978-1259539060 Chapter 8 Lecture Notes

Unlock access to all the studying documents.

View Full Document

Instructor’s Manual

CHAPTER 8

Collaboration Strategies

SYNOPSIS OF CHAPTER

In this chapter the factors that determine whether or not collaboration is the optimal strategy for

an organization are identified. Among the issues to be considered are the availability of

necessary resources, the risk that collaboration will expose proprietary resources to

expropriation, the level of control required over both the development process and the future

development of the resulting technology, and the opportunity for the firm to develop capabilities

or access another firm’s capabilities in the collaboration.

The types of collaboration considered include strategic alliances, joint ventures, licensing,

outsourcing and collective research. Each type of collaboration has its own tradeoffs with regard

to speed, cost, control, potential for leveraging existing competencies, developing new

competencies and accessing another firm’s competencies. All are important factors in the

decision to collaborate or not.

Finally, for a collaboration to be successful a firm must consider both the resource and strategic

fit of its potential partner. If the partner is desirable on these dimensions the firms must develop

an agreement that includes clear and flexible monitoring and governance mechanisms (including

evaluation and enforcement) to ensure both partners understand their rights and obligations.

TEACHING OBJECTIVES

1. Familiarize students with the factors firms use to evaluate the collaboration opportunities.

Education

Instructor’s Manual

2. Identify and explain the various forms of collaboration and the tradeoffs associated with

each of them.

3. Establish the factors that are crucial to a successful collaboration.

LECTURE OUTLINE

I. Overview

a. Whether to perform activities in house or with partners is a difficult decision for

firms but the reality is that a significant portion of innovation comes from the collaborative

efforts of multiple individuals or organizations.

b. Collaboration requires the firm to relinquish some degree of control over a technology’s

development, share the financial returns and exposes a firm to the possibility of

malfeasance by its partner. On the upside, collaboration also lowers the costs and risks

associated with the development of a new technology.

II. Reasons for Going Solo

a. Why would a firm develop a technology on its own instead of collaboration with a

partner? A firm may go solo if it possesses all the capabilities and resources in house that it

needs, the development of the new technology is an opportunity to develop new

competencies, the risk of transferring knowledge to a partner is too great, the firm wants to

control the subsequent trajectory of the technology’s development, or if an appropriate

partner is not available. Examples follow:

i. For example, Monsanto developed on its own a genetically modified soybean

seed that could be used in conjunction with Roundup, an herbicide. They had to

go solo because the biotechnology industry was in its infancy; there were no

appropriate partners to supply the technology. Monsanto turned the need to

Education

Instructor’s Manual

develop this capability in house into an opportunity to make biotechnology its

strategic focus.

ii. Honda Motors did not join the Alliance of Automobile Manufacturers hwne

developing its Honda Insight hybrid electric vehicle because it wanted to retain

control over the development process (and the profits) and because the

company’s culture emphasizes independence and self-reliance.

iii. Boeing considered going solo to develop its Sonic Cruiser because they knew

they needed to create a new airplane every 12 to 15 years to transfer the skills

and experience necessary to do so on to the next generation of employees.

III. Advantages of Collaborating

a. Collaborating can provide a firm with the needed skills or resources faster than

developing them on their own.

b. Using the skills or resources of a partner can help a firm reduce its asset commitment

(and avoid a large investment in a technology that may become obsolete quickly) and enable

it to be more flexible; an especially important feature in markets characterized by rapid

technological change.

c. Collaboration can also be an important opportunity for the firm to acquire new

knowledge, either through the transfer of knowledge between development partners or the

more efficient creation of new knowledge as a result of the collaborative efforts.

d. Collaboration may also be advantageous if it results in the creation of a shared standard.

Where compatibility and complementary goods are important to the commercialization

efforts of a new technology, collaboration at the development stage can bring about

cooperation at the commercial stage. For example,

Education

Instructor’s Manual

i. In 1997, Nokia, Motorola and Ericsson formed a nonprofit corporation, the

WAP Forum, the purpose of which was to establish a common wireless

telecommunication format and to prevent multiple competing standards. The

forum merged with the Open Mobile Architecture initiative to form the Open

Mobile Alliance (OMA) in 2002. By early 2003, more than 200 mobile operators,

equipment producers and software developers had signed on to the standard.

ii. IBM, Apple and Hewlett Packard were not as fortunate with their joint venture,

Taligent. Taligent was formed with the intention of developing and promoting an

operating system that would replace Microsoft Windows. Despite an investment

of $50 million and a three-year commitment, the venture failed to meet the

expectations of the partners and was dissolved.

e. The passage of the National Cooperative Research Act (NCRA) in 1984 allowed

competitors to cooperate as long as the efforts were not anticompetitive. There was

subsequently a large surge in alliance activity in the 1990s as firms scrambled to respond to

the massive technological shock (and opportunity) unleashed by advances in information

technology.

IV. Types of Collaborative Arrangements

a. Collaboration can take many forms and can be formed to accomplish almost any

business function.

i. Potential partners include suppliers, customers, competitors, and

complementors, organizations that offer similar products in different

markets or offer different products in similar markets, non-profit

organizations, government organizations and universities among others.

Education

Instructor’s Manual

ii. Firms may choose to collaborate in the areas of manufacturing, services,

marketing, or technology-based objectives. Collaboration for the purpose of

research and development ranks high among the reasons partners join efforts,

particularly in North America.

b. Collaboration arrangements range from very informal alliances to highly structured

joint ventures or technology exchange agreements (licensing). The most common forms of

collaboration in technological innovation are strategic alliances, joint ventures, licensing,

outsourcing, and collective research organizations.

c. Strategic alliances require a significant investment in time and resources but in exchange

firms gain access to capabilities not available in house, leverage their capabilities by

combining their efforts with another firm, achieve innovation goals faster, at a lower cost

and with less risk. Alliances can also provide a firm with the flexibility to pursue various

opportunities for innovation or access different types and scale of capabilities, important in

rapidly changing markets. For example,

i. An alliance between a large pharmaceutical company and a small

biotechnology firm provides the large firm access to drug discoveries and the

smaller firm benefits from the capital resources, manufacturing, and distribution

capabilities of the larger firm.

ii. Doz & Hamel categorized alliance strategies along two dimensions:

1. Whether the alliance pools or transfers capabilities from one firm to another,

2. Whether the alliance is between two companies or three or more companies

(i.e. collective network of alliances).

Education

Instructor’s Manual

Show Figure 8.2

iii. To avoid the sharing of too much information with alliance members, firms need

to ensure that participating employees understand the limits on the information

and resources to be shared within the alliance.

d. Joint Ventures are formal alliances requiring a significant equity investment and

commitment from each partner. Joint ventures usually involve the creation of a separate legal

entity.

i. Invamed Pharma Incorporated, established in 2005, was formed by New Life

Scientific (of the US) and InvaPharm LLC (of the Ukraine) to manufacture

prescription pharmaceuticals for the US market. New Life Scientific would

provide funding for the project and InvaPharma would supply technical

know-how and intellectual property. Each partner received a 50% stake in the

venture.

e. Licensing is a contractual arrangement granting a licensee the rights to an asset

(proprietary technology, trademark, copyright, etc.) owned by the licensor.

i. For the licensor, the advantages of licensing include the ability to penetrate a

wider range of markets than it could on its own. Licensing to potential

competitors can preempt them from developing their own technologies (this is

especially important if it is likely that competitors will copy the key features of

the technology or if there will be substantial pressure for the adoption of a single

dominant design). For the licensee, licensing is typically less expensive and less

risky than in-house development.

ii. Disadvantages of licensing include losing the technology as a source of

sustainable competitive advantage as it gains use among many licensees and the

potential that knowledge will be transferred to licensees enabling them to develop

their own proprietary technology.

Education

Instructor’s Manual

g. The factors determining a company’s optimal strategy include whether there are

barriers to imitation, capable competitors, complementary goods available and whether

or not the firm is able to produce the technology and complementary goods (if necessary) in

house. Outsourcing is an effective strategy for firms that develop technological innovations,

but are missing one or more capabilities to manufacture and bring the product to market. The

advantages of contract manufacturing (one of the most common forms of outsourcing)

follows:

i. Advantages of Contract Manufacturing include flexibility by providing a

manufacturing capability without long-term capital investments or added labor,

enabling a firm to focus on activities central to competitive advantage while

getting expertise and resources not available internally and by enabling a firm to

achieve economies of scale and faster response time while keeping costs down.

(Instructor may wish to refer to the Apple example provided in the text here.)

ii. Disadvantages of Contract Manufacturing include the potential loss of

important learning opportunities needed to develop innovations in the future,

potentially high transaction costs, and the risk that a contract manufacturer will

appropriate proprietary technology.

h. Collective Research Organizations may take the form of trade associations,

university-based research centers or private research corporations and are formed through

government or industry association initiatives (e.g. National Center for Manufacturing

Sciences) or groups of private companies (e.g Aspla)

V. Choosing a Mode of Collaboration

Education

Instructor’s Manual

a. Solo internal development is relatively slow and expensive,

offers little-to-no potential for accessing another firm’s competencies but enables a firm

to retain control over how the technology is developed and used and is most likely to

contribute the leveraging of existing competencies and the development of new ones. Solo

internal development is appropriate when a firm has strong competencies related to the new

technology, access to capital, and is not under great time pressure.

Show Figure 8.3

b. Strategic Alliances enable firms to quickly gain access to another

firm’s technology, or to broader markets, to leverage existing competencies or develop

new competencies depending on the structure of the alliance.

c. Joint Ventures offer a slight time advantage over solo development efforts due to

combined efforts of partners. Joint ventures also offer cost sharing, the potential for

leveraging existing competencies and developing new competencies and the opportunity to

access partners’ competencies. Joint ventures are particularly desirable when a firm places

value on access to other firms’ competencies.

d. Licensing in is a fast and moderately priced way to access new technology. Licensing

also has the potential to leverage the firm’s existing competencies, develop new

competencies and provide access to another firm’s existing competencies. On the downside,

licensing in offers limited use of a technology and a low degree of control.

e. Licensing out offers a fast and low cost way of expanding the use of a technology into

new products or markets. It leverages the firm’s existing competencies and can enable it to

access other firm’s competencies (for example, their superior knowledge of a particular

market). If offers little opportunity for development of new competencies.

Education

Instructor’s Manual

f. Outsourcing affords rapid access to another firm’s expertise and lower costs and

leverages a firm’s existing competencies by allowing it to focus on activities providing the

greatest return. On the downside, the firm has little opportunity to build new

competencies.

g. Collective Research Organization is a form of long-term commitment in which costs

and degree of control can vary significantly. These arrangements often enable a firm to

leverage and build upon its existing competencies as well as to learn from other

participating organizations. These organizations are particularly useful in industries with

complex technologies and/or industries that require considerable investments in basic science.

II. Choosing and Monitoring Partners

a. Risks of collaboration include difficulties in determining if the resources provided by

partner are a good fit, the possibility that the partner will exploit the relationship by

expropriating the company’s knowledge with little or no reciprocal contribution, and the

possibility that managers will become overburdened by managing more collaborations than is

reasonable. It is thus important to limit collaborations, choose partners carefully and

establish monitoring and governance systems to limit risks.

b. Partner selection is crucial to success. Key factors fall into two dimensions, resource

fit (e.g. partner’s relative size and strength and complementarity of resources) and strategic

fit (e.g. alignment of objectives and similarity of values and culture).

c. To assess a potential partnership a manager should ask the following questions:

Education

Instructor’s Manual

i. How would collaboration change the bargaining power of customers or suppliers,

barriers to entry, competitive rivalry and the availability of complementary goods

and the threat of substitutes?

ii. How would the collaboration leverage or enhance the firm’s strengths (or would

any firm strengths be put at risk) and offset its weaknesses (in terms of

capabilities and financial position) and would the collaboration create a

competitive advantage?

iii. How does the collaboration fit with the firm’s strategic intent? Is the collaboration

likely to help close a resource or technology gap within the firm? Is it likely the

objectives of the collaboration will change? If so, will the changes be compatible

with the firm’s strategic direction?

d. Partner Monitoring and Governance is as crucial to success as partner selection. There

are three main types of governance mechanisms used to manage collaborative relationships:

Alliance contracts, equity ownership, and relational governance. Alliance contracts

clarify partners’ rights and obligations and specify legal remedies in the case of a violation of

the agreement. Often included in the agreements are:

i. What each partner is obligated to contribute to the collaboration.

ii. How much control each partner has in the collaboration.

iii. When and how proceeds of the project will be distributed.

iv. Mechanisms for monitoring each partner’s adherence to the agreement.

v. Provisions for periodic auditing.

vi. Provisions for terminating the relationship.

Education

Instructor’s Manual

Equity ownership (i.e., each partner contributes capital and owns a share of the equity in the

alliance) help to align the incentives of the partners and provides a sense of ownership and

commitment to the project. Relational governance is the self-enforcing governance based on the

goodwill, trust, and reputation of the partners, that is built over time through shared experiences

of repeatedly working together.

e. Firms should also think about how their alliances position them within the overall

collaborative network. Firms that occupy highly central positions might have access to more

information and be able to access that information more quickly. Firms that occupy “brokerage”

positions (by bridging groups of otherwise disconnected firms might have opportunities to make

unique and valuable combinations between heterogeneous types of information, and might also

become valuable gatekeepers in the flow of information through the network.

Show Figure 8.

Education