Innovation strategy at large companies is changing from an internal research and development based approach toan external-oriented, open innovation model.
This transformation requires organisations to employ a variety of innovation mechanisms, such as in-licensing, co-development, strategic alliances, joint ventures (JVs) and corporate venture capital.
This article describes the different types of innovation partnerships and their applicability in various business situations. The typical use of different innovation mechanisms can be plotted on a grid that illustrates the depth of collaboration against the number of relationships (see figure).
The relative risk of an individual project is depicted by the color shading. Thus in-licensing, which involves buying the use of a specific technology, is more like a transactional exchange and hence involves limited risk.
Partnership innovations that are more complex, such as strategic alliances, require a firm to invest significant time and effort in finding a partner and maintaining that relationship JVs require even more commitment because such efforts involve setting up a new entity that is fully owned by the parent companies.
They are common for companies entering markets in China and India. Partnerships with universities and other consortia, another form of alliance, fall midway in the collaboration intensity spectrum.
These partnerships require relationship maintenance but not to the same level as needed with strategic alliances. Often, these types of cooperatives include multiple partners that are part of the group (for example, consortium), which distributes the effort and risk across the group.
One of the challenges with collaborative innovation is that most companies are comfortable only with acquisitions and alliances for their innovation purposes. There are two main reasons for this.
First, more sophisticated partnership mechanisms require significantly more management effort. To manage these alliances successfully, the company needs to have an overarching and previouslyestablished alliance strategy, an internal organisational structure to support collaboration, a receptive culture, an appropriate risk-taking propensity; and suitable rewards and incentives.
Many organisations simply do not have this infrastructure. Second, traditionally, the business need for collaboration- based innovation structures has been limited to fast-moving industries, such as high-tech or life sciences.
The pace of change, however, has now accelerated across many industries, and the rapid emergence of competitors from developing countries has added an additional competitive threat.
The current economic recession is also adding financial pressure on companies to reduce internal development costsby leveraging their partners’ expertise.
Companies that rely purely on a traditional merger and acquisition approach tend to look for opportunities in binary terms – either to acquire a target company or not. This kind of analysis misses a wide spectrum of partnership opportunities, such as licensing technology or collaborative development.
Another drawback of the M&A mindset is that an acquisition typically occurs when target companies have already been funded by another venture capital firm and have been in existence for some time.
Thus, the acquiring company will miss both the financial upside, because they have to pay a higher valuation multiple, and the strategic advantage of an earlier adoption. Finally, acquisitions are notoriously difficult to execute successfully.
The challenges of organisational integration and cultural clashes often lead to an exodus of key people from the acquired target, leaving the new company and taking valuable expertise with them. To form an alliance with a much larger organisation, a small company has to pass through a rigorous vetting process.
This includes passing meticulous partner selection criteria. Will the small company still be in business after a couple of years? Is it sufficiently funded? How much risk does the smaller company add to the joint development project? The next hurdle is that if an alliance is formed, significant overhead in managing the alliance is subsequently required.
The larger firm usually expects a structured development process rather than an ad-hoc "whatever works" entrepreneurial approach. To accommodate these requests, the smaller company often ends up becoming a supplier to the larger company rather than being a true partner.
As a result, most traditional alliances, joint ventures and consortia are formed between large companieswith well-established business models.A welcome business development is that large organisations are adopting open innovation principles.
The wellpublicised innovation successes of companies such as Procter & Gamble have encouraged others to follow suit. This has enabled ideas and opportunity sharing that is not limited to large partners or consortia.
Now, small companies, suppliers and even individual consumers can contribute to joint innovation (see figure 2). Yet open innovation is still in its infancy as companies try to develop the organisational structure and processes to source these innovations and move toward a culture that embraces these ideas.
Corporate venturing entails two key activities: a broad scan of business opportunities and actual investment in some of those business opportunities.
Significant strategic benefits result from the scan activity itself, as companies can gauge the key technologies and trends on whichthe start-up and broader venture capital community is focusing.
A key distinction of this scan is that it exposes the company to new opportunities before a need arises. This is in contrast to the other approaches, which are typically employed after an innovation need is confirmed (see figure above).
Corporate venturing, of course, is riskier than other innovation partnerships. This is contrary to the traditional organisational mindset of minimising risk and makes it difficult for companies to embark on this path.
This additional risk, however, can be attributed to the earlier development stage of the opportunities compared with the other types of partnerships. A testament to the power and promise of corporate venturing is that even Google has entered the arena.
Google arguably has one of the most powerful internal innovation engines on the planet, in addition to an agile partnership and acquisition group, such as YouTube and VoiceCentral.
Yet Google felt the need to start a unit focused on corporate venturing. This unit "looks for companies and people that have the best opportunity to create significant, disruptive and innovative ventures". This underscores the importance of corporate venturing activity to round out the organisation’s innovation toolkit.
Leading companies understand the importance of employing a variety of innovation techniques depending on innovation requirements. For example, Nokia operates a world-class research and development group that focuses on supporting its core business opportunities.
Nokia also embraces open innovation principles, has strong alliances with academia, such as MIT and others, participates in multiple consortia, ranging from the Bluetooth Interest Group to the WiMedia Alliance, and has successfully acquired and licensed technologies. In addition, for external funding it has established Nokia Venture Partners and Innovent, an innovation unit that explores emerging market opportunities.
In conclusion, companies need to match the innovation mechanism to their specific business need. A single innovation approach will not work in all situations, and identifying where and when to use different techniques is critical to innovation success.
Meraj Mohammad has over 10 years’ strategy and innovation consulting experience. Most recently he was with PRTM Management Consulting, leading engagements for high-tech, consumer goods and industrial clients. He can be reached at mmohammad11@gsb.columbia.edu