Benefits of Collaboration

A collaborative arrangement is necessary for almost all innovation of firms, for development or commercialization but the failure rate of such alliances remains high. In this we examine the role of collaboration in the development of new technologies, products and businesses.

  • Why do firms collaborate?
  • What types of collaboration are most appropriate in different circumstances?
  • How do technological and market factors affect the structure of an alliance?
  • What organizational and managerial factors affect the success of an alliance?
  • How can a firm best exploit alliances for learning new technological and market competencies?

I would like to link the rationale for collaboration with different forms and structures of alliances focusing on the specific cases of supplier relations, strategic alliances and innovation networks. Next is to identify recent trends and patterns in collaborative activity, and finally how to better manage alliances, including the potential to acquire new market or technological knowledge.
Role of technological and market competencies in developing an innovation strategy: Firms collaborate for a number of reasons,

  • To reduce the cost of technological development or market entry.
  • To reduce the risk of development or market entry.
  • To achieve scale economies in production.
  • To reduce the time taken to develop and commercialize new products.
  • To promote shared learning

In any specific case, a firm is likely to have multiple motives for an alliance. However, for the sake of analysis it is useful to group the rationale for collaboration into technological market and organizational motives. Technological reasons include the cost, time and complexity of development. In a current highly competitive business environment, the R&D function, like all other aspects of business is forced to achieve greater financial efficiency, and to examine critically whether in-house development is the most efficient approach. In addition there is an increasing recognition that one company’s peripheral technologies are usually another’s core activities, and that it often makes sense to source such technologies externally, rather than to incur the risk costs and most importantly, timescale associated with in-house development. The rate of technological change, together with the increasingly complex nature of many technologies means that few organizations can now afford to maintain in-house expertise in every potentially relevant technical area. Many products incorporate an increasing range of technologies as they evolve, for example, automobiles now include much computing hardware and software to monitor and control the engine, transmission brakes and in some cases suspension. Therefore, most R&D and product managers now recognize that no company, however large, can continue to survive as a technological island. For example, when developing the Jaguar XK8 Ford collaborated with Nippondenso in Japan to develop the engine management system and ZF in Germany to develop the transmission system and controls. In addition, there is a greater appreciation of the important role that external technology sources can play in providing a window on emerging or rapidly advancing areas of science. This is particularly true when developments arise from outside a company’s traditional areas of business, or from overseas.

Two factors need to be taken in to account when making the decision whether to make or buy a technology the transaction costs, and strategic implications. Transaction cost analysis focuses on organizational efficiency, specifically where market transactions involve significant uncertainty. Risk can be estimated and is defined in terms of a probability distribution, whereas uncertainty refers to an unknown outcome. Projects involving technological innovation will feature uncertainties associated with completion, performance and pre-emption by rivals. Projects involving market entry will feature uncertainties due to lack of geographical or product market knowledge. In such cases firms are often prepared to trade potentially high financial returns for a reduction in uncertainty.
However, sellers of technological or market know how may engage in opportunistic behaviour. By opportunistic behaviour we mean high pricing or poor performance. Generally, the fewer potential sources of technology, the lower the bargaining power of the purchaser, and the higher the transaction costs. In addition where the technology is complex it can be difficult to assess its performance. Therefore transaction costs are increased where a potential purchaser of technology has little knowledge of the technology. In this respect the acquisition of technology differs from subcontracting more routine tasks such as production or maintenance work, as it is difficult to specify contractually what must be delivered.

As a result, the acquisitions of technology tends to require a closer relationship between buyers and sellers than traditional market transactions resulting in a range of possible acquisition strategies and mechanisms. Some form of collaboration is normally necessary where the technology is novel, complex or scarce. Conversely, here the technology is mature, simple or widely available, market transactions such as subcontracting or licensing are more appropriate. However, the cumulative effect of outsourcing various technologies on the basis of comparative transaction costs may limit future technological options and reduce competitiveness in the long term.