Collaborating to innovate: balancing strategy dividend and transactional efficiencies

Abstract

When a firm collaborates with its suppliers, it expands its access to external know-how, and thus, can enhance its innovation outcomes. However, such partnerships also expose it to various transactional hazards including knowledge spillovers and opportunism appropriations. The trade-offs are also underscored by whether the collaboration complements the firm’s strategic resources and directions deployed to yield a strategy dividend. Recent accounts suggest the verdict on supplier collaborations is noisy. Reports indicate buyer-supplier perceptions of these collaborations do not align on the key issues of governance, strategy, and value generation. We study co-development contracts of a sample of high-tech original equipment manufacturers that collaborated with suppliers from 1985 to 2016 and show that misalignment between a firm’s co-development contracts, strategic capabilities, and positioning strategy significantly erodes its innovation outcomes. This suggests that blanket prescriptions for one or the other types of contracts may be misdirected. Valuation Insight: Innovation performance is a key element contributing to firm value, and product co-development collaborations of original equipment manufacturers with suppliers are common. These collaborations provide access to external know-how but also allow proprietary firm knowledge to spill over or be appropriated. Thus, the net impact of these collaborations on firm value is uncertain. For a sample of original equipment manufacturers collaborating with suppliers, misalignment between governance form, strategies, and capabilities is responsible for the cases in which innovation performance is disappointing.