Strategies for innovation: When does sharing with a competitor rather than going alone make sense?

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In a world where innovation is increasingly expensive, going it alone is not always the best way for firms to produce a product. But how do executives know when strategic alliances and teaming up with others is the most productive strategy?

 4 min read 

Xavier Castañer, Louis Mulotte, Bernard Garrette and Pierre Dussauge, have some answers.

CastanerXavier Castañer is a professor of Strategy. His current research interests revolve around corporate governance, strategy and development, in particular alliances and acquisitions.

Innovation may be the route to corporate success, but increasingly organizations have to accept that the source of that innovation may lie outside the firm’s boundaries. A few companies might once have been able to hoard or purchase almost all the necessary resources for a given product. But technological sophistication, financial requirements and globalization mean that if a company wants to introduce an innovative product it might need to collaborate with other firms already established in the same market (incumbents), and not just with suppliers or distributors. Thus one common strategic decision for firms is whether to go it alone, or to form an alliance with another firm for a particular project – a make-or-ally decision.

Autonomous governance vs. Collaborative governance

Xavier Castañer from HEC Lausanne and co-authors Louis Mulotte, Bernard Garrette, and Pierre Dussauge, have investigated some important factors involved in making that decision and the performance consequences of choosing whether to be the sole decision-maker for a new product, or share decision rights with another industry incumbent, sometimes a competitor. These represent two different scenarios. In one scenario firms undertake a business venture by incurring all costs and risks and concentrate all decision making authority (autonomous governance). With the other scenario firms share costs, risks, and decision making authority with another incumbent firm or set of firms (collaborative governance).

New product introduction entails the design, manufacturing, and marketing of new products – in this case in the aircraft industry. More specifically, the authors considered all new fighters, turboprops, helicopters, and passenger/cargo jets brought to market by Western firms from 1942 up to 2000, with either one firm as prime contractor, or two or more firms sharing the prime-contractor role. This covered 291 different aircraft projects, and 334 product innovation decisions made by 129 firms.

To measure performance of a new product the authors looked at both costs and benefits by using time-to-market and unit sales, respectively.

Jointly resolving technological conflicts may lead to superior solutions

The authors suggest that strategic alliances may offer both direct performance benefits and disadvantages. On the one hand horizontal collaboration may have a positive impact on performance. This may be through the synergies available from pooling of resources and its enhancing effect on innovation, for example. Jointly resolving technological conflicts may also lead to superior solutions. Thus, they expect that horizontal collaboration will lead to higher benefits than autonomous governance for similar projects.

At the same time, however, coordination costs and conflict resolution are likely to be greater in horizontal collaboration than in autonomous governance, where conflict can be resolved through hierarchical authority, whereas partners need to negotiate. The authors predict, therefore, that horizontal collaboration will entail greater costs than autonomous governance. In short, collaborative advantages are inevitably accompanied by governance disadvantages.

The authors also looked at the impact of governance fit on performance. Here they explored the possibility that the impact on performance from collaborating or going it alone may vary, depending on the suitability of the governance mode selected – autonomous or collaborative – given the firm’s existing resources, the resources required by the venture, and the risk involved in any exchange of resources at the time of the choice.

As the authors predicted, compared with firms going it alone, collaborating firms benefited from an increase in unit sales. At the same time, though, there was an increase in the time to market for the products of collaborating firms, compared to autonomous firms. However, if firms choose the most appropriate governance mode, based on the resources that they have and need, then they improve their unit sales and time-to-market performance relative to those firms that make inappropriate choices.

Collaborate with another incumbent firm or firms also with insufficient resources by themselves

The optimal choice for firms with insufficient resources for introducing a particular product is to collaborate with another incumbent firm or firms also with insufficient resources by themselves, rather than attempting to develop the required resources internally. As the firms involved recognize that they need the resources of their partners, they are likely to be more accommodating about the collaborative process, as well as generating superior technological and commercial solutions which they could not have come up with alone. Thus these collaborating firms benefit from products with a higher quality-to-price ratio, and consequently greater unit sales, plus a shorter time-to-market, than if they had chosen to go it alone.

Similarly, firms with sufficient resources for producing a particular product should go it alone. This avoids unnecessary and time-consuming negotiations with strategic partners about who does what, and which technological and commercial options to deploy. It also avoids conflicts that arise from collaborating firms trying to prevent their partners from obtaining certain resources.

Executives must factor into the make-or-ally decision the state of firm’s resources

For executives contemplating a strategic alliance versus autonomous innovation the message is clear. As the authors show, collaboration is double edged, unavoidably entailing both distinct advantages and disadvantages – both of which will directly impact different aspects of performance. However, it is possible to optimize the overall gains from collaboration and gain a competitive edge in a market. To do this, executives must factor into the make-or-ally decision the state of firm’s resources, as well as the resources required by the particular activity. Only then should they decide whether, in pursuit of a strategic and innovative advantage, it is better to team up with other incumbents or to go it alone.

Read the original research paper: “Governance Mode Vs. Governance Fit? Performance Implications of Make-Or-Ally Choices for Product Innovation in the Worldwide Aircraft Industry, 1942-2000 by Xavier Castañer, Faculty of Business and Economics, University of Lausanne, Louis Mulotte, Tilburg University, Bernard Garrette and Pierre Dussauge, HEC Paris.

Featured image by Christopher Badzioch / istockphoto