both supporting the legitimacy of the industry despite differing views of the firm’s legitimacy. Naysayers will attempt to classify the firm as an outsider with little technological or social value, while supporters and the firm itself will seek to realign its identity with that of the broader industry and attempt to reassign ownership of the failure using objective evidence. This study sheds light on the dynamics of a nascent industry, namely how stakeholders interpret failure differently and the factors linked to distinguishing between organizational and industry legitimacy. 

Reference 

Chai, S., Doshi, A. R., & Silvestri, L. (2021). How catastrophic innovation failure affects organizational and industry legitimacy: The 2014 Virgin Galactic Test Flight Crash. Organization Science.