Innovation Management, GSB 2013
Stefan Wuyts
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Alliances
◦ The Resource-Based View of the firm
◦ Alliances in practice
Alliance portfolios
Outsourcing innovation
◦ Transaction Cost Theory
◦ Outsourcing innovation in practice
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Low
High
Alliances on the continuum of vertical integration:
◦ Market
◦ Licensing-agreements (e.g., selling rights to use a
technology, commercialize new products)
◦ Strategic alliances: All forms of cooperation that aim at
improving the long-term perspective of the
product/market combination of the parties involved.
◦ Joint venture: New entity that emerges from uniting
complementary resources from different companies that
share ownership and management of the new entity.
◦ In-house
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Alliances are mechanisms to access “external resources”: extension
of the RBV which considers firms as “bundles of resources”
Generalizations and assumptions of RBV
(Penrose 1959; Wernerfelt 1984; Prahalad and Hamel 1990):
2 empirical generalizations:
◦ There are systematic differences between firms in terms of
their resources and how they deal with resources;
◦ These differences are relatively stable;
2 fundamental assumptions
◦ Differences in the use of resources lead to differences in
performance;
◦ Firms pursue higher performance.
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Which resources lead to a sustainable competitive advantage?
Four conditions:
1. Resource heterogeneity (differences between firms);
2. Ex-ante limits to competition (before a firm occupies a
superior resource-position, the competitive battle for this
position must be limited – resource must be valuable);
3. Ex-post limits to competition (difficult to substitute and
difficult to imitate);
4. Imperfectly mobile (competitor cannot simply buy it, e.g.
goodwill, latent knowledge).
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Evolution of the Resource Based View of the firm:
First developments were restricted to firm resources;
Then followed the capabilities perspective:
Organization of activities within the firm; capabilities
refer to the processes that translate resources into
outputs.
And then followed the dynamic capabilities perspective:
Firms continuously try to improve their current
capabilities or to develop new capabilities, driven by
changes in the environment.
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An extension of the Resource Based View of the firm:
accessing external resources (through alliances)
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The RBV helps understand why firms forge strategic
alliances and why firms often collaborate with other
firms on innovation projects: alliances broaden the
scope of resources available to the firm.
Resources accessed through alliances are often called
“external resources”.
Managing alliances has been shown to be an important
firm capability: alliances are fraught with problems!
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ALLIANCE = OPPORTUNITY
ABILITY
MOTIVATION
Qualification problem
Safeguarding problem
(alliance partner does not have
complementary skills)
(alliance partner opportunistically
appropriates knowledge)
Adverse selection problem
Performance evaluation problem
Adaptation problem
Misalignment problem
(alliance partner is not as good as
he claims to be)
(alliance partner is not capable to
handle change)
(alliance partner free-rides because
he is difficult to evaluate)
(alliance partner has different,
incompatible strategic objectives)
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Many alliances are horizontal, sometimes involving competitors
(coopetition). A key success factor, in view of the potential
motivational problems, is TRUST.
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1.
2.
3.
How will each partner contribute (over time)?
When and how will we evaluate the alliance?
Do we agree on the scope of the alliance?
◦ Strategic scope: strategic importance for partners.
◦ Economic scope: activities that are beneficial to
the alliance; advantages from the alliance.
◦ Operational scope: joint activities.
4.
5.
Time horizon (end  failure)
Where can we foresee problems? (~ potholes)
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Production of integrated circuits, miniaturized electronic
networks of transistors, resistors, and capacitors conducted
on a single piece of semiconductor material, typically silicon.
Semiconductor industry: from few large
integrated firms to specialist firms that
focus on narrow slices of the value chain;
codification of dependencies between
production steps  modularization.
(Shih, Pisano, and King, 2008)
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The TWINSCAN XT:1950Hi
Step-and-Scan system
takes single-exposure
water-based immersion
lithography to its limits.
Combining high
productivity with ultra lowk1, this dual-stage
immersion lithography tool
is designed for volume
production on 300-mm
wafers at 38-nm resolution
and beyond.
Specialized in system design & system integration
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ASML co-develops systems with specialized suppliers such
as Carl Zeiss, specialized in lithography optics (lens
manufacturer)
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IBM has a formal program to create customer solutions
together with salesmen, hardware- and software
manufacturers, and other parties.
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Collaborative innovation is not solely about combining your physical
capital. That misses the point entirely. It is about combining your
intellectual capital. The physical capital is good to have because it
solves a problem in managing corporate financials in an increasingly
complex world, but it is the intellectual capital you combine that really
provides the horsepower.
-- Bernard Meyerson, IBM Fellow and CTO, and VP of IBM Strategic Alliances.
After successful collaboration in DRAMs, IBM decided to
form R&D alliances with competitors in microelectronics
Challenge: rigorously control dissemination of intellectual
property while also ensuring information sharing
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“Increasingly, in the new economy, competition is not between companies but rather
between collaborative networks, with the prize going to the company that has
built the better network.” -- Kotler, Jain and Maesincee 2002
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Logic (Powell, Koput and Smith-Doerr 1996):
In industries where knowledge is (1) complex, (2) in evolution, and
(3) sources of expertise are widely dispersed, innovation takes place
in networks instead of in individual firms.
Examples:
- Cfr. ASML and IBM forge alliances with many members to innovate.
- Pharmaceutical industry: “Pfizer has assembled an unprecedented
portfolio of quality alliances [..]. We expect these ongoing initiatives to have
a significant impact on R&D productivity”
(George M. Milne Jr., senior VP and president Worldwide Strategic and
Operations Management)
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“Modern biotechnology is a set of biological techniques, based
on molecular-biological knowledge, using or modifying
living organisms for industrial applications”
Relevant for agriculture (crops, animals), environment,
pharmaceutical industry (therapeutics, diagnostics, vaccines)
Traditional biotechnology: controlling and influencing the
environment of bacteria aimed at multiplication (e.g. alcoholic
beverages)
New biotechnology: techniques of recombinant DNA and cell
fusion to modify inner structures of micro-organisms.
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1953
Watson, Crick, Wilkins, (Pauling, Franklin): double helixstructure of DNA, basis of modern biotechnology.
DNA: molecule that carries the genetic information
cells needed to multiply and produce proteins;
double helix, kept together by weak connections
between pairs of nucleotides (adenine (A), guanine
(G), cytosine (C), and thymine (T)).
DNA sequencing: technique to determine the precise
sequence of nucleotide-pairs in one DNA segment
(GenBank).
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1973: Cohen and Boyer discover a basic technique for
recombinant DNA: copying and pasting DNA and producing
new genes in bacteria (“genetic engineering”).
1975: Kohler and Milstein discover the technique for cell fusion:
production of new hybrid cells that can produce large
quantities of antibodies.
1976: Biohazard Protocol: 140 molecular biologists form a
committee that establishes guidelines for DNA research.
1980: US Supreme Court rules that genetically manipulated
organisms can be patented.
1982: FDA approves first biotech-product.
1980-1985: Thanks to venture capital investments in
biotechnology, 74% of the biotechnological companies
(biotechs) are able to start up as an independent organization.
1985-1990: Reduction in venture capital + interest from large
pharmaceutical companies: alliances between biotechs and
established pharmaceutical companies.
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As of ~1985:
Pharmaceutical firms tried to access new knowledge
domains by allying with dedicated biotechnology firms
Technology domain 2
Genomics
Biotech firm 2
Human
Genome
Science
Technology domain 3
Biotech firm 3
SmithKline
Beecham
Technology domain 4
Biotech firm 4
Biotech firm 5
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To get a complete view on a firm’s access to external
resources, we need to examine alliance portfolios rather than
individual alliances. Alliance portfolios differ in terms of:
1. Size (number of alliances)
E.g., Johnson and Johnson (25); Lilly (50).
2. Technological diversity (non-redundancy)
The degree to which the alliances in a portfolio cover a
diverse set of technologies.
E.g., Becton Dickinson (narrow) versus Syntex (diverse)
3. Repeated partnering (multiple alliances with same partners)
The degree to which the firm engages in multiple alliances
with the same partner.
E.g., Sandoz (much overlap in partners) versus Johnson &
Johnson (mostly new partners)
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B1
B2
B3
B4
B9
B6
B5
B7
Portfolio size
B11
B8
B13
B10
B12
Pharmaceutical
company
Consequences: exposure to external knowledge; experience;
reputation as exchange partner.
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B1
B2
B3
B4
B9
B6
B5
B7
Technological diversity
B11
B8
B13
B10
B12
Pharmaceutical
company
Consequences: flexibility (alliances as “real options”); BUT: at
a high cost.
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B1
B2
B3
B4
B9
B6
B5
B7
Repeated partnering
B11
B8
B13
B10
B12
Pharmaceutical
company
Consequences: Trust & improved knowledge transfer. BUT:
working too often with the same partners can lead to
complacency, taking relationship continuation for granted
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Findings from empirical test among pharmaceutical firms:
Radical
innovation
Incremental
innovation
Additional
effect on
profitability
Portfolio Size
No effect
+
+
Technological
diversity
+
+
-
Repeated
Partnering
+
No effect
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Radical innovation = generation of a drug which is based on a
unique active ingredient (“technology”) and which provides
superior therapeutic advance (“customer benefits”)
(Wuyts, Dutta, and Stremersch, Journal of Marketing 2004
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Low
High
The extremes on the continuum of vertical
integration (Transaction Cost Economics, Coase, Williamson):
◦ Market ( outsourcing)
◦ Licensing-agreements (e.g., selling rights to use a
technology)
◦ Strategic alliances: All forms of cooperation that aim at
improving the long-term perspective of the
product/market combination of the parties involved.
◦ Joint venture: New entity that emerges from uniting
complementary resources from different companies that
share ownership and management of the new entity.
◦ In-house ( “vertical integration”)
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TCT is an economic theory that explains when activities should be
integrated vs. outsourced (market contracting)
Criterion: Maximize Cost Efficiency = revenues – variable costs
fixed costs
Choose outsourcing unless EfficiencyVertical Integration > EfficiencyOutsourcing
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TCT: Outsourcing = default. Why?
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5 advantages of outsourcing:
1. Motivation: A third party has stronger incentives to perform
because it (a) wants to make a profit and (b) is easy to replace
2. Specialization
3. ‘Survival of the economically fittest’
4. Economies of scale
5. Heavier market coverage
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If outsourcing = default because of market efficiency, then why not
always outsource?
Answer: because the market isn’t always perfect (“market failures”).
Assumptions of TCT:
◦ Bounded rationality (firms don’t know/foresee everything)
◦ Risk of opportunism (self-interest seeking with guile)
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Relationship-specific investments
= investments that are tailored to
a particular exchange partner and cannot be easily redeployed
outside the relationship.
1.
Site specificity
2.
Physical asset specificity
3.
Dedicated asset specificity
4.
Human asset specificity
Problem: If you cannot redeploy these assets, your exchange
partner may behave opportunistically.
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Uncertainty
◦ External uncertainty
 Demand uncertainty: you cannot specify all possible
contingencies in a contract (and incomplete contracts
can be problematic when dealing with exchange
partners that pursue their self-interest)
◦ Internal uncertainty
 Uncertainty about performance of the exchange
partner, difficult to evaluate (hence risk of free-riding
because not easy to detect)
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One key problem when applying TCT to innovation activities:
choice between outsourcing innovation and innovation within
firm boundaries is not only a function of cost efficiency!
That choice is also a function of external resources. Cfr:
Resource Based View  outsourcing allows the firm to access
external resources. That is particularly beneficial when faced
with technological uncertainy

In case of high technological uncertainty firms should
choose outsourcing over vertical integration.
(↔ demand uncertainty, the other form of external uncertainty)
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Outsourcing in practice: The provision, by an external agent,
of business activities that a firm used to perform internally.
Nokia Siemens Networks transfers business
software and platform R&D to TietoEnator
Telecom & Media in Finland.
All Radio Access R&D activities currently
performed in Berlin are transferred to Wipro
Technologies (Bangalore, India).
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When outsourcing innovation, technological and cultural
uncertainty create both ability and motivation concerns.
(Raassens et al. 2012)
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How should firms shape their NPD outsourcing deals to cope with these
forms of uncertainty?
Firms deploy different (formal and informal) “governance mechanisms” to cope
with uncertainty. In the case of outsourcing NPD, the following two
governance mechanisms are often used in practice:
Formal governance
mechanisms
Informal governance
mechanisms
Minority equity stake *
Prior tie selection **
* The outsourcing firm takes a minority equity stake (5-10%) in the outsourcing provider
** The outsourcing firm selects an outsourcing provider that he has worked with before (in
alliance portfolio literature this mechanism is also referred to as repeated partnering)
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Key findings in a decision matrix: different governance mechanisms are
required when the outsourcing firm faces different types of uncertainty:
Recommended
governance
mechanisms
Low cultural
uncertainty
High cultural
uncertainty
Low technological
uncertainty
Minority equity
stake & prior tie
selection not needed
Prior tie selection
Minority equity
stake
Minority equity
stake & prior tie
selection not
warranted!
High technological
uncertainty
(Raassens et al. 201238)
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Resource Based View
When do alliances give access to external resources?
Anticipate ability & motivation problems
Alliance Portfolio Perspective
Consequences for knowledge access & innovative output?
Shape the portfolio: size, diversity, and repeated partnering
Transaction Cost Theory
Outsourcing innovation under uncertainty?
Deploy governance mechanisms to cope with uncertainty
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