Strategic Alliances for Innovation Exploiting and Exploring in Turbulent Times Master Thesis Strategic Management By Josse Dorleijn Strategic Alliances for Innovation Exploiting and Exploring in Turbulent Times Tilburg University Faculty of Economics and Business Administration Master Program Strategic Management Subject Master Thesis Name Josse Dorleijn Student number 863932 Date March 2010 Supervisor Tilburg University prof. dr. G.M. Duijsters Supervisor internship D.P.M. Maessen MMC, CMC Reader drs. S.H.J. van den Hoogen 1 PREFACE This thesis is the final assignment for my master ‘Strategic Management’ at Tilburg University. After 6 months of work, it is finally done. It has been a difficult and sometimes stressful process, however, a very educational and satisfying way to end my wonderful time as a student in Tilburg. The topic ‘alliances for innovation’ was chosen because innovative products have always fascinated me. Especially the way that existing technologies from distant industries can sometimes be combined rather easily and still generate a fabulous new product. Famous examples of this on the Dutch market are the Senseo, which was developed by an alliance between electronics company Philips and coffeemaker DE, and the BeerTender which was developed by Heineken and Krups. These products were so successful that similar alliances for innovative product development are also referred to as ‘The Senseo Effect’ (Griffioen, 2008). I would like to use this opportunity to thank a few people that helped and supported me with writing this thesis. First, I would like to thank my colleagues at SDG for providing an exceptional stimulating and comfortable working environment and for introducing me to the business consultancy world by filling me in on all sorts of strategic business projects. Especially I would like to thank Denis Maessen for supervising my work and allowing me to make use of the network of associates of SDG. I would like to thank all the participants of the interviews for telling me all about their company’s strategy. Also my dad needs be thanked for being there as a discussion partner and for reviewing my work. In addition, I want to thank Kirkman Company for providing me with a management traineeship even before this thesis was finished. Whom I cannot forget are all my friends from TSVV Merlijn, ESN and ‘Het Konijnenhok’ who were always there when I needed some distraction. Last but not least, I want to thank prof. dr. Duijsters for inspiring and supervising me to the final product that is in front of you. I hope you enjoy reading it! Josse Dorleijn Tilburg, March 2010 2 MANAGEMENT SUMMARY Strategic alliances are increasingly seen as the future of innovation strategy. No matter how large companies are, they show a tendency to develop a major part of innovations outside the company walls. While on one hand the world needs to be explored for brilliant innovations, at the same time, businesses are struggling to keep their heads above water. This study integrates these two issues by combining strategic alliances with ‘ambidextrous innovation strategy’: the simultaneous pursuit of exploitative and exploratory innovation. The following research question was formulated: What are the key dynamics of ‘ambidextrous innovation’ and how can strategic alliances be used in this innovation strategy? To answer this question a theoretical model is created and empirically cases were examined. A theoretical model is built, beginning with the identification of three business environmental forces: technological change, competition intensity and institutional uncertainty. Organizations need to adapt to the business environment by pursuing both exploitative and exploratory innovation, also called ‘ambidextrous innovation’. In a stable environment a major focus should be on exploitative innovation while in a highly turbulent environment a major focus needs to be on exploratory innovation. This way, the environmental forces determine to what extent these innovation types need to be pursued. However, innovation can be developed by ‘make, buy or ally’ strategies. While the majority of organizations used to develop all their innovation in-house, organizations increasingly develop innovations through forming strategic alliances. This ‘ally’ strategy is proposed to outweigh ‘make’ or ‘buy’ strategies. The research examines how different types of strategic alliances are able to complement internal innovation strategies. In order to empirically validate the proposed theoretical model, nine case studies were performed. The cases provide all different and interesting perspectives on how alliances can be used for the purpose of innovation. The most important findings were that even though there is wide support for organizations pursuing a focus strategy, it is found that organizations pursuing both exploitative and exploratory innovation perform better, as long as the firm is organized appropriately. In addition, the business environment should not be seen as either stable or turbulent. Instead, environmental forces need to be treated separately. Organizations should adapt to high technological change by pursuing mainly exploratory innovation, while they should adapt to high competition intensity by pursuing mainly exploitative innovation. This way, innovation strategy needs to be determined according to company specific environmental forces. Besides, the value of strategic alliances for developing innovation is confirmed by the research. The companies preferred alliances over ‘make’ or ‘buy’ strategies. The main reason for this is that alliances can be used to complement internal innovation strategies that are incomplete. Even though alliances were expected to be used as a tool to integrate mainly exploratory innovation, a remarkable finding was that mostly exploitative innovation is pursued in alliances. Furthermore, it was expected that alliances would have a focus strategy on either integrating extra marketing/production activities or integrating extra R&D activities. However, the experience was that in the ideal alliance, both types of activities are pursued. While many studies stop after providing theoretical solutions, this study wants to make sure that the theoretical model can be applied effectively by business managers. Therefore, practical and comprehensive recommendations have been formed which integrate the most successful alliance strategies that were found during this research. 3 TABLE OF CONTENTS Chapter 1 Introduction ...................................................................................................................... 6 Innovation in turbulent times ........................................................................................................ 6 Innovation explained ............................................................................................................................ 6 Ambidextrous innovation ..................................................................................................................... 7 Collaborating for innovation .......................................................................................................... 8 Strategic alliances ................................................................................................................................. 9 Main research question ................................................................................................................. 9 Research sub-questions ................................................................................................................. 9 Structure of this report ................................................................................................................ 10 Chapter 2 theoretical framework ..................................................................................................... 11 Environmental Forces .................................................................................................................. 11 What environmental forces do organizations have to deal with? ..................................................... 11 Innovation ................................................................................................................................... 13 How can innovation be used to adapt to changing environmental forces? ...................................... 13 Knowledge sourcing process ........................................................................................................ 18 Absorptive capacity ............................................................................................................................ 18 Make, buy or ally? ....................................................................................................................... 20 Make ................................................................................................................................................... 20 Buy ...................................................................................................................................................... 20 Ally ...................................................................................................................................................... 20 Strategic alliances ........................................................................................................................ 24 How can strategic alliances be used for exploitative and exploratory innovation? .........................