Chapter 8 Avimanyu Datta, PhD Collaboration Strategies

Overview Firms must often choose between performing innovation activities alone or in collaboration. Collaboration can enable firms to achieve more, at a faster rate, and at less cost and risk. However, collaboration also entails sharing control and rewards, and may risk partner malfeasance. The advantages of going solo are compared with those of collaborating, and then different forms of collaboration are compared. Whether to perform activities in house or with partners is a difficult decision for firms but the reality is that a significant portion of innovation comes from the collaborative efforts of multiple individuals or organizations. Collaboration requires the firm to relinquish some degree of control over a technology’s development, share the financial returns and exposes a firm to the possibility of malfeasance by its partner. On the upside, collaboration also lowers the costs and risks associated with the development of a new technology. 2

Reasons for Going Solo Whether a firm chooses to engage in solo development or collaboration will be influence by: Availability of capabilities (does firm have needed capabilities in house? Does a potential partner?) Protecting proprietary technologies (how important is it to keep exclusive control of the technology?) Controlling technology development and use (how important is it for firm to direct development process and applications?) Building and renewing capabilities (is the project key to renewing or developing the firm’s capabilities?) Why would a firm develop a technology on its own instead of collaboration with a partner? A firm may go solo if it possesses all the capabilities and resources in house that it needs, the development of the new technology is an opportunity to develop new competencies, the risk of transferring knowledge to a partner is too great, the firm wants to control the subsequent trajectory of the technology’s development, or if an appropriate partner is not available. Examples follow: For example, Monsanto developed on its own a genetically modified soybean seed that could be used in conjunction with Roundup, an herbicide. They had to go solo because the biotechnology industry was in its infancy; there were no appropriate partners to supply the technology. Monsanto turned the need to develop this capability in house into an opportunity to make biotechnology its strategic focus. Honda Motors not joining the Alliance of Automobile Manufacturers is an example of a company that went solo because they wanted to retain control over the development process (and the profits) and because the company’s culture emphasizes independence and self-reliance. Boeing considered going solo because they knew they needed to create a new airplane every 12 to 15 years to transfer the skills and experience necessary to do so on to the next generation of employees. 3

Advantages of Collaborating Collaborating can offer the following advantages: Obtaining needed skills or resources more quickly Reducing asset commitment and increase flexibility Learning from partner Sharing costs and risks Can build cooperation around a common standard Worldwide formation of technology or research alliances varies over time. Collaborating can provide a firm with the needed skills or resources faster than developing them on their own. Using the skills or resources of a partner can help a firm reduce its asset commitment (and avoid a large investment in a technology that may become obsolete quickly) and enable it to be more flexible; an especially important feature in markets characterized by rapid technological change. Collaboration can also be an important opportunity for the firm to acquire new knowledge, either through the transfer of knowledge between development partners or the more efficient creation of new knowledge as a result of the collaborative efforts. Collaboration may also be advantageous if it results in the creation of a shared standard. Where compatibility and complementary goods are important to the commercialization efforts of a new technology, collaboration at the development stage can bring about cooperation at the commercial stage. For example, In 1997, Nokia, Motorola and Ericsson formed a nonprofit corporation, the WAP Forum, the purpose of which was to establish a common wireless telecommunication format and to prevent multiple competing standards. The forum merged with the Open Mobile Architecture initiative to form the Open Mobile Alliance (OMA) in 2002. By early 2003, more than 200 mobile operators, equipment producers and software developers had signed on to the standard. IBM, Apple and Hewlett Packard were not as fortunate with their joint venture, Taligent. Taligent was formed with the intention of developing and promoting an operating system that would replace Microsoft Windows. Despite an investment of $50 million and a three-year commitment, the venture failed to meet the expectations of the partners and was dissolved. The passage of the National Cooperative Research Act (NCRA) in 1984 allowed competitors to cooperate as long as the efforts were not anticompetitive. There was subsequently a large surge in alliance activity in the 1990s as firms scrambled to respond to the massive technological shock (and opportunity) unleashed by advances in information technology. 4

Types of Collaborative Arrangements There are numerous types of collaborative arrangements, each with its own advantages or costs. Strategic Alliances: formal or informal agreements between two or more organizations (or other entities) to cooperate in some way. Doz and Hamel note that a firm’s alliance strategy might emphasize combining complementary capabilities or transferring capabilities. It might also emphasize individual alliances or a network of alliances. Types of Collaborative Arrangements Collaboration can take many forms and can be formed to accomplish almost any business function. Potential partners include suppliers, customers, competitors, and complementors, organizations that offer similar products in different markets or offer different products in similar markets, non-profit organizations, government organizations and universities among others. Firms may choose to collaborate in the areas of manufacturing, services, marketing, or technology-based objectives. Collaboration for the purpose of research and development ranks high among the reasons partners join efforts, particularly in North America. Collaboration arrangements range from very informal alliances to highly structured joint ventures or technology exchange agreements (licensing). The most common forms of collaboration in technological innovation are strategic alliances, joint ventures, licensing, outsourcing, and collective research organizations. Strategic alliances require a significant investment in time and resources but in exchange firms gain access to capabilities not available in house, leverage their capabilities by combining their efforts with another firm, achieve innovation goals faster, at a lower cost and with less risk. Alliances can also provide a firm with the flexibility to pursue various opportunities for innovation or access different types and scale of capabilities, important in rapidly changing markets. For example, An alliance between a large pharmaceutical company and a small biotechnology firm provides the large firm access to drug discoveries and the smaller firm benefits from the capital resources, manufacturing, and distribution capabilities of the larger firm. Doz & Hamel categorized alliance strategies along two dimensions (Figure 8.3 shows the resulting 2x2 chart): Whether the alliance pools or transfers capabilities from one firm to another, Whether the alliance is between two companies or three or more companies (i.e. collective network of alliances). To avoid the sharing of too much information with alliance members, firms need to ensure that participating employees understand the limits on the information and resources to be shared within the alliance. 5

Types of Collaborative Arrangements Joint Ventures: A particular type of strategic alliance that entails significant equity investment and often establishes a new separate legal entity. Licensing: a contractual arrangement that gives an organization (or individual) the rights to use another’s intellectual property, typically in exchange for royalties. Outsourcing: When an organization (or individual) procures services or products from another rather than producing them in-house. Collective Research Organizations: Organizations formed to facilitate collaboration among a group of firms. Joint Ventures are formal alliances requiring a significant equity investment and commitment from each partner. Joint ventures usually involve the creation of a separate legal entity. NEC Lamilion Energy, established in May 2002 was formed by a joint venture (NEC Corporation and Fuji Heavy Industries were the venture partners) to take advantage of each partner’s complementary expertise in order to develop and manufacture high-performance batteries for use in environmentally friendly automobiles. Licensing is a contractual arrangement granting a licensee the rights to an asset (proprietary technology, trademark, copyright, etc.) owned by the licensor. For the licensor, the advantages of licensing include the ability to penetrate a wider range of markets than it could on its own. Licensing to potential competitors can preempt them from developing their own technologies (this is especially important if it is likely that competitors will copy the key features of the technology or if there will be substantial pressure for the adoption of a single dominant design). For the licensee, licensing is typically less expensive and less risky than in-house development. Disadvantages of licensing include losing the technology as a source of sustainable competitive advantage as it gains use among many licensees and the potential that knowledge will be transferred to licensees enabling them to develop their own proprietary technology. The factors determining a company’s optimal strategy include whether there are barriers to imitation, capable competitors, complementary goods available and whether or not the firm is able to produce the technology and complementary goods (if necessary) in house. Outsourcing is an effective strategy for firms that develop technological innovations, but are missing one or more capabilities to manufacture and bring the product to market. The advantages of contract manufacturing (one of the most common forms of outsourcing) follows: Advantages of Contract Manufacturing include flexibility by providing a manufacturing capability without long-term capital investments or added labor, enabling a firm to focus on activities central to competitive advantage while getting expertise and resources not available internally and by enabling a firm to achieve economies of scale and faster response time while keeping costs down. Disadvantages of Contract Manufacturing include the potential loss of important learning opportunities needed to develop innovations in the future, potentially high transaction costs, and the risk that a contract manufacturer will appropriate proprietary technology. Collective Research Organizations may take the form of trade associations, university-based research centers or private research corporations and are formed through government or industry association initiatives (e.g. National Center for Manufacturing Sciences) or groups of private companies (e.g 6

Choosing a Mode of Collaboration Firms should match the trade- offs of a collaboration mode to their needs. Choosing a Mode of Collaboration Solo internal development is relatively slow and expensive, offers little-to-no potential for accessing another firm’s competencies but enables a firm to retain control over how the technology is developed and used and is most likely to contribute the leveraging of existing competencies and the development of new ones. Solo internal development is appropriate when a firm has strong competencies related to the new technology, access to capital, and is not under great time pressure. Strategic Alliances enable firms to quickly gain access to another firm’s technology, or to broader markets, to leverage existing competencies or develop new competencies depending on the structure of the alliance. Joint Ventures offer a slight time advantage over solo development efforts due to combined efforts of partners. Joint ventures also offer cost sharing, the potential for leveraging existing competencies and developing new competencies and the opportunity to access partners’ competencies. Joint ventures are particularly desirable when a firm places value on access to other firms’ competencies. Licensing in is a fast and moderately priced way to access new technology. Licensing also has the potential to leverage the firm’s existing competencies, develop new competencies and provide access to another firm’s existing competencies. On the downside, licensing in offers limited use of a technology and a low degree of control.Licensing out offers a fast and low cost way of expanding the use of a technology into new products or markets. It leverages the firm’s existing competencies and can enable it to access other firm’s competencies (for example, their superior knowledge of a particular market). If offers little opportunity for development of new competencies. Outsourcing affords rapid access to another firm’s expertise and lower costs and leverages a firm’s existing competencies by allowing it to focus on activities providing the greatest return. On the downside, the firm has little opportunity to build new competencies. Collective Research Organization is a form of long-term commitment in which costs and degree of control can vary significantly. These arrangements often enable a firm to leverage and build upon its existing competencies as well as to learn from other participating organizations. These organizations are particularly useful in industries with complex technologies and/or industries that require considerable investments in basic science. 7

Choosing and Monitoring Partners Partner Selection Resource fit: How well does the potential partner fit the resource needs of the project? Are resources complementary or supplementary? Strategic fit: Does the potential partner have compatible objectives and styles? Impact on Opportunities and Threats: How would collaboration impact bargaining power of customers and suppliers, degree of rivalry, threat of entry or substitutes? Impact on Internal Strengths and Weaknesses: Would collaboration enhance firm’s strengths? Overcome its weaknesses? Create a competitive advantage? Impact on Strategic Direction: Would the collaboration help the firm achieve its strategic intent? Risks of collaboration include difficulties in determining if the resources provided by partner are a good fit, the possibility that the partner will exploit the relationship by expropriating the company’s knowledge with little or no reciprocal contribution, and the possibility that managers will become overburdened by managing more collaborations than is reasonable. It is thus important to limit collaborations, choose partners carefully and establish monitoring and governance systems to limit risks. Partner selection is crucial to success. Key factors fall into two dimensions, resource fit (e.g. partner’s relative size and strength and complementarity of resources) and strategic fit (e.g. alignment of objectives and similarity of values and culture). To assess a potential partnership a manager should ask the following questions: How would collaboration change the bargaining power of customers or suppliers, barriers to entry, competitive rivalry and the availability of complementary goods and the threat of substitutes?\ How would the collaboration leverage or enhance the firm’s strengths (or would any firm strengths be put at risk) and offset its weaknesses (in terms of capabilities and financial position) and would the collaboration create a competitive advantage? How does the collaboration fit with the firm’s strategic intent? Is the collaboration likely to help close a resource or technology gap within the firm? Is it likely the objectives of the collaboration will change? If so, will the changes be compatible with the firm’s strategic direction? 8

Choosing and Monitoring Partners Partner Monitoring and Governance Successful collaborations require clear yet flexible monitoring and governance mechanisms. May utilize legally binding contractual arrangements. Helps ensure partners are aware of rights and obligations. Provides legal remedies for violations. Contracts often include: What each partner is obligated to contribute. How much control each partner has in arrangement. When and how proceeds of collaboration will be distributed. Review and reporting requirements. Provisions for terminating relationship. Partner Monitoring and Governance is as crucial to success as partner selection. The more resources a firm risks in a collaboration, the more important it becomes for the collaboration to be governed by a clear, flexible and often a legally binding monitoring and governance agreement. Such agreements clarify partners’ rights and obligations and specify legal remedies in the case of a violation of the agreement. Often included in the agreements are: What each partner is obligated to contribute to the collaboration. How much control each partner has in the collaboration. When and how proceeds of the project will be distributed. Mechanisms for monitoring each partner’s adherence to the agreement. Provisions for periodic auditing. Provisions for terminating the relationship. Firms should also think about how their alliances position them within the overall collaborative network. Firms that occupy highly central positions might have access to more information and be able to access that information more quickly. Firms that occupy “brokerage” positions (by bridging groups of otherwise disconnected firms might have opportunities to make unique and valuable combinations between heterogeneous types of information, and might also become valuable gatekeepers in the flow of information through the network. 9

Strategic Positions in Collaborative Networks Research Brief Strategic Positions in Collaborative Networks A firm’s position within a collaborative network influences its access to information and other resources, and its influence over desired outcomes. Some of the key aspects of a firm’s position include centrality and opportunities for brokerage. For example, in this graph, though PPD Inc. has only three alliances, it serves as an important bridge between the two lobes of the network, which should give it important opportunities for brokerage. 10

The XenoMouse Abgenix spent seven years and $40 million to produce a genetically-engineered mouse that could produce antibodies that would treat human illnesses. One antibody, ABX-EGF showed great promise for treating several types of cancer. Abgenix had to decide whether to: License ABX-EGF to a pharmaceutical company which would do all further testing and commercialization (bear little risk and receive license royalties) Use a joint venture with a biotechnology company to complete the testing and commercialization (bear moderate risk and split profits) Pursue the ABX-EGF project as a solo venture (bear all risks and keep all profits) 11

The XenoMouse Discussion Questions: What are the pros and cons of Abgenix collaborating with a partner on ABX-EGF? If Abgenix chooses collaboration, would it be better off licensing ABX-EGF to the pharmaceutical company, or forming a joint venture with the biotech company? How does Abgenix’s decision about collaborating for ABX-EGF impact its prospects for its other drug development projects? 1. What are the pros and cons of Abgenix collaborating with a partner on ABX-EGF? A partner would bring the advantage of providing Abgenix with additional resources and cash to develop ABX-EGF properly, while decreasing the risk Abgenix runs of either not developing it properly or that the product turns out to be unsuccessful after Abgenix invests a large amount of their limited cash. The partner also may help them get through the testing and regulatory approval phase, developing knowledge that could be very useful in future innovations. Finally, given the presence of competitors with similar products in development, a partner might help Abgenix bring ABX-EGF to market faster. By bringing in a partner Abgenix will definitely have to share the returns on the product and may lose control over its development. They also run the risk the partner will expropriate some technology or knowledge proprietary to Abgenix. 2. If Abgenix chooses collaboration, would it be better off licensing ABX-EGF to the pharmaceutical company, or forming a joint venture with the biotech company? Encourage students to get into a good discussion of this. It may be worthwhile to assign students to take sides to really debate the pros and cons. In the course of the debate, make sure that the students consider Abgenix’s resources and the resources of the potential partner (resource fit), as well as the form of collaboration. Does the potential partner have the skills and resources Abgenix does not have? They would also have to evaluate the strategic fit of a partner. 3. How does Abgenix’s decision about collaborating for ABX-EGF impact its prospects for its other drug development projects? While going it alone may provide Abgenix with many opportunities to develop internal knowledge and resources that may be useful in future development projects, it will also tie up scarce cash and other resources. This will limit the resources they can devote to other projects. 12

Discussion Questions What are some of the advantages and disadvantages of collaborating on a development project? 2. How does the mode of collaborating (e.g., strategic alliance, joint venture, licensing, outsourcing, collective research organization) influence the success of a collaboration? 3. Identify an example of collaboration between two or more organizations. What were the advantages and disadvantages of collaboration versus solo development? What collaboration mode did the partners choose? What were the advantages and disadvantages of the collaboration mode? 4. If a firm decides it is in its best interest to collaborate on a development project, how would you recommend the firm go about choosing a partner, a collaboration mode, and governance structure for the relationship? 1. What are some of the advantages and disadvantages of collaborating on a development project? Advantages of collaboration are the opportunity to share the costs and risks of development, to access and possibly develop skills and resources not available in house, increased flexibility because of reduced need to commit assets to a particular project, and the possibility of establishing a shared standard. Disadvantages include the possibility of exposing proprietary knowledge, the potential loss of control over development, the need to share rewards, and the loss of possible opportunities to develop skills and resources that may prove useful in future projects. 2. How does the mode of collaborating (e.g., strategic alliance, joint venture, licensing, outsourcing, collective research organization) influence the success of a collaboration? Each mode of collaboration carries its own set of tradeoffs in terms of speed, cost, control, potential for leveraging existing competencies, developing new competencies, or accessing another firm’s competencies. If success of the project requires being a first or early mover, then speed may be a critical factor, and modes that reduce speed are likely to improve the project’s success. If the project is particularly large or risky, then modes that enable cost and risk sharing will prove particularly valuable. Many technological innovations are complex and require more competencies than any individual firm possesses; in such instances modes that enable each firm to access from each other’s competencies will improve the project’s likelihood of success. 3. Identify an example of collaboration between two or more organizations. What were the advantages and disadvantages of collaboration versus solo development? What collaboration mode did the partners choose? What were the advantages and disadvantages of the collaboration mode? Students will identify a wide variety of collaborations. What you will be looking for in their answers is whether they considered the various tradeoffs inherent in the different forms of collaboration. You will also want to see that they are able to provide insight into the competitive implications of the collaboration (e.g. impact on Five Forces, firm strengths and weaknesses, etc.). 4. If a firm decides it is in its best interest to collaborate on a development project, how would you recommend the firm go about choosing a partner, a collaboration mode, and governance structure for the relationship? Once the decision is made to collaborate, the selection of a partner is crucial. Partner selection is a function of resource fit and strategic fit. Resource fit is the degree to which potential partners have resources that will add value. Strategic fit is a measure of the compatibility of partners’ objectives and cultures. While it is not necessary for partners to have identical objectives, they must be compatible. The choice of a collaboration mode must give consideration to which mode will best provide the advantages sought in the collaboration while limiting the risks. Using the table of tradeoffs is helpful here. The type of governance structure is usually a function of the level of resources risked in the collaboration (more resources = stronger control mechanisms such as contracts and equity sharing).   13