Innovation product management Question & Excel

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chApter 5

collaBoration for innoVation

Not is it only important to work for ideas and inventions with external parties, such as commercial research organizations, competitors, inven- tors, suppliers, and universities (as discussed in Chapter 4), the collabo- ration with these during new product and service development will also determine the success of projects aiming at innovation, among other factors. However, the collaboration with partners is often perceived as dif- ficult, when speaking to firms. Particularly, this is the case for innovation, which is associated with risks at the long run. From this perspective, often issues such as trust and power are mentioned. This mix of risks, trade-offs between long run and short-term benefits, trust, and power make collabo- rations often complex and challenging for those involved.

To look at how companies can collaborate effectively, how to work in networked organizational forms, and how to avoid pitfalls in these collaborations are the topics of this chapter. The first section of this chapter looks at so-called strategic networks for collaboration. This type of networks includes alliances and joint ventures. Section 5.2 will look into collaborations with suppliers. It covers the selection of suppliers during new product and service development, the involvement of suppliers and the development of the capabilities of suppliers. In Section 5.3 innovation networks are discussed, which consist of more loosely-connected actors that collaborate to achieve innovations. How those actors work together is found in Section 5.4. In these collaborations the absorptive capacity of individual firms plays a key role, according to Section 5.5. Global research networks in Section 5.6 and innovation management in supply chains in Section 5.7 conclude this chapter.

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5.1 strAtegic netWorKs for innovAtion

One way of collaborating for innovation is through strategic networks. The study of these networks as a key aspect of industrial organization goes back to the 1980s with the seminal work of Håkansson (1990) at Uppsala University, who defined networks as sets of more or less special- ized, interdependent actors involved in exchange processes; this means that these actors work together, but retain their independence. Around the same time, the study of urban, networked organizations in the industri- alized regions of northern Italy recognized the importance of networks for innovation aiming at improving logistical efficiency (Camagni 1988, 1993). Simultaneously, writings appeared on strategic networks, which are defined as long-term, purposeful arrangements among distinct, but related, for-profit organizations that allow members to gain or sustain competitive advantage over their competitors outside the arrangement (Ireland et al. 2002; Jarillo 1988, p. 32). According to this view, strategic networks are merely a superior method of managing the process necessary for the generation and sale of a chosen set of products (like in Freiling 1998); this applies also to innovation and new product development (e.g., Deeds and Hill 1996). The participation of companies in these networks depends on managing product and service development, both at the level of the network and individual companies, and on managing operational processes; the purpose of these networks is to gain competitive advantage through access to resources and through the development of competitive products and services.

These strategic networks are usually in the form of strategic alliances and joint ventures. SMEs tend to work together in networks or virtual networks. These forms of strategic networks will appear in the next sub- sections, followed by how best to select a mechanism for collaboration.

5.1.1 STRaTegic allianceS

As one form of strategic networks, a strategic alliance is an agreement between two or more parties to pursue a set of agreed-upon objectives needed while remaining independent organizations. This form of coop- eration can be positioned between mergers and acquisitions, and organic growth of firms. Strategic alliances happen when two or more organiza- tions join together to pursue mutual benefits. These benefits are found in what the partners may provide to the strategic alliance, such as products and services, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.

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coLLAborAtion for innovAtion • 149

Therefore, an alliance is a cooperation or collaboration that aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts.

The alliance often involves technology transfer (access to knowl- edge and expertise), economic specialization, shared expenses, and shared risk. Alliances tend to maintain and improve competitive advan- tage by making strategic decisions, which are primarily focused on the development of new products, services, and processes. These decisions are aimed at aligning the strengths of the alliance with its external pos- sibilities. Entering these cooperative arrangements lowers the costs and risks, as the costs and market risks for new product and service develop- ment tend to be very high for an individual company. Bearing in mind the increase in costs, risks, and needs for new technologies, the pre- requisite for competitive success is cooperation in terms of innovative activities, production, and distribution of new products. An innovation strategy can introduce new perspectives for development of strategic alliances aiming at specific market. Therefore, forming of strategic alli- ances and formulating a related innovation strategy are key processes for sustaining alliances.

By applying strategies of innovation, these strategic alliances offer new products for customers and position themselves at (new) market segments. Some innovation strategies for these alliances are platform strategy, co-creation strategy, technology strategy, research strategy, part- nership strategy, knowledge-based strategy, and risk mitigation strategy (derived from Stefanović and Dukić 2011, pp. 61–2):

• The application of a platform strategy enables each firm in a stra- tegic alliance to offer products for specific market segments, while sharing a generic product or service architecture. For example, Nokia and Siemens as partners created different phones, in terms of external design, while their manufacturing technology was 80 per- cent the same (Lord et al. 2005, p. 126). This practice has also been used in the automotive industry among others (Meyer and Utterback 1993). For instance, Citroen, Fiat, Lancia, and Peugeot in the 1980s developed a common platform for mini-vans (or multi-purpose vehicles); this allowed the companies to share their development costs while still retaining their own specific (external) design. Also, this allows firms in this type of alliances to expand their business globally, at the same time adapting their products to specific mar- kets. This strategy demands strong visionary leadership, intensive teamwork, which is focused on innovation and product develop- ment. In case of implementation of this strategy, strategic alliances come along with financial and technological risks (Bowonder et al.

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2010, p. 21). Therefore, a new product is the same technologically when an alliance focuses on a platform strategy, but differs in its special characteristics depending on the target market.

• A co-creation strategy of a strategic alliance creates value by involving customers in new product creation and development with a goal to increase customer satisfaction. The needs and sugges- tions of customers are captured and new products are developed accordingly (Bowonder et al. 2010, p. 23). For example, Procter & Gamble reached an agreement with the International Olympic Comity and connected to mothers of six top Olympic athletes worldwide. Within this arrangement, ideas were created for new products development aimed at improving the life of athletes; 50 percent of these ideas emerged from the interviews with these mothers (Lord et al. 2005, p. 130). Thus, the co-creation strategy aims at reaching out to (potential) customers and eliciting ideas for new products and services.

• A technology strategy for a strategic alliance aims at the use of innovative technologies in order to achieve dominant competitive positions. These technologies may have been generated internally within the alliance or acquired externally. Strategic alliances could also use technologies from more than one source and maintain their leadership position in this manner (Bowonder et al. 2010, pp. 26–7). For example, at the time Nokia entered a strategic alliance with Microsoft with the purpose of expelling Android-based mobile phones and Apple’s iPhone; it was going to exploit Microsoft’s Windows Phone 7 platform, while its competitors used platforms made by Google, and Apple had its own operating system. How- ever, this had not only to be seen as a battle between Nokia on one side and Google and Apple on the other, but also as a battle between Microsoft and Google in the field of modern technologies (Lord et al. 2005, p. 135). Thus, this type of strategy for strategic alliances aims at creating partnerships for one of competing technologies in order to strengthen the position of all partners in the alliance.

• A research strategy for strategic alliances implies that collabora- tion is seen as beneficial based on monitoring technology trends and as strengthening positions of individual firms for the future. However, the future cannot be predicted easily, so firms and stra- tegic alliances must have more than one option (see Dekkers [2017, pp. 247–54] for multiple strategies and scenario planning). A case in point is that Canon foresaw that LCD monitors would be replaced with more technologically advanced solutions. However, it was not able to develop advanced technology, so it entered the

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coLLAborAtion for innovAtion • 151

partnership with Toshiba and began developing flat screens based on surface-conduction electron-emitter technology as an alternative strategy (Bowonder et al. 2010, p. 27).

• A partnership strategy for a strategic alliance is used to improve the innovation process, to exploit complementary competencies of each partner, and to share risk and resources. The objective of these alliances is to beat the competition by innovating in partnership. For example, Airbus forged an alliance with Aérospatiale, British Aerospace, CASA, and Deutsche Aerospace AG to develop the A380. The exchange of knowledge and resources between the five partners helped Airbus in creating the biggest airliner in the world (Bowonder et al. 2010, pp. 27–8). Thus, the aim of a strategic alli- ance based on a partnership strategy is because the capacity and capabilities of an individual firm are insufficient for the develop- ment of a process, product, or service; this also means that risks are being shared in such a strategic arrangement.

• Strategic alliances that use a knowledge-based strategy of innova- tion are oriented toward development of new high-quality products with high level of different types of knowledge built into them. The application of this strategy aims at improving technology in order to satisfy specific needs of certain customer segments. This hap- pens specifically when technological and market uncertainties are deemed high (Whitly 2000, p. 871). For instance, Daimler AG and Renault-Nissan joined up so that they could develop technology for small electrical cars. This cooperation entailed joined development of small volume batteries and aggregates that are built into electric cars. The main objective of the cooperation was the development of small city car for the needs of Daimler. In return, Daimler helped Nissan with developing technology of large volume aggregates and hybrid technology (Lord et al. 2005, p. 140). This means that a knowledge-based strategy can be asymmetrical with regard to the knowledge of the partners and benefits of the partnership.

• A risk mitigation strategy of innovation in a strategic alliance aims at the development of new, technologically superior, high-quality, knowledge-based products, which perform in a broad range of dif- ferent uses and enable the replacement of older products and ser- vices. Strategic alliances aim to dominate markets with this strategy, but they can also be exposed to high risks when introducing these products and services in the market. In many cases, alliances are focused on specific types of customers who were ignored by previ- ous manufacturers. By developing cooperation with customers and suppliers, diversification of risk is achieved and mutual interests

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can be satisfied (Whitly 2000, pp. 872–3). The partnership between Bayer CropScience and Food Chain was created with the idea in mind that Bayer CropScience would give its clients expert advice and technical support. Bayer CropScience supported breeders, pro- cessors, and sellers in their efforts to offer high-quality product to the end customer at acceptable price. Thus, Bayer CropScience proactively initiated partnerships within the food supply chain. Participation in Food Chain projects was focused on improving reliability of customers, as well as the food industry regarding qual- ity and food security (Lord et al. 2005, p. 145).

It could also be that partners in a strategic alliance seek a multiple of these arrangements. Nevertheless, these different strategies for innova- tion in strategic alliances demonstrate the variety of objectives, benefits, and arrangements that motivate partners to collaborate for achieving innovation.

However, it appears often that the factors power and trust domi- nate the relationships in these types of strategic networks (Das and Teng 2001; Thorelli 1986, p. 38). This is caused by the fact that these strategic alliances come about through strategic objectives of one or more of the partners, which make it necessary to collaborate and which create ten- sions in inter-organizational relationships (whether they are research- or market-oriented [Hagedoorn and Schakenraad 1999, p. 307]). This means that each partner aims to serve its self-interest, which does not necessar- ily align with the espoused objectives of the strategic alliance. There are plenty of examples of strategic alliances that have failed. A case in point is the acquisition of a substantial stake in Japanese manufacturer Suzuki Motor Corporation by German Volkswagen in late 2009. The deal saw VW take 19.9 percent of Suzuki for 1.7 billion Euros and sign an agreement to share technologies and global distribution networks. This would help both firms break into each other’s markets, with VW dominant in Europe, but struggling to enter Asian markets. Part of the arrangement saw VW allow Suzuki to have use of much of its electric and hybrid vehicle technologies, while the Japanese firm offered its German partner its own technologies, as well as access to its lucrative hold of the Indian market. The partnership quickly unraveled in a storm of disagreements. By October 2011, Suzuki claimed VW had breached its contract, particularly in failing to handover the hybrid technology. A month later, the two companies terminated their agreement to work together, and Suzuki demanded VW return its near 20 percent stake: something the German firm refused to do. The dispute eventually went to an international arbitration court. This example shows expected benefits of all partners should be managed through the life cycle of a strategic alliance to avoid failure.

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5.1.2 JoinT venTuReS

Another form of collaboration for innovation is a joint venture. This is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. Normally, they exercise control over the newly founded enterprise, and consequently share rev- enues, expenses, and assets. The objectives and related strategies can be similar to those of strategic alliances (see Subsection 5.1.1). An example of what is considered a successful joint venture is the one formed in 2006 by Siemens of Germany and Nokia of Finland, called Nokia Siemens Net- works U.S. It was headquartered in Espoo, Finland. The formation of this joint venture was prompted by the mergers in the industry, such as Alcatel with Lucent. Its need also came about to counter the rise of low-cost Chi- nese manufacturers, such as Huawei Technologies. The joint venture was officially launched in 2007 and has continuously operated since then in 150 countries. In 2011, the company was rated by measure of revenues as the fourth largest manufacturer of telecom equipment. In this respect, it was next only to Ericsson, Huawei Technologies, and Alcatel Lucent. In 2013, Nokia acquired 100 percent of Nokia Siemens Networks, buying all of Sie- mens’ shares. The advantage of this arrangement is that the exposure to risks is limited to the joint venture and the equity put into it by the partners.

These joint ventures that are successful normally develop into dif- ferent forms, as already shown by the example of Nokia Siemens Net- works in the previous paragraph. They become an independent firm, what is sometimes called outsourcing, or they merge with one of the part- ners or another firm; Figure 5.1 depicts this process for joint ventures. For example, IBM decided to divest itself of its Rolm Communications Division in 1989, rather than selling it outright; it spun it off into a 50–50 joint venture with Siemens, which then eventually bought the entire division after assimilating Rolm into a new culture. This means that even successful strategic collaborations are sometimes temporary and subject to competitive market forces.

Figure 5.1. Schematic represen- tation of joint ventures turning into outsourcing and mergers.

Time

Joint Ventures

Outsourcing

Mergers

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5.1.3 SelecTion of mechaniSmS foR collaBoRaTion

Whether aiming for a temporary or long-term collaboration, the nature of the strategic collaboration has to be selected. To this purpose, the classi- fication of Roussel et al. (1991) can be used; see Subsection 3.3.1. Based on its four categories, Omta (2004) presents a matrix for partner selection and forms of collaboration; see Table 5.1. In this matrix, when there is an emerging technology, which may have competitive impact in the future, and if the firm’s technological capability is strong, optimizing the tech- nological capability to reinforce the potential competitive advantage is called for. If the internal technological capability is moderate or weak, catching up may be necessary. However, uncertainty requires for scanning the options for R&D, that is, many partners and flexible relationships, preferably in strategic partnerships and alliances, or via contract research organizations and sponsoring of knowledge institutions. In all cases, ade- quate patent protection strategies need to be considered (see Chapter 7). A pacing technology may have strong competitive impact on the short or medium term. If a firm’s technological capability is relatively strong, the bias should be toward doing the work in-house. Extra investments may be required for research into the application of the technology in new products and markets. If a firm’s technological capability is moderate, sharing the risk by strategic alliances with partner firms makes the most sense. If a firm’s technological capability is weak, acquiring of licenses or joint development may be viable alternatives. Pacing technologies need utmost management care, especially if the technology is maturing rapidly, because these might become essential in the (near) future. It is, therefore, necessary to scan research efforts by competitors and potential technol- ogy sources intensively. Furthermore, the technologies in-house need to be protected carefully. Generally speaking, the company should own key

Competitive impact of technology

Internal technological capability Weak Moderate Strong

Emerging Scan Scan/collaborate Collaborate Pace Collaborate Share risks In-house Key Optimize Optimize In-house Base Outsource Outsource/

exchange Sell/ exchange

Table 5.1. Matrix for partner selection and collaborative modes

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coLLAborAtion for innovAtion • 155

technologies, as being critical to current competitiveness. If a firm’s tech- nological capability is weak or moderate in the technology area at issue, it should acquire extra technological capability for building in-house R&D strength by acquisition or by introduction of a substitute technology. For non-critical base technologies, outsourcing might be the appropriate choice if a firm’s technological capability in the field is weak. If it is mod- erate, it may serve as a means of exchange in a partnership. If it is strong, it either may serve as a means of exchange or may be sold to focus the internal technological capabilities on key technologies.

5.2 coLLAborAting With suppLiers

One of the external sources for innovation is collaboration with suppli- ers (see Subsection 4.3.1); if managed successfully, collaborative sup- plier innovation can contribute to new product and services via improved differentiation, time-to-market, and lowered costs. According to Johnsen (2010, p. 188), the interest in collaborating with suppliers is rooted in how the Japanese automotive industry managed to shape this involve- ment across all stages from new product development to manufacturing; he notes that these practices have now become common ground in other countries and other industries (ibid., p. 193). It requires companies to pay attention to supplier selection, supplier involvement, and supplier devel- opment, which are the topics of the next subsections.

5.2.1 SelecTing SuPPlieRS

For the collaboration with suppliers, the selection process is critical, and for this reason, the assessment of the capabilities of suppliers (Hartley et al. 1997, p. 67) should be incorporated in decision making. An example is the method proposed by Handfield et al. (1999, p. 65); see Figure 5.2 for an adapted version of this model. In this approach, setting out of a technology strategy forms the starting point of identifying potential sup- pliers. Such a strategy can be based on strategic tools for innovation and technology management (see Section 3.5). Further insight can be derived from the matrix for partner selection and collaborative modes (Table 5.1). The technology strategy intersects with the need for supplier selection in specific projects for new product and service development. Particularly, the selection of suppliers with so-called critical technologies is of inter- est; according to the classification of Roussel et al. (1991), these are the emerging and pacing technologies (see Subsection 5.1.3). The suppliers of

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interest should be evaluated on whether they have the capability and capac- ity to contribute with critical technology to new product development and how such should be integrated in the development of new products and services. In the case that suppliers have a critical technology but do not have the capability, yet, supplier development should be considered (see Subsection 5.2.3). Furthermore, the integration into new product and ser- vice development depends on the whether the technology strategy of the supplier is aligned with the firm, the degree of technological change, and the expertise in product design and engineering. The lesser the alignment, the less the supplier will be integrated into new product and service devel- opment. Therefore, the capabilities of a supplier in terms of being able to integrate a pacing or emerging technology into a new product or service determines when and how it will be integrated in its actual development.

Figure 5.2. Supplier selection and involvement for new product and service development.

Technology strategy, e.g. • Portfolio analysis • Technology roadmaps • Collaboration matrix

New product development • Customer requirements • Technical specifications • Internal capabilities • Performance targets

Identification potential suppliers

Risk assessment (supplier integration) • Technological capability • Capacity • Performance criteria

Pre-qualify

No Evaluation • Acceptable history • Prior experience • Industry reputation • Pre-qualification

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High degree of technological change?

High degree of supplier design expertise?

Integrate supplier in later stages of NPD

Consider following options • Collaborate for current NPD • Improvement program • Other long-term sources

Integrate supplier when appropriate

Fully integrate supplier early in NPD

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coLLAborAtion for innovAtion • 157

A related type of decision making is whether an activity should be outsourced; this is particularly of interest for manufacturing. Such decisions often have far-reaching consequences for manufacturing in terms of performance criteria. However, these decisions are also subject to progressive insight about the new product and service, and incomplete and inaccurate information. To deal with these characteristics of deci- sion making during new product development, Shishank and Dekkers (2013, p. 325) have proposed an iterative method; see Figure 5.3. This framework consists of four quadrants. The first quadrant A contains pro- cesses for decision making on outsourcing related to the manufacturing strategy of a firm. Similar to the framework for supplier selection in the previous paragraph, pre-selection of suppliers takes place, and the actual performance of existing suppliers is also evaluated. The manufac- turing strategy and capabilities of suppliers determine mostly whether a component or part should be produced in-house or outsourced. These decisions are integrated in the processes for new product and service development (Quadrant B). The actual decision-making processes and methods should also be considered (Quadrant C), because they deter- mine how these decisions are underpinned (see also Section 2.4). Finally, the expected performance of the decision to produce in-house or externally is evaluated in Quadrant D. This evaluation if not satisfactory may lead to starting the cycle of decision making again. This framework for outsourcing, as was also the case for supplier selection, depends on evaluation and assessment to ensure that external capabilities match with (future) expectations of performance by the supplier, and with the technology and manufacturing strategies.

The decision to outsource can also be extend to R&D itself. Howells et al. (2008) investigate outsourcing in the U.K. pharmaceutical indus- try. They find that most companies, whether small or large, engage in external sourcing of processes and activities. These activities range from basic research to services, such as clinical trials. However, these exter- nal activities need to be set off against internal capabilities. Grimpe and Kaiser’s (2010, p. 1502) research demonstrates that joint R&D projects with a variety of external partners can be used to complement R&D out- sourcing in that diverse collaboration leads to a higher diversity of the accessed knowledge resources. However, firms should be aware that R&D outsourcing can become disadvantageous if firms rely heavily on external knowledge; deterioration of integrative capabilities and high demands on governance by management are the most notable of these disadvantages. Thus, gains from R&D outsourcing need to be balanced against the pains that stem from a dilution of firm-specific resources.

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coLLAborAtion for innovAtion • 159

5.2.2 eaRly SuPPlieR involvemenT

So far, the methods and model have covered whether to engage with suppliers during new product and service development; another matter when such a decision is taken is how to involve a supplier. That supplier involvement has a positive effect is indicated by Kanapathy et al. (2014, p. 9) when they state that 28 percent of the variance in performance of new product development is related to supplier involvement. For this involve- ment, a matrix by Le Dain et al. (2010, p. 79) can serve as starting point; see Figure 5.4. This supplier involvement matrix is based on distinctions made by Clark and Fujimoto (1991), Bortolazzi et al. (1996, pp. 37–8), and Handfield et al. (1999, p. 67) for design and engineering activities by suppliers:

• In the case of white box design and engineering, there is no or only a low level of involvement during product design and engineering. The supplier will follow mostly the specifications set by the firm (buyer); thus, the information exchange is limited to informal con- sultation when appropriate. This approach is also called informal supplier integration.

• When there is blackbox design and engineering, the design of the component is led by the supplier according to the buyer’s perfor- mance specifications. This is possible when the (internal) design of the component or part is independent from the design of other components and parts of the product; the product configuration (see Subsection 1.1.2.2) should allow this to happen, meaning that this

Figure 5.4. Matrix for supplier involvement, incorporating white, gray, and blackbox approaches.

Subcontracting Co-ordinated development

Devolved design and engineering

Strategic co-design

Critical co-design

Development risk

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is typically associated with a modular structure for a product. • In the case of gray box design and engineering, there is joint devel-

opment with formalized integration. Characteristic for this type of supplier involvement is that the interaction between the suppliers and buyers leads to the design of the component or part. This also means that the supplier may become part of the project team for the new product.

The choice how to involve a supplier also depends on the capabilities of the supplier and the strategic alignment; see Figure 5.2. Le Dain et al. (2010, p. 79) add that the risks associated with the development also play a role; these risks may cover the degree of novelty, product configura- tion, technological complexity of the component or part, contribution of component or part to market differentiation of the product, position of the component or part on the timeline of the project, and relative cost of the component or part compared with the product. Using this elaborate assessment of the development matrix, there are five modes for supplier involvement during new product development:

• Subcontracting (white box). In this mode, the supplier follows the specifications of the firm developing the product; this also means that there is hardly any interaction with regard to specifications and technology. However, it is still important to assess the capabilities of the supplier to provide the component or part.

• Co-ordinated development (white box). This type of involvement happens when the product design is carried out in-house and the process design performed by a supplier. The aim of this coordina- tion is to effectively integrate both activities (product design and process design), while keeping the supplier informed of modifica- tions related to the iterative nature of new product development. The supplier may be consulted during the product design phase to provide tacit knowledge about its manufacturing process.

• Devolved design and engineering (blackbox). In this case, the sup- plier is fully responsible for the design and development of the component or part. The buyer supplies functional specifications and the interface with other components and parts in the product configuration. This may involve also testing whether these func- tional specifications have been met.

• Strategic partnership (blackbox). Also in this case, the supplier takes on the responsibility for the design and engineering of the component or part. Nevertheless, this type of collaboration requires intense communication with the supplier in order to clarify requirements and monitor changes occurring throughout the project.

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coLLAborAtion for innovAtion • 161

• Critical co-design (gray box). Neither the customer nor the supplier possesses the knowledge or the ability to completely execute the design of the component or part in-house. The higher the development risk, the more the buyer will try to promote and manage collaboration between its own project team and the supplier’s team.

According to the level of supplier autonomy, a position in the supplier involvement matrix can be associated with white box configurations that will require a decision to perform the design in-house, whereas a position associated with gray or black box configurations will require a decision to buy the design.

5.2.3 SuPPlieR DeveloPmenT

Sometimes, the selection process of suppliers, see Figure 5.2, may lead to considering supplier development. This means that the firm that is collaborating with the supplier supports its development of (technologi- cal) capabilities (Lawson et al. 2015, pp. 788–9). Supplier development should lead to improvements in the total added value from the supplier in question in terms of product or service offering, business processes and performance, improvements in lead times, and so on. There are different ways of doing this, but no universal approach. Joint value engineering (see Subsection 2.3.2) is one possibility in supplier development projects. Another approach to supplier development is reverse marketing; one example of which is where a buying organization encourages a suppli- er(s) to enter a new market. This might involve the supplier developing its operation or introducing a new range of products. Another example of supplier development is positioning an engineer at the supplier to provide technical support and informal knowledge exchange. This means that the supplier development aims at improving technological capabilities so that (strategic) suppliers can be more effectively involved during new product and service development.

5.3 LooseLy-connected innovAtion netWorKs

Another way of how companies can collaborate is in so-called innova- tion networks; to this purpose, it is necessary first to look at what type of networks can be distinguished. A typology is provided by Robertson and Langlois (1995, p. 548); see Figure 5.5. The typology has two dimensions.

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162 • innovAtion MAnAgeMent And npd for engineers

The first dimension is the one of coordination integration. This means to what extent companies and other agencies, such as economic development agencies, are working together and coordinating their individual actions. The second dimension is that of ownership integration, which means that one or more companies in these networks own shares of other companies in the network. Based on these two dimensions, six types of networks can be distinguished. The first type of network is that of so-called Marshallian districts. This terminology refers to the Marshall aid that was provided by the United States after the Second World War to nations and regions in Europe to recover from the damage to industry. Even though regions and nations were the target of this aid, the actual collaboration was accidental, and also, the companies involved in these networks did not own shares in each other’s companies (remember that Europe was poor at that point in time). The second type of network is that of venture capital networks. These networks are loosely connected and exist because of a financier or a group of actors providing capital for development of companies. In return for these investments, these venture capital funds share expertise across their network. The third type of network is that of keiretsu networks, also called kaisha networks and in South Korea, chaebol networks. As the name implies, these are organized around a single firm, which is usually a large assembler. The satellite firms supply intermediate inputs to the focal firm, which effectively coordinates the network as a whole (for example, Toyota as described in Dyer and Nobeoka [2000] and Rolls-Royce Areo Engines in Prencipe [1997]). A fourth type is the regional network labeled Third Italy by Biggiero (1999) and Robertson and Langlois (1995, p. 549). The

Figure 5.5. Archetypes of industrial networks mapped on ownership and integration. Source: Robertson and Langlois (1995, p. 548).

Degree of coordination integration

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Chandlerian firm

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Venture capital network

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‘Third italian’ district

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coLLAborAtion for innovAtion • 163

fifth and sixth types are forms of single firms looked at from a network perspective. In the case of a holding company, sometimes also called a conglomerate, the degree of common ownership is high, but the constitu- ent companies hardly work together or share information. The Chandlerian networks are generally large companies where they own companies or divisions from the supply of materials to the distribution of products. Think about some traditional companies such as in the automotive industry and the electronics industry (for example, Siemens in the 1960s and 1970s). All these networks have different characteristics, but generally, we do experi- ence a move toward more loosely connected entities (Dekkers and Bennett 2010; Nobelius 2004), adding to the possible ways, industrial firms might collaborate for innovation and new product and service development.

The repositioning toward loosely connected entities in networks implies complex interaction as particularly found in the fifth-generation (and sixth-generation) processes for innovation (see Section 3.4). The shift toward more loosely connected entities collaborating for innova- tion are now enabled by possibilities offered by information and com- munication technology and the need to find novel solutions sources from a wide variety of sources. These developments encourage companies to concentrate on core competencies, even given the flaws and pitfalls of this approach (for the latter see Barthélemy 2003). Consequently, companies have transformed from centralized, vertically integrated, single-site facili- ties to geographically dispersed networks of resources (Dekkers and Ben- nett 2010, pp. 22–3). These simultaneous developments foster the specific characteristics of (international) networks, which require adaptations by companies to fit these characteristics. This also raises questions to what extent these networks are orchestrated by a focal firm or hub, the thinking of Dhanaraj and Parkhe (2006), or really consist of autonomous agents, as Rycroft and Kash (2004) advocate. If these networks are orchestrated, then there is at least some degree of coordination (see Figure 5.5) and possibly some degree of ownership. These thoughts also lead to views whether the emergence of these networks are a result of globalization, which allows companies to source further afield, or interaction between companies, in which serendipitously connections are formed (even though these may be stimulated through networking events, etc.).

Examples of these loosely connected networks are Swiss Microtech Enterprise Network and Virtuelle Fabrik. The collaborative enterprise network Swiss MicroTech consists of small and medium-sized enter- prises (Cheikhrouhou et al. 2012). Originally, it was founded as a group of four enterprises belonging to the same professional association, as an outcome of an applied research project aiming to define a strategic indus- trial network. The network was founded in 2001; its aim was improving

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the position of its members on the market and addressing weaknesses of smaller firms with regard to commercial services for larger customers in the automotive, electronics, and medical industries. In 2018, it consists of eight members, which specialize in machining, thermal treatments, metallic treatments, and quadratic parts. Together, they cannot only offer services to other, mostly large companies, but they also create innovative solutions. Innovation would have been more difficult, because none of the members has on its own the resources to reach out to large customers and create novel solutions. A similar example, but larger in its constituency, is Virtuelle Fabrik (Katzy and Crowston 2008). It started as a virtual organi- zation in 1996 of manufacturing companies with idle machine capacity; akin Swiss Microtech Enterprise Network, it was part of a network devel- opment project (a cooperation between the network members and univer- sity researchers) in two adjacent regions of Lake Constance and the Swiss Midlands. These networks are still operating as two separate ongoing collaborative enterprises. Their members range from small and medium enterprises to production divisions of large multinationals. Over the years, Virtuelle Fabrik has cooperatively produced dozens of products, from simple parts of a complex module for a letter-sorting machine to entire products like the litter shark, a city dustbin for which the Swiss Midlands network was awarded the prestigious Swiss innovation award Idea Swiss in 2004 (ibid., p. 681). This shows that these collaborative networks can be very successful in innovation, even if they started out as collaboration in manufacturing networks with the purpose of using idle capacity.

5.4 Actors in processes of innovAtion netWorKs

Collaborative efforts are not only seen as an approach to decrease manu- facturing cost; cooperation between networked companies is increasingly seen as a means for lowering development costs, accelerating product and process development, and maximizing commercialization opportu- nities in innovation projects. The capability of building and maintaining inter- organizational networks, such as joint ventures, license agreements, co -development (between suppliers and customers), and strategic alliances, has led to more product and process innovations (Ritter and Gemünden 2003). This also covers the extension of capabilities, with manufacturing services as a newly emerging trend, and the capabilities embedded in man- ufacturing services partly answering the demand for customization. These collaborations can be modeled as displayed in Figure 5.6 (adapted from

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coLLAborAtion for innovAtion • 165

Dekkers [2005, p. 330]); this carries some resemblance to the coupling model in Figure 3.13. The figure shows that companies can collaborate in two modes. The first mode for collaboration is based on complemen- tary assets, which is commonly called vertical collaboration. This means that each of the actors in the value chain possesses knowledge, skills, and assets that are necessary to create a product (or service). It also implies that each of these sets of knowledge, skills, and assets is necessary to produce a product or service. Through vertical collaboration, companies insure value innovation spanning the entire value chain and the inte- gration of skills and knowledge for meeting performance requirements. Vertical collaboration provides the chance for improving processes by learning, if learning cycles are present. The second mode of collaboration is called horizontal collaboration and is based on supplementary assets. Because these supplementary assets have similar knowledge, skills, and capabilities for the value chain, this means principally achieving econo- mies of scale through collaboration. In terms of innovation, by horizontal collaboration, firms will increase the chances of finding substitutes for products or their components. Both vertical and horizontal collaboration allow companies to deploy effective resources for innovation albeit with different outcomes.

Both horizontal and vertical collaboration require managing the rela- tionships between actors in the network. Burt (1992) and Uzzi (1997) have

Figure 5.6. Collaboration model for the value chain and innovation networks.

Materials

Products

Market

Resources

Skills, knowledge

Exchange relationships

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demonstrated the general mechanisms by which relationships between firms in supply chains and networks can be explained. As starting point, they use two different aspects of networks, namely, the positioning of firms in the structure of the network and the nature of the mutual relation- ships. Burt’s reasoning implies that the chance of achieving completely radical innovations may decrease if companies establish strong mutual contractual links, such as in supply chains. Links with other companies in the supply chain might be so strong that they prevent a company from suc- cessfully implementing an innovation, even if it is in a strategic position to do so. Typically, a successful collaboration strategy consists of three basic elements, that is, selection of a suitable partner, formulation of clear-cut agreements (getting the project underway), and management of the ongo- ing relationship. Carefully selecting future cooperation partners can pre- vent many problems, and according to Hagedoorn (1990), the aim should be similarity balanced by complementarity, with similarity referring to the firm’s size, resources, and performance. However, of more importance are the required complementarities offered by the cooperation partner, that is, the combination of complementary activities, knowledge, and skills to realize the desired synergy. The literature on strategic partnerships offers many models to evaluate potential cooperation partners (e.g., Souder and Nassar 1990). Based on a study of 70 U.K.-based firms in different indus- try sectors, Bailey et al. (1996) even concluded that selecting partners based on their track record in previous collaborations turns out to be a poor basis for future collaboration. These signals indicate that how collab- orations can be exploited effectively has not yet been settled.

5.5 Absorptive cApAcity

For how companies can benefit from collaboration for innovation, the concept of absorptive capacity plays a key role according to academic literature. By the originators of this concept, Cohen and Levinthal (1990, p. 128), it has been defined as “a firm’s ability to recognize the value of new information, assimilate it, and apply it to commercial ends”, with the focus of their study being R&D investment. This process of assessing and inte- gration new information can be used for new markets, new products, and services at individual, group (or department), and firm levels. Antecedents for absorptive capacity are prior-based knowledge (knowledge stocks and knowledge flows in a firm) and communication, both internal and exter- nal. Prior knowledge ranges from skills and knowledge at the individ- ual level to scientific or technological developments in a domain. Cohen

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coLLAborAtion for innovAtion • 167

and Levinthal (ibid., pp. 129–31) derive their thinking from psychology and conceptualizations of learning. Particularly, this learning through the assimilation takes place at individual and organizational level; the latter as a result of how internal communication is structured. An example of the opposite is General Motors in the 1960s, 1970s, and 1980s. Whereas Toyota developed its production system into what later became to be known as lean production (Womack et al. 1991), General Motors was a bureaucratic and inward-looking organization, so much that it did not advance its production system and fell back in competitiveness. Even later, when it recognized that potential impact of lean production, it strug- gled to adopt this concept and integrate it in its organization. This example shows how important it is to identify and assimilate external knowledge in order to be competitive; it has been said that, in order to be innovative, an organization should develop its absorptive capacity.

The original study on absorptive capacity by Cohen and Levinthal (1990) focused a lot on investments in R&D, but other investigations showed that several other areas could be explored to develop a firm’s absorptive capacity; this led to a review of the concept by Zahra and George (2002) and Todovora and Durisin (2007) and a reformulation that further defined it as being made of potential absorptive capacity and realized absorptive capacity; potential absorptive capacity is a firm’s receptiveness to external knowledge, and realized absorptive capacity reflects a firm’s capability to leverage absorbed knowledge and transform it into innovation outcome. This distinction is relevant because it delineates how firms interact with the environment and how they communicate internally. Thus, the combination of the external interaction and internal communication can only lead to new or modified business models, new or modified products and services, and new or modified processes. Then the external interaction, as part of potential absorptive capacity, is knowledge acquisition that “refers to a firm’s capa- bility to identify and acquire externally generated knowledge that is critical to its operations” (Zahra and George 2002, p. 189); critical in this process is understanding the value of this information (Todovora and Durisin 2007, p. 777). A second component of potential absorptive capacity is the capability for assimilation that “refers to the firm’s routines and processes that allow it to analyze, process, interpret and understand the information obtained from external sources” (ibid. p. 189). In this perspective, poten- tial absorptive capacity can also be viewed as sensing information from the environment (see Dekkers [2017, p. 22] for the definition of environment in systems theories). The concept of realized absorptive capacity constitutes the capability “to develop and refine the routines that facilitate combining existing knowledge and the newly acquired and assimilated knowledge”

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(Zahra and George 2002, p. 190). In addition, the realized absorptive capac- ity concerns the capability of a firm to apply the newly acquired knowledge in product or services that it can get benefits from; this is called the exploita- tion capability. These capabilities based on processes in a firm—sensing the environment to acquire relevant information, assimilation of information to contextualize information, transformation of information into concepts for products and services, and exploitation of products and services—constitute absorptive capacity of a firm.

However, it should be noted that absorptive capacity is an academic term used mostly in innovation management. Omidvar (2013) recognizes this and adds a practice-based perspective, which includes meaning, par- ticipation, identity transformations, and agency. However, even with these extensions, the concept of absorptive capacity is elusive for practice. For example, Andersén (2012, p. 442) speaks about protective capacity as being the “capacity to sustain, or to reduce the speed of depreciation of knowledge-based resources by preventing knowledge from being iden- tified, imitated or acquired by direct or indirect competitors.” This is inversely related to absorptive capacity. The need for companies to pro- tect themselves may outweigh to interact with the environment in an open and transparent manner. This means that, in practice, companies limitedly share information with others.

5.6 gLobAL reseArch netWorKs

The advent of collaboration has also led to the emergence of so-called global research networks. These networks can be formed as part of a cor- poration or based on partnerships between firms. Particularly for firms, the conventional wisdom said that strategy formation and R&D had to be kept in close geographical proximity (Kuemmerle 1997). Because strategic decisions about new markets, products, and services were centralized and made primarily at corporate headquarters, the thinking went, R&D facil- ities should be closely located. A case in point was the renowned Philips Natuurkundig Laboratorium that was located in Eindhoven and later in the 1960s in Waalre, a village next to Eindhoven; Philips’ headquarters were located in Eindhoven until 2001 when they were moved to Amsterdam. At the same time, the Philips Natuurkundig Laboratorium was transformed into High Tech Campus Eindhoven, which is open to researchers from many different companies. Philips Research, the remnant of the Philips Natuurkundig Laboratorium, is still one of the largest campus tenants, although not with anything like the number of people employed in its hey- days. Nowadays, Philips Research has branches in China, Germany, India,

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coLLAborAtion for innovAtion • 169

the United Kingdom, and the United States of America; the non-Dutch parts of Philips Research account for about half the research work done by Philips. There are two main reasons why companies have relocated and expanded their research base across the globe (Howells 1990, pp. 496–7). The first reason is that, as more and more sources of potentially relevant knowledge emerge across the globe, companies must establish a presence at an increasing number of locations to access new knowledge, to attract talent, and to absorb outcomes of research by universities. Also, proxim- ity to research and development by (foreign) competitors may instigate such establishment of global research networks. The second reason is that R&D is treated as a tool that firms use to defend and develop their market presence across national boundaries. Particularly, multinationals seek to extend their control of a market by foreign direct investment, and one element in strategy is technology. Thus, to extend market presence and control in new and existing foreign markets, multinationals set up research laboratories to support product differentiation through product innovation and development. Because of these reasons, large firms often have multi- ple R&D locations across national boundaries, with some of these located such so that access to markets is facilitated.

5.7 suppLy chAin MAnAgeMent

In terms of collaboration in networks, the integration of supply chain man- agement into processes for innovation of processes, products, and services is of paramount importance. Not getting it right may lead to substantial loss of revenue, loss of reputation, and increased cost. This was demonstrated during the 2000s when smartphones were introduced. All smartphone makers, including Apple and Samsung, experienced considerable troubles when their products were more popular than expected, and consequently, the supply of components and materials lagged behind; this was a serious concern, because for some components and parts, such as micro-proces- sors and displays, considerable investments are required coming along with relatively long lead-times to build facilities for production. This example of smartphones shows that having a supply chain that can ade- quately respond to increases in demand (or lesser demand) than expected is crucial to successful introduction of new products and services.

Particularly, the design of supply chain should be characterized by responsiveness. In this respect, the model for the supply chain strategy by Fisher (1997) is often referred to; see Figure 5.7. In this model, a distinc- tion is made between efficient supply chains and responsive supply chains. Efficient supply chains are suitable for functional products, such as basic

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foods and cleaning agents, for which demand is predictable. These sup- ply chains should offer lowest costs and a high rate of turnover to lower costs associated with inventory. Also, the design of products should aim at maximizing performance and minimizing cost, akin value engineering (Subsection 2.3.2). For innovative products, responsive supply chains are required because demand can be volatile and unpredictable. Decisions in these supply chains are not aiming at minimizing cost, but at utilizing production capacity for availability of products and positioning products in the right places for maximizing sales to hedge against unpredictable demand. Also, the design of innovative products could facilitate if they are based on modular designs; see Subsection 2.6.3. In this strategy, for the supply chain speed of delivery and flexibility dominate, with cost playing a lesser role. Therefore, the approach to the supply chain strategy is very different for innovative products and functional products.

5.8 Key points

• Not only for being a source of innovation (see Chapter 4), but also for providing knowledge during new product and service devel- opment collaboration with strategic partners is seen as key to an effective innovation strategy. This type of collaborations can take the form of strategic alliances and joint ventures. A strategic alli- ance for innovation is when partners cooperate to combine their knowledge, skills, and technologies in order to jointly come to new ideas and plans that can be converted into a good or service; these alliances are most based on complementary assets, skills, and knowledge. A joint venture includes the forming of a new entity for expansion, development of new products and services, or moving into new markets, particularly overseas.

Figure 5.7. Fisher’s matrix for design of supply chain.

Innovative productsFunctional products

Ef fic

ie nt

su pp

ly c

ha in

s R

es po

ns iv

e su

pp ly

c ha

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Mismatch

• Predictable demand • At lowest cost • High rate of inventory turnover • Product design: maximize performance and minimize cost

• Unpredictable demand • Respond swiftly to minimize stockouts, forced markdowns and obsolete inventory • Excess buffer capacity • Use modular design

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coLLAborAtion for innovAtion • 171

• Collaboration with suppliers is seen as beneficial to innovation. It requires companies to pay attention to supplier selection, (early) supplier involvement, and design of supply chains:  One dominant aspect is that the selection of suppliers should be

based on their technological capabilities. Sometimes, supplier development to enhance their technological capabilities may be worthwhile, especially when there is strategic alignment between the buying firm and a supplier.

 Furthermore, early supplier involvement is a form of vertical col- laboration between supply chain partners, in which a firm involves suppliers at an early stage of the product development process. For this involvement, a distinction is made between white box (the supplier will follow mostly the specifications set by the buying firm), gray box (joint development with formalized integration in NPD), and blackbox (led by the supplier according to the buying firm’s performance specifications) design and engineering.

 For innovative products, the design of supply chains should be responsive. Typically, this means that not cost considerations do prevail, but the availability of products in new or emerging markets determines the position and the level of inventory. In addition, if possible, short lead-times should be achieved.

• Collaboration does not only extend to companies working together in supply chains or for access to market, but also happens in loose- ly-connected networks; two notable forms are:  Regional networks. In regional networks, firms participate

and complement each other’s capabilities with the aim to offer products and services that otherwise could not be achieved by the individual entities and to utilize resources better.

 Venture capital networks. Firms in venture capital networks are able to make use each other’s capabilities and knowledge. This also depends on how a venture capital fund has built its portfolio.

• Global research networks can be established as part of a corpora- tion or based on partnerships between firms. They consist of R&D centers at multiple locations. The decision for locations is informed by access to expertise, talent, and proximity to markets.

• The innovative capabilities of a firm are determined by its capability to recognize the value of new, external information (for example, about technologies), assimilate it, and apply it to commercial ends; this is called absorptive capacity.

• Trust and power are important factors in maintaining relationships for collaborations. These issues emerge in strategic networks and

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collaborative networks, particularly when one actor tries to take advantage of another without reciprocation.

5.9 references

Bailey, W.J., R. Masson, and R. Raeside. October 15–18, 1996. “Choosing Suc- cessful Technology Development Partners: A Best Practice Model.” Paper pre- sented at the 6th International Forum on Technology Management, Amsterdam.

Barthélemy, J. 2003. “The Seven Deadly Sins of Outsourcing.” Academy of Management Executive 17, no. 2, 87–100. doi:10.5465/AME.2003.10025203

Biggiero, L. 1999. “Market, Hierarchies, Networks, Districts: A Cybernetic Approach.” Human Systems Management 18, no. 2, pp. 71–86.

Bortolazzi, J., T. Hirth, and T. Raith. 1996. “Specification and Design of Electronic Control Units.” Paper presented at the Conference on European Design Automation, Geneva.

Bowonder, B., A. Dambal, S. Kumar, and A. Shirodkar. 2010. “Innovation Strat- egies for Creating Competitive Advantage.” Research-Technology Manage- ment 53, no. 3, 19–32. doi:10.1080/08956308.2010.11657628

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