How Catastrophic Innovation Failure Affects Organizational and Industry Legitimacy : The 2014 Virgin Galactic Test Flight Crash

We examine how catastrophic innovation failure affects organizational and industry legitimacy in nascent sectors by analyzing the interactions between Virgin Galactic and stakeholders in the space community in the aftermath of the firm's 2014 test flight crash. Our findings show that catastrophic innovation failure creates a legitimacy jolt to the firm and the nascent industry. This provides an occasion for the firm and its stakeholders to jointly reassess organizational and industry legitimacy, based on their interpretations of the failure. We trace the emergence of three competing interpretations. Each interpretation maintains the industry's legitimacy via differing interpretations of the firm's or its operating segment's legitimacy. Some detracting stakeholders blame the firm for the failure, reject the firm's legitimacy, and redraw industry boundaries to isolate the firm. Other detracting stakeholders blame the firm and its industry segment for the failure, reject the legitimacy of both, and redraw industry boundaries so as to isolate them both. Conversely, the firm and supporting stakeholders jointly argue for the legitimacy of the firm and of the innovative endeavor writ large, embed the firm within the nascent industry, and transfer ownership of the failure to the community. The firm also re-narrates its organizational identity to draw links to the industry's identity. Our findings show that catastrophic innovation failure affects the evolution of nascent industries and impacts how firms manage optimal distinctiveness: detracting stakeholders push for further distinctiveness of the firm, while supporters seek to reduce it