©2009 Prentice Hall 14-1 MGMT 738 Management of Technology Lecture 10 Collaboration Strategies

©2009 Prentice Hall 14-2 Learning Objectives 1.Identify different modes of doing business 2.Explain why certain types of technologies are better suited than others to exploitation through contractual modes of doing business 3.Understand how the different contractual modes of doing business work 4.Describe strategic alliances and understand their pros and cons 5.Identify the different types of licensing that firms can undertake 6.Explain why strategic alliances and licensing agreements are more common in some industries than in others 7.Describe contract manufacturing and outsourcing and understand their pros and cons 8.Describe joint ventures 9.Explain how firms can improve their performance at contractual modes of doing business 10.Understand the difficulties that arise when large, established firms contract with small, start-up firms

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.

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?)

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 new technology or research alliances is rising.

©2009 Prentice Hall 14-6 Contractual and Vertically-Integrated Modes of Doing Business A company’s value chain can be:  Vertically integrated when a company owns all parts of the value chain  Contractual when a company signs an agreement with independent firms to provide part of the value chain Contractual forms of doing business are composed of:  Technology licensing  Joint ventures  Strategic alliances  Contract manufacturing  Outsourcing

©2009 Prentice Hall 14-7 Discreteness and Tacitness Contractual modes are better when technologies are discrete rather then when they are part of a system Vertically integrated modes work better when technologies are part of a system that requires coordination of components Contractual modes are better when the knowledge is easily codified Vertically integrated modes are better when the knowledge is tacit

©2009 Prentice Hall 14-8 Alliances, Licensing, Joint Ventures, Contract Manufacturing, and Outsourcing If a company decides to use a contractual form of governance, then they have a number of more specific choices to make in the use of:  Strategic alliances  Licensing, joint ventures  Contract manufacturing  Outsourcing

©2009 Prentice Hall 14-9 Strategic Alliances A relationship between two firms to work together to achieve a common business goal They can be:  Vertical (between firms at different stages of the value chain)  Horizontal (between firms at the same stage of the value chain)

©2009 Prentice Hall International Technology Alliances

©2009 Prentice Hall Advantages and Disadvantages of Strategic Alliances

©2009 Prentice Hall Joint Ventures Contractual agreements between two firms to create and hold equity in a third firm Joint ventures can help:  Companies to learn new capabilities  Improve efficiency  Pool resources Joint ventures have drawbacks:  Can lead to opportunistic action by parent companies  Demand costly efforts to blend organizational structure, culture, and strategy to be effective

©2009 Prentice Hall Licensing An arrangement in which a firm permits another to use its intellectual property in return for a fee

©2009 Prentice Hall Advantages and Disadvantages of Licensing Licensing helps firms to:  Enhance financial returns  Achieve rapid market penetration  Manage risk  Reduce intellectual property disputes Licensing can hinder:  The development of capabilities  Lower profits than producing a product or service  Create competitors

©2009 Prentice Hall Dos and Don’ts of Technology Licensing

©2009 Prentice Hall Exclusive and Non-Exclusive Licenses Licensing can be:  Exclusive: to only one licensee  Non-exclusive: to multiple licensees Exclusive licensing gives licensees stronger incentives to develop technology, but raises the risk of choosing the wrong licensee

©2009 Prentice Hall Cross-Licensing Cross-licensing, or bilateral licensing, is an agreement between two parties to license reciprocally Important in industries in which patents belonging to many firms are needed to develop a single product

©2009 Prentice Hall Outsourcing and Contract Manufacturing Outsourcing is the assignment of some aspect of a company’s operations to another company When manufacturing is outsourced, it is called contract manufacturing Outsourcing allows firms to:  Specialize on their core capabilities  Expand their operations at lower risk  Increase the pace of activity Outsourcing can hinder:  Risk the loss of proprietary knowledge  Capability development  Involve high transactions costs Outsourcing is more successful if firms focus on non-core activities at which large savings can be garnered

©2009 Prentice Hall Work Alone or Collaborate? Forces to Consider

©2009 Prentice Hall Markets for Knowledge Markets to sell technology often fail because of the disclosure paradox and hold-up problems

©2009 Prentice Hall Information and Biotechnology Share of Strategic Alliances

COMPETITOR OR COLLABORATOR Which co-opetitors a firm decides to collaborate or compete with is a function of three factors:  the type of technology and market  the timing and cost of the innovation  co-opetitors’ competences and assets Bottom line:  Collaborate if doing so increases the size of the profit pie, and then compete for your share of the pie  If collaboration does not increase the size of the pie or get a firm in early then compete.

TYPE OF TECHNOLOGY AND MARKET Collaboration may be important when:  development costs are high  when network effects are high - the more people who use the products the more valuable they are  when creating an industry standard is important  when an innovation is competence destroying (may provide the time to unlearn the old technology and absorb the new)

TIMING Collaboration may be more important early in the life of some innovations:  if developing an industry standard is important  if firms want to enter a new business quickly and do not want to develop competences from scratch

COMPETENCES AND ASSETS In collaboration firms must have something to offer. A VIDE analysis can help determine the value of competences and assets in a collaboration VIDE Analysis - for each stage of the value chain of an innovation a firm determines what the key capabilities are and evaluates them using VIDE criteria

VIDE CRITERIA Customer value - Does the capability make an unusually high contribution to the value that customers perceive? Imitability - How quickly and to what extent can other firms duplicate or substitute the capability? Competitor differentiation - Is the type or level of the capability unique to the firm? Extendability - Can it be used in more than one product?

INNOVATION VALUE-ADDED CHAIN The assumption thus far is that innovation effects only the organization in question. More realistically an innovation impacts an organization as well as its local environment including co-opetitors. Further, an innovation may be viewed by a firm as incremental but to co-opetitors such as suppliers and customers it may be radical. To do a thorough analysis of predicting new entrants all co-opetitors should be analyzed as well.

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  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.

Research Brief Using Alliances and Licensing to Establish a Standard Charles Hill describes a range of strategies designed to help a firm’s technology become dominant.

Choosing a Mode of Collaboration Firms should match the trade-offs of a collaboration mode to their needs.

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?

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: –1. What each partner is obligated to contribute. –2. How much control each partner has in arrangement. –3. When and how proceeds of collaboration will be distributed. –4. Review and reporting requirements. –5. Provisions for terminating relationship.

METHODS OF ACQUIRING TECHNOLOGY Using internal R&D Participating in a joint venture Contracting out for R&D Licensing of technology Buying of technology

FACTORS AFFECTING TECHNOLOGY ACQUISITION DECISION Acquisition Method Company’s Relative Standing Urgency of Acquisition Commitment / Investment Involved Technology Life Cycle Position Categories of Technology Internal R&D HighLowestHighestEarliestMost Distinctive/ Critical Joint VentureLowerEarlyDistinctive or Basic Contracted R&D LowEarlyDistinctive or Basic License - inHigh Lowest LaterDistinctive or Basic Non- acquisition Low HighNo Commitment /Investment All StagesExternal

METHODS OF EXPLOITING TECHNOLOGY Employ in-house in products and/or processes Contract (outsource) marketing or manufacturing Joint venture License - out

FACTORS AFFECTING TECHNOLOGY EXPLOITATION DECISION Exploitation Methods Company Relative Standing Urgency of Exploitation Need for Support Technologies Commitment/ Investment Involved Technology Life Cycle Position Categories of Technology Potential Application Own Production or Products Lowest HighestEarliestMost Distinctive /Critical Narrowest Contract (Outsource) Manufacture /Marketing LowerHigh EarlyNarrow Joint VentureHighLowHighEarlyWide License - outHighHighestLow Lowest Later Least Distinctive /Peripheral Widest

Technology Portfolio Criteria Needs  Normative/Comparative/Forecast Life Cycle Stage  Embryonic/Growth/Maturity Type of Innovation  Product/Material/Process/Market/Service Industrial segment Expenditure  Overhead/Capital Expenditure