INNOVATiON THROUGH ALLIANCES: ARCHIMEDES’ HALL OF MIRRORS

I~ovation rOugh Alliances: Archimedes’ Hall of M~ro~ THOMAS CUMMINGS, ~ese~rc~ Fe~lo~, ~~te~~ti~~ul ~~stit~te for Ma~~ge~e~t ~e~eZop~e~zt (IMD), Lausanne, Switzerland

In this article, Thomas Cummings reviews the basic assumptions underlying the recent trend to new technology partnerships and suggests that managers in such partnerships need to be skilful in managing the collaboration. Both the uncertainty in the innovation process and the integration of partner capabilities are necessary if the joint R&D project is to really succeed.

Archimedes, the famous ancient Greek mathematician and inventor (c. 290-280 BC) resided in Syracuse, the principal &y-state in Sicily. It is reported that he played an important role in the defence of Syracuse against the siege laid by the Romans in 213 BC by constructing walls of mirrors and other war machines so effective that they long delayed the capture of the city.

Since 1983, many European companies have used Archi- mede’s most famous saying - Eureka - as the rallying cry to form strategic alliances between high technology research sectors. The Eureka project was created to put Europe in a technologically competitive position vis-k-vis the US and Japan. Nearly five billion ECUs have been invested by governments and the private sectors in over 400 Eureka ventures to date. When Eureka was being formed, and since that time, a number of major pro- grammes have been announced: Race, Bright, Esprit I and II, Comett, to name but a few. AI1 of these pro- grammes have been created with at least one common view: that success in new technology development depends, to some extent, on forming and managing cooperative agreements, either with other companies, universities, or research labs.

In the last few years, a number of companies have formed alliances to carry out breakthrough technological developments. These well-financed, well-equipped projects have had varying degrees of success and, if we are to believe the research of our finest business schools, the story has a sad ending, for most have failed.

The intent of this brief paper is to review and question some of the basic assumptions that underlie the recent

trend toward new technology partnerships, and to explore the managerial implications of carrying out significant innovation projects in the context of business partnerships. It will close with a brief discussion about management approaches that are likely to reinforce the goals of the innovation team, while keeping the rules of the partnership on track.

The Challenge of Technological Innovation in Partnerships Among the various forms of collaboration employed by companies, R&D collaborative ventures are a special case. They are special because the partners must be aware continually that the intent of the partnership - to carry out technological innovation - is a difficult and risky operation even for a single firm. To be successful, partners must agree to be more or less committed to the transfer and/or creation of skills, knowledge, tools, with the intent of receiving long-term economic gains from the interaction.

Perhaps the greatest challenge facing R&D partners is that they must have an on-going awareness of managing the dynamic processes of technological innovation and of managing a partnership in ways that do not contradict the intent to innovate successfully.

Nearly all of the previous research about technological innovation and inter-firm cooperation falls into two separate domains. Let’s split the problem in half, and then recombine. Experienced managers of research and development and their counterparts in academe (see the work of T. Allan, E. Roberts, M. Madique and Burgleman, or more recently the research of Taguchi and Nonaka for background work in this area) will describe a number of key factors for innovation success. Some of these include:

l a committed champion; l a project sponsor or sponsors; . clear ownership of intellectual property; . built-in flexibility (contingencies) yet appropriate

controls (milestones);

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. easy and fast communication between research groups and management.

Why do successful innovation projects depend on these factors? Of course there are others, but a review of the literature reveals surprisingly common agreement on the above factors. Taking each of these factors in turn, it is possible to see their importance.

First, an innovafion leader or champion is important because he or she is the steward who carries out an innovation from its inception to the market.

Second, a seasoned innovation manager depends on having a project ‘godfather’ or sponsor. This person protects marginal work from the financial axe when markets are consolidating, and finds the fit between long-term company goals and the goals of an innovation prolect.

Third is the question of ownership - of knowledge, of technology, of intellectual property. This is important in managing new technologies, since it relates to the value creation intention of the innovation team, and is critical to the long-term interests of a company.

Fourth, an innovation team needs both built-in flexibirify and appropriate controls to be successful in the technology creation process. Managers ask: Is there too much control or too little? Innovation flourishes in ‘skunk- works’ or processes and structures that break out of established formal processes, and yet planning is a critical aspect of innovation as well.

Fifth, the open and rapid communication between research groups and management - informally between R&D professionals, and in formal presentations to senior management - is cited as a common characteristic of innovative firms, groups and individuals.

Luckily, there is some general agreement about the key success factors of managing internal technology develop- ment projects. But notice that even though the above innovation roles and issues are quite straightforward, at times they often conflict with the logic of partnerships:

Many partnerships encounter difficulty finding a champion who is willing to work in between two R&D teams and two companies. In addition, a project champion must gain the confidence and trust of two or more R&D groups. Having a demanding sponsor in each partnering company can be like having too many parents. Yet, at the other extreme, sponsors will often confine their support to projects that remain firmly within the boundaries of one company, causing problems in a partnership. A question of ownership would make any manager think twice about participating in R&D collabora- tion; and unless clarified, can become a deeply contentious issue, especially when the joint innovation is successful.

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Built-in flexibility and appropriate controls are a sine qua non for innovation projects, and yet, the logic of partnering will lead to contracts that may limit flexibility (the parties agree to completion of phase I of project X by a specific date or will be subject to penalties!) and may confuse project control (your prototype release date is inconsistent with our current product introduction schedule!). Proper communication pathways are essential to innovation. Inter-firm communication is a major partnering task, and some partners are often required to withhold certain information from the agreement.

Roles and issues of successful innovation projects often conflict with the logic of partnerships

An on-going survey of joint innovation partnerships suggests that a number of partnership issues may impede and in some cases cancel joint innovation processes. It is important that managers accept this contradiction as a normal state of affairs in joint R&D projects, and seek to find artful ways to manage through the hurdles. It is paradoxical that most innovations occur as a consequence of informal interactions with cus- tomers, suppliers, even competitors, and yet, the systematic management of joint innovation projects among these same groups can quickly run into roadblocks.

The Innovation/Partnership Paradox Over the last several years, researchers at IMD have interviewed the senior managers of multinational companies in a variety of partnership settings. The focus of these discussions has been about the technology development intentions of the partners and the structure and processes that managers and their innovation teams employed.

To observe technology development intentions, we asked managers about several critical factors:

. stages of technical development being carried out in partnership;

. existing vs new applications of technology;

. technical/market potential perceived by the partners;

. technologies explicitly shared vs limited exposure;

. qualifications of technologists in the partnership.

By analysing these factors it was revealed that while many partners form cooperative agreements with very minor technology intentions, others see partnering as a way to achieve major breakthroughs. The character- istics of the joint innovation process can be observed in this way.

Next, to understand the structures and processes of a partnership, managers suggested that they had con- sidered several key aspects of inter-firm cooperation:

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Project supervision (partner company attributes) - sponsor relationship to champion (cross-over?) - structuring process of parent companies 1 specificity of project requirements (low for

innovation) Specific joint R&D project structure (flexibility vs rigidity) - formal structure (shared, dominant, auto-

nomous) - legal arrangement - policy level (e.g. where formal partnering rules

are set) - formality (e.g. frequency of partner meetings) Partner’s experience and intentions - joint use, separate use vs unspecified use of

results - prior experience with partnerships - relative importance of project for each partner - relative importance compared to in-house

development - risk aversity of the partners - degree of shared core knowledge

Managing Alliances Through the InnovationlAlliances Tension Figure 1 illustrates graphically the innovation/partnership paradox. Four partnerships - A, B, C and D have been mapped. Each point represents a composite of examples

1 i

drawn from our sample, drawn to reveal the innovation/ 1 alliances paradox facing partnership managers. Let’s / briefly discuss them in clusters AC and BD, and then : draw some conclusions.

Partnerships A and C Partnerships A and C represent sets of firms that intend to carry out significant innovations in their respective :

partnerships. Intuitively, senior managers seek to tighten up the partnership structures and processes commensurate with the high degree of technology development (partnership C). One computer manufac- turer suggested that they would achieve breakthrough semiconductor developments with their partner but, at the same time, they would have to create major barriers to prevent their partner from taking advantage of the shared development. Yet if we go back to our previous discussion about the key requirements of innovation, we see that it is partnership A, not C, that is more likely to achieve significant joint innovations. The tight partnership structures of C are likely to break down lines of commu~~ation, and place barriers to flexibility while favouring tight controls on joint development projects. A, on the other hand, is more likely to have a favourable innovation environment and yet, without proper management, will disappoint the project sponsors who will need a steady flow of outputs to justify their continued support.

Partnerships B and D Partnerships B and D represent sets of firms that intend to carry out minor innovations in their respective partnerships. A number of managers openly discussed projects of this nature, e.g. limited applications develop- ment, semi-contract research, flexible value-added re-selier agreements, etc. Again, relying on intuition, many managers paid little attention to partnering struc- tures and processes since they gained little from the minor modifications often made to existing products or processes. But for the sake of argument, it stands to reason that low innovation projects are more likely to benefit from very tight specifications drawn up by the partners. Why? First, the project is seeking to achieve short-term concrete adaptations, not fuzzy long-term outcomes. Second, there is a chance that partners will

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Figure 1 The innov~t~on~pa~nership paradox

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sh,tre much more technology than was planned in the 10%~ level agreement, and this sharing could cost one or both partners their competitive advantage.

WV can thus summarize that high technology develop- ment intentions require management structures and processes that guarantee successful innovation, while minor joint innovations will benefit from a more ‘con- tractual’ arrangement. Of course, there are no hard and fast rules. The purpose of the discussion thus far has been to reveal some inherent tensions that exist between the formation and management of so-called partnership agreements and the effective management of innova- tion. One fact should be clearer at this point: there is a need to systematically develop joint management struc- turcs that take into account the innovation intentions of rhe partners.

To clarify some of the issues raised above, managers / net,d

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to consider the following questions at the o&et:

How ambitious is our intended joint innovation project? What will happen to the results of our joint innovation project?

Neil partners can be sure that if they can clarify their rel‘ltive R&D ambitions, it will become clearer just how much or how little effort will be required to manage the joint innovation project.

If the results of the project will be jointly exploited, then the partnering process will need to be managed in a way that drives toward the integration of partner capabilities that are beyond the joint R&D project. If partners are working together to separately exploit the fruits of their iabl,urs, this will require an altogether different partner- ing arrangement - one that is specific enough to resolve partnering issues, while flexible enough to allow for joint innovation.

Ani research and development professional is alzrare of the high degree of uncertainty in the innovation process. Applying the proper amount and type of resources to such projects is truly an art that starts by building commitment and trust that will sustain partners through project hurdles. Collaboration can breathe new life into an R&D project that lacks critical complementary ass& such as financing or know-how. But R&D partner- ships require management processes that support innovation and continuously clarify and resolve issues in the partnership.

Perhaps it is important to revisit Archimedes. He was known, primarily, as a great mathematician and as an effective innovator, having developed the lever, the water screw, and a method for determining the amount of gold in the king’s crown (for which he declared ‘Eureka’). But equally to his credit, he formed effective partnerships to test and refine his new tools. One partnership was with the city of Syracuse to construct a giant array of mirrors that would turn away conquering ships. To achieve this feat he declared: ‘Give me a place to stand and I wiI1 move the Earth.’ If innovative com- panies intend to develop new products in the context of cooperative agreements that wiil help them defend their markets against invading conquerers, they will need to find a place to stand their ground. When in an alliance, managers are likely to find solid ground in between their innovation intentions and their partnership management practices.

THOMAS CUMMINGS, Research Fellow, IMD Jnter- ?zutionul, 23 chemin de Bellerive, 1001 CH Lausanne, Swit.zerland

Thomas Cummings is currently a Research Fellow at JMD Jnfer- ~z~t~on~r. He is the co-founder, wifh Prof.

Francis Bidaulf, of the IMD Workshop on Business Alliances, a co-principal investigator in the JMD Manufacturing 2000 research project on Techno- Jogicul lnnov~tion through Corporate Alliances, and a p~~ici~nf in Ei~reku Project EU-3~ff, formed with IFL in Sweden and JESE in Spain to improve cooperative R&D nzanagement practices in Europe, Before joining IMD, Mr Cummings was a partner with the Technology Resources Group and a consul- tant for the Center for Strategy Research, ~Rrnb~dge, M~s~chl{setts. Prior to that he ~Jorked with North Atlantic Associafesllndivers in Amsterdam, the Netherlands. Mr Cummings was selected as the 1990-92 Jnternational Wavin Fellow at the Univer- sity of Twente in the Netherlands. he is currently a PhD candidate at the University of London, lrnpe~a~ College, and has degrees from ~ij~~rude in the Netherlands, and the University of Pugef Sound in the USA.

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