Inter-company networks for jointly developing innovative products: Configuration and current examples from German industry

Term Paper, 2008

28 Pages, Grade: 1.7

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Table of Contents

1 Introduction

2 Overview of Networks
2.1 Changing business conditions and the need for collaboration
2.1.1 Shift to Open Innovation Paradigm
2.1.2 Changes in Organizational Structures
2.1.3 Collaboration as a Response
2.2 Defining Networks

3. Inter-Company Networks
3.1 Networks of Innovation
3.2 Inter-company Networks
3.3 Development Process of Inter-Company Networks
3.4 Benefits and Barriers

4 Concept of Network Configurations

5 Examples from the German Industry
5.1 Interactive Video Services Stuttgart
5.2 Biotech Region Martinsried/Munich (BRM)
5.3 Other Examples

6 Conclusion



1 Introduction

In the foreword to Henry Chesbrough’s book on Open Innovation, John Seely Brown, Director Emeritus of Xerox PARC, emphasizes the need to be innovative in the area of innovation itself by calling the foreword as “Innovating Innovation”. Rapid technological advancement catalyzed by globalization has resulted in stellar economic growth worldwide. The chances and challenges posed by these changes are central to the need expressed by John Seely Brown. In response to this need to find new ways of innovating products, network form of organizations has appeared encompassing the collaborative activities between organizations. Academic community, industry and government bodies have realized the importance of these so-called innovation networks. The initiatives for inter-company networks are identified by the government as important measures for regional and national-level economic development. With the increasing number of inter- company networks, researchers are attempting to find a pattern within them by performing empirical and statistical methods. This paper in context of the German industry, tries to explore the theoretical aspects of inter-company networks and their types (network configurations).

For this purpose, firstly, the paper provides an overview of networks by explaining how changing business conditions resulted in an increase in collaborative activities between organizations, which in turn lead to the formation of networks. The focus is then on inter- company networks - its development process and related aspects. Next, the concept of network configurations of inter-company networks is explained. Finally, selected examples from German industry are analyzed against the above mentioned theoretical aspects.

2 Overview of Networks

2.1 Changing business conditions and the need for collaboration

2.1.1 Shift to Open Innovation Paradigm

Innovations, in simple terms, are inventions implemented and taken to market. They can be either new products/services or processes aimed at providing the users with better functionality and/or reduced costs than the existing ones. Successful innovations not only rejuvenate the revenue streams of a firm, but also ensure that the firm continues to grow or at least sustains itself. On the other hand, failed innovations or no innovations at all can question the existence of the firm. With the underlying potential to create, sustain or disrupt, the occurrence of innovations in a firm could not be left to chance. This demands systematic planning and implementation of innovations within a firm.

With the embracement of the concept of innovation by the academic community since early 20th century, the industry depicted a systematic approach to innovation. However, in the last couple of decades, the impetus for innovation within industry has intensified and has become more far-reaching than before. This can be attributed to the ongoing integration of the world economies expressed by the phenomenon of globalization, which on one hand has opened up an array of business opportunities for the firms and challenges on the other (Tiwari, 2007:3). Ascribed to the disadvantage faced by the firms in developed or industrialized nations to compete with the low-cost producers from the emerging markets, the competitive advantage for these firms has predominantly become innovation-driven (Tiwari(2), 2007). Additionally, the steeper technological advancement following the World War II and the ever increasing market competition have led to reduced life cycles for products and services. This collectively, in turn coerced the industry and thereby the academic community to come forward with better and faster ways of innovating.

The process of finding these better ways to innovate resulted in shifting of the innovation paradigm, ascertained by Henry Chesbrough (Professor at University of California, Berkeley), and evinced by him as shift from the closed innovation paradigm to open innovation paradigm. Closed innovation describes the paradigm of innovation persistent predominantly in the post-war (after World War II) period, wherein the innovative firms relied entirely on their own ideas and restricted the use of its inventions to a single internal path to market (Chesbrough, 2003:19). In contrast, open innovation implies that the source of valuable ideas for a firm can be from both outside or inside the firm’s boundaries and the firm’s inventions can be taken to market using either internal or external paths (Chesbrough, 2003:43). The possibilities include licensing, spin-offs, joint ventures, lead users, involvement of internet communities, etc.

The authors of this paper have found internet communities of particular interest, as this typically means user involvement in the innovation process. What is more interesting, however, is that some companies seem to start a new trend in open innovation – setting up internet portals and asking not (only) the users, but particularly companies to join their innovation efforts (refer to Siemens Medical Systems example).

In short, in today’s world, the adoption of a more “open” approach to innovation enables the firms to bring new products and services faster to market and/or remain cost- competitive, thereby enabling sustenance of the firms’ competitive advantage.

2.1.2 Changes in Organizational Structures

Another important aspect looking back in history is that approximately two decades ago firms started facing “organizational revolution” (Miles and Snow, 1992:53) - an internal structure change due to changing business conditions (increasing global competition, shifting patterns of international trade and rapid technological change) (Miles and Snow, 1986:62-64). As a response, firms tended to be more dynamic and smaller. New companies, especially in emerging industries, like biotechnology, have from the beginning been flat and lean. Other companies in so-called mature industries (oil, steel, textiles) started downsizing. They tend not to have the departments which are not performing well, and focus instead on their core competencies (Miles (1989:14-15); Miles and Snow (1986:64)).

The important notion in discussing organizational changes is that very often, instead of one complex organization with vertically integrated departments, there appeared a number of organizations teamed up in a value chain. For example, a product would be developed by a team comprising of the parent company, suppliers and probably allied companies in multiple locations. (Miles, 1989:14,17)

2.1.3 Collaboration as a Response

The implication of the above mentioned changes was the need for collaboration with other firms. Firms desiring superior innovation performance focus their collaboration efforts on strategy, organization and collaborative capability development instead of limiting themselves to the outsourcing mindset (MacCormac et al., 2007:1-3,16). Such collaboration between firms and their partners can occur at different stages of the value chain. The majority of the research literature is found to discuss collaboration in R&D stage, which supports the reasoning that firms are increasingly looking for external source of ideas as mentioned above. They try to focus where they have comparative advantage and act in a coordinated manner to bring innovations to the market (MacCormac et al., 2007:3, Perks and Jeffrey, 2006:67-68). Essentially, collaboration in R&D, or jointly development of new products, suggested some benefits to companies. However, there also exists literature discussing collaboration in supply chains, manufacturing (See Krajewski and Wei, 2001; Shi and Gregory, 1998; Ruderg and Olhager, 2003), and probably other stages in the value chain.

2.2 Defining Networks

The engagement of firms into collaborative activities with other organizational entities involves interactions between them. Blois (1972) describes these interactions in terms of “relationships”, since 1) the firms themselves tend to see their interactions as relationships and 2) that over time the interaction results in a quasi-organization which can be termed as a relationship. (cit. op. Håkansson and Snehota, 1995:25) Thus, relationships can be described as “mutually oriented interaction between two reciprocally committed parties” (Håkansson and Snehota, 1995:25). It is also argued that single business relationships are part of a larger whole indicating interdependencies between them. Interdependence between relationships here implies that things happening in one relationship have effect on other relationships, which highlights the connectedness of these relationships (Håkansson and Snehota, 1995:17). This suggests an aggregated structure or a form of organization, which is qualified by Håkansson and Snehota (1995) as a (business) network. Such understanding of network is also reflected by Lechner and Dowling (1999:312), where they provided definition of network as: “a specific set of links between a defined set of actors with the characteristic that the links as a whole may be used to interpret the social behavior of the actors involved.”

The concept of network can be visualized in Figure 1 in Appendix. As shown in the diagram, a network consists of actors connected by relationships. Actors can be individuals/teams/departments within organizations (for the purpose of this work they are not discussed further), firms, research institutions or universities. Networks often need facilitators, which play pivotal role in the formation and sustenance of the network. The function of facilitator is assumed by either actors themselves (refer to DHL Innovation Network and Siemens Medical Systems examples) or government agencies (refer to Biotech Region Martinsried/Munich and Interactive Video Services Stuttgart examples). Relationships are links between the actors and represent the interactions between the network partners. The complexity of the relationships is best described by Håkansson and Snehota in their book “Developing Relationships in Business Networks” (1995).

3. Inter-Company Networks

3.1 Networks of Innovation

The formation of relationships with other firms in the network creates potential for innovations by providing access to external capabilities and expertise (Bönte and Keilbach, 2005:1). Naturally, this potential is not always realized. Sometimes companies are not successful in capturing it, and sometimes networks simply fail before innovation is generated. Innovations for a network participant can result either as a positive externality of participation in the network and/or by the attainment of explicit network objectives.

The term innovation networks is used quite often by the academic community while referring to networks of organizations, however, it is not clear as to what relation(s) between the network and innovations allow to qualify it for this term. As mentioned above, the network’s relation to innovation can be different.

Furthermore, on review of scientific literature a clear and authoritative definition of innovation networks seems to be non-existent. However, researchers in this field have made attempts to construct their own definitions. One such definition is provided below: “Innovation networks can be understood as all organizational forms between market and hierarchy which serve for information, knowledge and resources exchange and which help to implement innovations by mutual learning between the network partners”. (Fritsch et al., 1998, cit op., Koschatzky et al., 2001:5)

For the purpose of its own reference, Forfás (2004:1-2) defined “innovation networks” as independent groups of institutions and/or companies that are:

- “Collaborating and competing;

- Geographically located in one or several regions nationally;

- Specialized in a particular field, linked by common technologies and skills;

- Either science-based or business related;

- Either formal or informal.”

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Inter-company networks for jointly developing innovative products: Configuration and current examples from German industry
Hamburg University of Technology
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Inter-company, Configuration, German
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Mahipat Ranawat (Author)Paulius Armonaitis (Author), 2008, Inter-company networks for jointly developing innovative products: Configuration and current examples from German industry, Munich, GRIN Verlag,


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