Cooperation Between Established Firms and Startups in Order to Address Technological Discontinuities


Master's Thesis, 2014
125 Pages, Grade: 2,3

Excerpt

TABLE OF CONTENTS

1 INTRODUCTION

2 LITERATURE REVIEW
2.1 Conditions of incumbents and startups
2.1.1 Challenges of startups
2.1.2 Challenges of incumbent firms
2.2 Interfaces between incumbents and startups
2.2.1 Challenges associated with cooperation
2.2.2 Benefits associated with cooperation
2.3 Types of cooperation
2.3.1 Corporate Incubator
2.3.2 Corporate Venture Capital Firms
2.3.3 Non-equity relationship

3 METHODOLOGY

4 RESULTS
4.1 Survey of startups
4.2 Survey of incumbents
4.3 Limitations

5 DISCUSSION
5.1 Managerial Implications

6 SUMMARY

REFERENCES

APPENDIX I

APPENDIX II

TABLE OF FIGURES

FIGURE 1 Interaction between startups and incumbents as orientation of the literature review

FIGURE 2 Specific challenges that startups and incumbents face

FIGURE 3 Governance costs as a function of asset specificity

FIGURE 4 Distinguishing characteristics of forms of transactions

FIGURE 5 Analysis of corporate incubator relationships regarding the resource-exchange

FIGURE 6 Characteristics of the transactions associated with corporate incubators

FIGURE 7 Analysis of CVC relationships regarding the resource-exchange

FIGURE 8 Characteristics of the transactions associated with CVCs

FIGURE 9 Analysis of non-equity relationships regarding the resource-exchange

FIGURE 10 Characteristics of the transactions associated with non-equity relationships

FIGURE 11 Participated incumbents in the three forms of cooperation

FIGURE 12 Impact of technological discontinuities on the startups´ capabilities

FIGURE 13 Characteristics of startups that determine commercialization

FIGURE 14 Startups´ conditions that influence the cooperation and the impact of this interaction

FIGURE 15 Criteria that determine the decision-making of startups regarding the selection of incumbent partners

FIGURE 16 Startups´ assessment of the cooperation and future potential

FIGURE 17 Characteristics that determine the innovation activities of incumbents

FIGURE 18 Incumbents´ conditions that influence the cooperation and impact of this interaction

FIGURE 19 Criteria that determine the decision-making of incumbents regarding the selection and termination of the cooperation with startups

FIGURE 20 Incumbents´ assessment of the cooperation and future potential

FIGURE 21 Guideline that may assist firms during the cooperation and adaptation process

1 INTRODUCTION

The world economy has become more and more open and dynamic in recent years. This is mainly based on the achievements of globalization and the Internet. As a consequence, the development of prototypes as well as market entries are easier then ever before. In the following, the diffusion of products can be done faster due to the global access to markets. However, this progress also results in technological discontinuities. Consequently, environmental uncertainty is also increasing. This means that no dominant design exists and that several products are competing in order to become the product-class standard (Tushman and Anderson, 1986). The rapid development cycle of technologies and the following discontinuities change the nature of this competition. As a result, obtaining and maintaining of a competitive advantage require fast innovation in products and processes (Bettis and Hitt, 1995). Due to this evolution established firms often find themselves in desperate straits (Rothaermel, 2002). In times of market equilibrium, incumbents are profiting from their product or process innovations. However, given that it is simply a matter of time before new innovations are introduced the competitive advantage of incumbents can be lost (Rothaermel, 2000) Thus, an adaptation to the changes is required. With this comes the question of how to adapt especially in terms of designing innovation procedures. There are basically two options to initiate and execute an adaptation process. This can be either an internal opportunity whereby the firm focuses on the in-house resources and capabilities or, alternatively the external way whereby outside sources are used to acquire the necessary resources. The former comes along with the complete integration of all value-added activities in extreme cases. However, due to the broad spectrum of capabilities it is quite costly and not really necessary to integrate all required complementary assets. Conversely, the external perspective involves for instance contractual relationships with suppliers, fabricators and service providers that provide the required resources (Teece, 1986).

In this paper the focus is on the external view that comes along with cooperation. Therefore, there are not only different market players considered but also companies at various stages of business development. These are on the one hand established companies, so called incumbents and on the other hand new entrants, which are startups. Naturally they interact with each other. This interaction can be basically characterized by competition, cooperation and no direct interaction where they operate in different markets. This thesis puts the focus on the cooperation and use of synergies between incumbent firms and startups in order to address technological discontinuities.

By doing so, the cooperation can take different forms. This paper emphasizes three types of cooperation between new and established firms, which are related to corporate incubators, corporate venture capitalists and non-equity relationships.

In addition to highlighting the cooperative interaction another focus is put on information and communication technologies. It could be observed that during globalization more and more industries were shaped by those new technologies for instance in logistics and communication (Bettis and Hitt, 1995). This leads to the result that almost every industry faces the situation of being revolutionized (Hamel, 1998). At the same time industries are becoming more interdependent. This means that firms need the know-how and innovations in different domains to be competitive. The associated costs for those operations across sectors as well as lower amortization costs due to faster technological changes require action beyond firms´ boundaries (Narula and Hagedoorn, 1999). Furthermore, interaction is not only going beyond firm and industry boundaries, but activities are also being extended over several markets while strategic cooperation is internationally taking place especially in the telecommunication and computer industry (Teece, 1986).

Associated with the gradual penetration of new technologies and digital solutions approaches across industries, established firms increasingly make use of the new opportunities related to digitization. These information technologies (IT) are often driven by young and innovative enterprises that specialize in digital goods and virtual services and seek for improvements of current solutions. Nevertheless, IT cannot autonomously create value. In the end it is always related to goods and commodities. Therefore the production is still fundamental. Advantages in manufacturing are especially effective when imitation of the technology becomes easier. In that case capabilities, which are related to manufacturing, can make the competitive difference (Teece, 1986).

Based on that it is assumed that the connection of manufacturing, which is usually undertaken by incumbents and IT that is developed by startups can yield high synergies. As a consequence, this merger of the manufacturing industry and information technologies may be considered to be a solution approach for future innovations.

Prior studies agree that adaptation is necessary in times of technological change. Thereby the cooperation between established and emerging firms may be one way for adapting. In addition to that, the target of the paper is to provide insights into specific forms of cooperation between startups and incumbents. Therefore a literature review forms the basis of this paper. In doing so, it is described how technological achievements and startups promote discontinuities, which can challenges established companies. Furthermore, this interaction between the market players is considered in greater depth. Based on the synergies among young ventures and incumbents the cooperation perspective is emphasized. However, challenges are also associated with this type of interaction. Finally, three forms of cooperation are considered. The following visualization shows the described structure regarding the line of argumentation that characterizes the subsequent section.

FIGURE 1 Interaction between startups and incumbents as orientation of the literature review

illustration not visible in this excerpt

In addition to the literature review an analysis takes place that identifies the opinion and evaluation of the target group that is involved in this type of interaction. Based on these empirical results implications for executives are presented. These should be useful to take into account the main issues that are, for example, related to the identification of appropriate cooperation partners, the management of challenges in times of technological discontinuities and finally the commercialization of novel products and services.

2 LITERATURE REVIEW

The following review of literature moves from a more abstract to at more precise perspective in relation to the overall topic. Put another way, the environmental conditions in which firms are operating are considered first. Therefore, technological progress that also comes along with discontinuities is emphasized. This change may have different associations with new and established companies. Thus, their firm-specific challenges, which are also related to their level of business development, are taken into account. These considered obstacles serve in the end as a basis for the examination of cooperation forms and their contribution to the firm-specific and environmental issues. However, before attention is directed to partnerships between startups and incumbents this cooperation is brought into the context of possible interactions. By doing so, the driving factors with regard to the choice of the cooperation strategy are highlighted. Subsequently, specific cooperation forms of corporate incubators, corporate venture capitalists and non-equity partnerships, which are related to new and established market players, are analyzed more in-depth.

Nevertheless, before previous research is taken into account an explanation of the two market players, incumbent and startup, is given. An incumbent firm is already present and offering its value proposition in a market. If this market is characterized by heterogeneous goods which are produced by different firms, incumbents are essentially in a superior situation compared to entrant firms based, among other things, on their advanced experience, reputation, market contacts and transacted sunk cost investments (Black et al., 2012). Nevertheless, especially in times of disruptive innovations established players can be challenged by new entrants, which may significantly influence the evolution of industries (Singh and Mitchell, 2005). These entrants are either companies that have been started from scratch or firms, which have already been operating in other markets before and want to expand to new markets (Black et al., 2012). The following paper refers to the understanding of an entrant that began its entire enterprise recently. This is also associated with the meaning of a startup and young venture, which is used synonymously in this work.

2.1 Conditions of incumbents and startups

Based on these explanations it is particularly interesting what the conditions are that incumbents and startups face. It can be assumed that these are different due to the distinct stages of business development. However, when both are operating in industries with technological discontinuities they face similar environmental influencing factors. Consequently, more specific characteristics of technological discontinuities are considered to better understand the environment in which startups and incumbents are positioned. Afterwards the specific obstacles of entrants and established firms, which are often also related to the discontinuities, are taken into account as well.

All of the developments in information technology resulted in an organizational environment that is characterized by richness of information and communication opportunities (Bettis and Hitt, 1995). In particular the Internet contributed significantly to this progress. For instance, it brought with it online technologies that enable access to product diversity and consequently makes it easier for users to compare these products and prices (Finkelstein, 2001). On the one hand, that results in higher transparency but on the other hand means that customers are becoming more price sensitive, which can lead to increasing competition. This may be yet further reinforced by that fact that increased knowledge intensity in industries as well as the global diffusion of technologies by firms led to decreased barriers of technology diffusion. Consequently, the pace of diffusion and the speed of technological change increased rapidly in the last decades. Hence, firms are being called to acquire competencies and technologies faster and more frequently (Bettis and Hitt, 1995). Moreover, this also requires more renewals of products and strategies because of the lower life-cycles of technologies. However, incremental advancements are not sufficient. In today´s world, which is also described as the “new economy”, non-linear strategies and innovations are necessary to face competition. By doing so, the whole business environment must be brought into question in order to adapt to changes in industries (Hamel, 1998). This does not only refer to the stakeholder in the industry itself because it can be assumed that borders between industries are getting more and more fluid due to the increasing diffusion of information and communication technologies. Established firms that operate in this industry have to deal with two certain influencing factors, which determine competition. Besides the Internet, these are also wireless technologies such as mobile telephony. Following these technological advances novel areas for business activities emerged, which are, however, also associated with new kinds of necessary capabilities (Maula et. al., 2013). This is, for example, supported by the fact that hardware was the key component that added value to technologies in the last century. However, today software is crucial in several applications and many industries (Bettis and Hitt, 1995).

This already shows that technological change is not just a matter of speed. It is also relevant what kind of novel technologies are introduced to the market and what effects they have. By doing so, Tushman and Anderson (1986) distinguish between discontinuities that either enhance or destroy existing competencies. Competence-enhancement means that the innovation builds upon capabilities that are already in place and, by doing so, increase the attractiveness and efficiency of the firm´s existing competencies. In contrast, competence-destroying discontinuities are associated with changing requirements so that existing competencies are no longer able to make a contribution to the innovation in an extreme case. This is also being referred to as the disruption of the industry (Abernathy and Clark, 1985). Those disruptive innovations that result in competence-destroying discontinuities are mostly driven by new companies. Conversely, established firms are mainly the initiator of discontinuities that are related to competence-enhancements (Tushman and Anderson, 1986). With this in mind, established firms try to build on their present capabilities in order to maintain their competitive advantage. By contrast, entrepreneurs are looking for the chance to place their new enterprise in the center of technological discontinuity and consequently exploit this. Therefore, the Internet especially affects knowledge-intensive industries, because information is the key factor for value-creation in the associated markets and can be more easily transferred via the Internet (Afuah and Tucci, 2003).

Followed by the prior descriptions it can be noted that the proceedings in the telecommunication and computer technology have an impact on all organizations (Bettis and Hitt, 1995). In addition to that, even if organizations and individuals have an increased and simplified access to information certain hurdles are still present. Although the product diffusion is facilitated through the technological achievements, adequate resource endowments are still necessary in order to introduce the value proposition to different markets. Thereby, strategic partnerships are often inevitable and are also increasingly used for R&D activities (Narula and Hagedoorn, 1999).

Before synergy effects between startups and incumbents can be considered, their specific characteristics and the associated challenges should be examined. Additionally, the question must be asked why there is a correlation between the stage of business development and the initiation of either competence-destroying or competence-enhancing discontinuities. To explain this phenomenon the strengths and weaknesses of startups and incumbents are taken into account as well. This serves as a base to evaluate how they can contribute to the particular circumstances of the respective party.

The assumption that the mentioned achievements and discontinuities of technologies also present companies with challenges is the starting position of the following examination. These are related to both entrants and incumbents. To specify this argumentation, startups that are more or less in the early stages of business development and face certain hurdles are considered first. Afterwards, established firms with a typically longer history are taken into account when considering the specific obstacles that they have to overcome.

2.1.1 Challenges of startups

Due to their young history new ventures face certain issues. In most cases a resource base has yet to be developed by the entrepreneur. In order to do so, the required resources must be identified, attracted and developed. Associated with that arises the question of make or buy. Thereby the answer is related to the access and the costs of these resources (Brush et. al., 2001). This is especially important because the innovator has to create a value proposition out of the technology, which requires specific capabilities and complementary assets. Nevertheless, based on the small size of the new venture, lower level of market experiences, scarce resources and necessary investments, the commercialization is the main challenge of the startup (Gans and Stern, 2003). Hence, the startup may struggle with the proof of concept, which may be related to both the technological realization, and the validation of the market demand.

Startups that build up their business and offer their value proposition online make the access to the product or service less tangible for customers. Consequently, the means by which they approach customers and the creation of trust is especially important and also costly. This is also associated with the development of necessary capabilities, which refers to value chain activities like procurement, distribution or customer service. The latter is particularly essential for building a relationship of trust. One of the main challenges that is related to the business development of startups is the achievement of efficiency as well as scaling of the business model which is often underestimated in advance (Finkelstein, 2001). Regarding this, a potential interface with other market players like incumbent firms comes into mind.

But they are often also dependent on established enterprises when it comes to complementary assets, which are necessary for the commercialization of their technology (Rothaermel, 2000). This dependence can be a threat because startups are often unable to protect their new value proposition and thus barriers to entry in that domain are missing (Finkelstein, 2001). This is made more difficult by the fact that contract negotiations are complicated in the case of technological change where no dominant design is foreseeable (Teece, 1986). Consequently, it is challenging for the startup to convince potential incumbent partners to put their faith in their new technology.

This provides the impression that established firms are placed in an advantageous position. However, more factors must be taken into account, which are, for instance, related to the issues that incumbents have to deal with. Let us now consider these issues in more detail.

2.1.2 Challenges of incumbent firms

While established companies have already passed through the ups and downs of the earlier stages of business development, this is not to say that they do not face any challenges. Quite the opposite, when firms mature they often struggle with certain problems.

These are mainly associated with their developed comfortableness. This behavior leads to inadequate response and adaptation to new environments, which are brought by disruptive innovations (Braganza et. al., 2009). In many cases incumbents do not recognize the potential of new technologies, which can serve as substitutes to existing ones (Ehrnberg and Sjöberg, 1995). Such technological discontinuities are in many cases challenging incumbents because they do not have the willingness or ability to respond to these changes. This can be reasoned by inertia that it is related to the organization. Consequently, the established firm does not provide appropriate resources, which would be necessary to react to the new criteria that determine performance and competition (Bergek et. al. 2013). Instead, incumbents usually continue with the activities they have undertaken in the past and where they have aggregated competencies. Although performance increases in the short run based on the developed capabilities, the motivation to be concerned with new technologies decreases. Their previous track record results in the narrowing down of search activities to only include the competencies that enabled previous success and by doing so limits organizational learning (Levinthal and March, 1993). As a consequence of this discouragement of risk-taking, incumbents will lose the initial creativity and begin to only develop mainly incremental innovations. The existing core capabilities and processes support those developments. But the knowledge and procedures that enabled the past success of the incumbent can become obsolete in times of technological change (Braganza et. al., 2009). Besides the internal perspective of matured organizations, the related ecosystem and market players must also be considered. Incumbents are involved in established networks with various stakeholders like investors, customers and suppliers. These ensured the success of their previous track record but in times of radical innovations it may result in inflexibility (Hill and Rothaermel, 2003). Organizations that possess a certain market power are able to influence the environment to their favor and do not necessarily have to adapt to external circumstances. Nevertheless, these missing capabilities in adaptation will most likely result to overextension when unfamiliar forces appear during changes (Levinthal and March, 1993).

The mentioned challenges incumbent enterprises have to deal with mainly result from their path dependence. Even though matured firms have an accumulated base of knowledge and experience, they cannot act independently of their past activities in the future. As a consequence, established companies often make use of existing capabilities in order to create a new value proposition. Therefore the developed products are often similar to previous ones what comes a long with a coherent diversification of firms. Otherwise, firms would probably fail to introduce new products into unknown markets because the necessary knowledge for that is out of their range (Teece et. al., 1994). As a consequence, organizations focus on learning that is closely related to existing knowledge because this yields immediately the highest performance benefits. Based on the fact that diverse expertise determines the innovativeness, established firms struggle with entering domains that are out of their current business (Cohen and Levinthal, 1990). Hence, they will lack the ability to create radical innovations in the future and therefore fear the loss of their competitiveness. This is yet further exacerbated because they lose contact with future technologies that cannot really be caught up later. This is associated with the observation that it needs a specific amount of time to build up a defined level of knowledge. It is not possible to acquire the same level in less time by increasing the efforts in the learning accumulation. This principle is labeled “time compression diseconomies” (Dierickx and Cool, 1989) and presents another challenge for incumbents in times of technological opportunities, which are driven by other leading players.

To sum up, incumbents mainly focus on their strengths but neglect their weaknesses. As a consequence, they do not recognize novel opportunities, which are becoming threats for them in the future. When there is an increasing threat posed by entrants that are introducing products similar to the cutting-edge technologies of incumbents, they feel incited to innovate. Consequently they achieve increases in growth (Aghion et. al., 2009). However, the real threat is related to startups that introduce innovative value propositions, which are further away from incumbents´ technologies. This is yet further reinforced in industries that are characterized by discontinuity because these often favor new entrants to rise to a leader position in the market. Conversely, the performance of incumbents is decreasing compared to their previous key figures. One explanation for that is that incumbents have difficulties to offset the knowledge accumulation that is associated with the radical innovation and already undertaken by the entrant (Hill and Rothaermel, 2003).

All these facts lead to a high vulnerability regarding new entrants, which are seeking to revolutionize the industry. This threat is especially present because incumbents´ strategies are becoming more similar and consequently reduces the differentiation of established firms (Hamel, 1998). In the following, the questions of how to differentiate from competitors and how to deal with the risk related to newcomers are raised.

In order to have a starting point for the evaluation of the contribution by cooperative approaches the following overview gathers challenges of both parties, established and new firms.

FIGURE 2 Specific challenges that startups and incumbents face

illustration not visible in this excerpt

Following the previous explanation it can be stated that there is a need for adaptation to changing environments. Associated with that, both new and established firms have to be in order to deal with their respective obstacles. By doing so, it can be stated that the simultaneous exploitation of existing capabilities and the exploration of new opportunities is the overall challenge of market players. Furthermore, the specific obstacles that were mentioned before are mainly associated with the competitive perspective. Hence, it becomes obvious that incumbent and startup firms do not exist independent from each other. The challenges and characteristics give already an idea of potential synergies. Thus, the interfaces and interactions between both market players are considered in the following. In addition to that, it is examined if the cooperation between incumbents and entrants can be a solution approach for the specific hurdles.

2.2 Interfaces between incumbents and startups

It can be noted that the environment of organizations is influenced by technological change. Nevertheless, such discontinuities can be considered on the one hand as threats but on the other hand it can also be utilized as opportunities for firms (Tushman and Anderson, 1986). It is always a question of how to deal with these factors. Therefore, companies can tackle the situation alone or through interaction with others. Concerning this, the different options are considered in the following. To do so, specific characteristics will be highlighted that are applied later on in order to distinguish the types of cooperation.

Interaction and particularly cooperation always comes along with some kind of transaction. Williamson made a significant contribution to the associated “transaction-cost economics”. To do so, he examined the generic forms of governance structures of markets, hierarchies and hybrids (Williamson, 1996). Associated with that, certain dimensions that describe transactions are underlying and consequently differentiate the modes of governance. These characteristics are asset specificity, uncertainty and frequency.

Specificity can be classified into non-specific, highly specific and mixed or semi-specific transactions. In case of non-transaction specificity the related governance structure is the market, where involved parties interact with each other. The other extreme characteristic of highly specific and idiosyncratic transactions is associated with a structure that is aligned with the specific needs. These make physical and human assets necessary that come along with a high degree of specialization (Williamson, 1979, 1985). Consequently, the use of those assets is usually limited to at certain transaction and cannot be applied to other cases (Geyskens et. al., 2006). Such specialized governance structure is influenced by the frequency. If, for example, transactions recurrently take place, the costs for the establishment can be better spread. Besides recurrent transactions, the other characteristics of frequency are one-time and occasional (Williamson, 1979, 1985).

Investments in order to build up specialized governance structures present a commitment but also some kind of path dependence of the involved parties. In the case that high uncertainty is prevalent such risky investments should be carefully considered.

Based on the fact that certain future contingencies often cannot be foreseen during the initial contract agreement, involved parties essentially face some degree of uncertainty. Followed by that, environmental influencing issues concerning adaptation arise. Consequently, transaction costs may increase and favor the hierarchical governance structure through the integration of the critical activities. This mode of governance goes hand in hand with authority in decision-making that is based on contractual employment relationships (Geyskens et. al., 2006). Conversely, in the case of standardized transactions uncertainty does not play a critical role. Therefore it is most likely that transactions are undertaken via the market, where relationships can be relatively easily closed and switched to other parties. Thereby it is obvious that uncertainty is more sensitive to specificity (Williamson, 1985). Moreover, uncertainty is also influenced by the industry life-cycle. More precisely, a negative correlation exists which means that the rise of an industry’s maturity results in a decrease of uncertainty. As a consequence, the governance structure associated with integration becomes less attractive in this case (Williamson, 1979).

However, when markets are inadequate for specific transactions another alternative to vertical integration exists. This refers to the relational governance, which is expressed in the form of alliances (Geyskens et. al., 2006). For that type of interaction various expressions exist. These are among others networks, which refer to persistent relationships between at least two organizations. Therefore, the division of labor among the involved parties is a result of the organizations´ endeavor to achieve economies of scale, specialization and associated with that also the decrease of transaction costs (Thorelli, 1986). Another term is related to interorganizational cooperation. As an alternative to being autonomous, this interaction covers organizations that collaborate in order to achieve their respective objectives (Schermerhorn, 1975). If such interfirm relationships involve idiosyncratic assets they may generate relational rents. These are profits, which are above average and can only be realized through the unique and collective interaction of the involved partners. Governance also plays a crucial role in this regard because it affects incentives of the involved parties as well as transaction costs. Consequently, the governance structure should be effectively managed in a way that means that alliance partners are willing to contribute to the value creation and that transaction costs are reduced as far as possible (Dyer and Singh, 1998). All these terms have similarities with cooperation, which is by definition an agreement between at least two parties with the purpose of working together in the form of coordinated economic activities. By doing so, it is the opposite of competition (Black et al., 2012).

In the following, all denotations that have this basic intention of cooperative interaction in common are used similarly in this work. That also applies to hybrids. According to Williamson (1996) who also refers to Macneil (1974; 1978), organizations operating in hybrids maintain their autonomy and rely on contractual safeguards in long-term contracts. Whereas firms are able to execute certain authority mechanisms, which facilitate adaptation and which cannot be provided by markets, hybrids lie between both modes concerning the dimensions of governance.

Based on the previous information the following correlations in terms of transactions and governance structures are concluded. Specialized governance structures should not be applied to transactions that are standardized to a high degree. This is also the case for non-standardized transactions, which occur on an occasional basis. Only when the frequency of transactions is recurrent, specialized governance structures are reasonable. Although they are associated with higher costs in their establishment, only recurring transactions are able to recoup those investments (Williamson, 1985).

These dimensions and their characteristics of transactions determine the governance structure. Therefore, the main driver for the choice is the relation between the degree of specificity and transaction costs. As the asset specificity grows, the market will be first replaced by the hybrid and afterwards by the hierarchy. By doing so, the governance costs are kept to a minimum. This relation is depicted in the graphic on the following page.

FIGURE 3 Governance costs as a function of asset specificity (Source: based on Williamson, 1991)

illustration not visible in this excerpt

The interval between k1 and k2 is emphasized in this work. This is related to the hybrid governance structure and is the most economic one related to the specificity in that section (k1 < khybrid < k2). If market structures are volatile, firms often prefer cooperation to deal with high uncertainty (Hagedoorn and Narula, 1996). In the following course of this paper three specific forms that are related to the interval of hybrids, namely corporate incubators, corporate venture capitalists and non-equity partnerships are examined. The latter refers for example to a classical business-to-business relationship. The first two mentioned forms, corporate incubator and CVC, tend to the hierarchy mode as will be described later on. Merger and acquisitions, which might sometimes be assigned to another cooperation form, are not considered due to the full integration of the involved parties.

In addition to the mentioned characteristics of the modes of governance, namely market, hybrid and hierarchy, another criterion must be taken into account. This is related to the forms of contract law that are supportive to the respective governance structure (Williamson, 1996). By doing so, Macneil (1978) provides a classification of contracts, which involves classical, neoclassical and relational contract law.

The need for this safeguarding is based on the uncertainties about the partners´ behavior, which may be opportunistic, and about the environment. In the following, the development of contracts or trust can serve as a method of risk reduction and consequently ensure success of the cooperation (Lui and Ngo, 2004). A contract basically seeks to provide the legal framework for future exchange. Therefore, the procedure that is related with the creation of the transaction is associated with conditions of entrance (“sharp in) and exit (“sharp out”). By doing so, the terms of the interaction are defined for the involved parties by commencement and termination. Based on the fact that exchange is fundamental in transactions, contract law systems should provide an environment in which participation is demanded. Concerning the classical contract law, these conditions of the involvement in the transaction are precisely determined. Thereby, the identity of parties is not significant and the performance relationship takes place simultaneously. If required, adaption takes place via the market because transaction parties are relatively easy to replace. By contrast, parties´ identity becomes more important in neoclassical contract law, which is applied to transactions with longer-term orientation. Therefore it requires some kind of flexibility due to gaps in planning. Therefor, the neoclassical contract law includes certain types of planning (e.g. arbitration) in order to cope with information asymmetries that result from temporal difference regarding the performance relationship. Nevertheless, this type of contract law makes reference to the agreement reached at the beginning. But in times of technological change the neoclassical approach is limited. In those cases relational contracts play a crucial role. These take the relation as a whole and in the course of time into account. Furthermore, the start and the end of relations are often not explicitly defined. Instead, they evolve step by step and in accordance to change. If transactions last for a longer time, contracts become more complex and cannot be completely defined in the original agreement. These gaps must be addressed by flexible and ongoing procedures, which enable adaptation during the transaction process (Macneil, 1974; 1978). By doing so, relational governance offers space for contractual improvements that may result from previous experiences (Poppo and Zenger, 2002).

Followed by the described characteristics of Macneil´s classification of contracts, an assignment of the different types of contract law and governance structures can be made. Classical contract law is particularly suited to transactions of standardized kinds so that market governance is the appropriate structure. Transactions that are non-standardized and occur occasionally require neoclassical contracting and should be governed with trilateral governance. Thereby, the parties pursue the interest of continuous transactions because of the costs that are associated with the establishment of the governance structure. In order to ensure this, potential discrepancies are resolved with external parties outside of the transaction. In the case of recurring frequency and non-standardized transactions, relational contracts must be applied. This can be undertaken by unified governance structures, which correspond with the vertical integration, or by bilateral governance that is related to hybrids (Williamson, 1985). However, the development of a governance structure also involves set-up costs. These mainly refer to safeguarding which serve to ensure the cooperation process (Dyer, 1997).

In order to provide an overview of the previous literature review the approach of Ring and Van de Ven (1992) can be used. They gathered distinguishing characteristics of governance structures from prior research, seized on these dimensions and differentiated forms of transactions according to specific characteristics. These are the nature and the terms of exchange, the kind of investment in terms of specificity, the temporal duration of the transaction, the status of the involved parties, the mechanisms for dispute resolution and the relevant contract law as well as the governance structure.

FIGURE 4 Distinguishing characteristics of forms of transactions

illustration not visible in this excerpt

(Source: Ring and Van de Ven, 1992)

Some of the distinguishing characteristics have already been explained before. Moreover, the table (Figure 4) provides an exemplary explanation according to the respective transaction forms. In addition to that, the comparison parameters are briefly described in the following.

The basic element of all the transaction forms is exchange. This refers to the interaction between parties that follow personal interests independent from the execution in a transactional or relational way (Macneil, 1974). Such exchange is characterized by specific attributes. Thereby, the nature of exchange comes along with the frequency of the production or transfer of property rights. The related terms of exchange include, for example, the commencement and the termination of transactions as well as the assignment of permissions. Moreover, control mechanisms also play an important role during the process from the beginning until the end of the relationship. Thereby, the extent of safeguards is significantly determined by expected costs for appropriation and coordination. The latter also influence the make-or-buy decision of firms (Gulati and Singh, 1998).

Another distinguishing characteristic that is listed relates to the specificity of transaction, which was classified before into nonspecific, idiosyncratic and mixed modes. In addition to that, the following elucidations regarding the cooperation examine the respective forms according to their involvement of tangible and intangible resources. Resources in general serve as basic requirement for every creation of value. This in turn is the origin of the development of capabilities. Such sources can have a tangible character like financial resources and physical assets for example plants and properties (Grant, 1991; 2013) or an intangible form. It is not easy to appraise intangible resources because they are particularly related to information and know-how. Independent from that, they can be classified into four groups. These are related to the human, the organization, the technology and the relationship. Human capital directly refers to the person and his knowledge, experience, network and other soft factors that affect the personal contribution to the organization. Intangible resources in the form of relational capital are oriented to the market and particularly to the awareness of the organization within that market. For instance, a brand name and a positive reputation are useful in order to establish relationships with distributors and customers. Another soft asset is related to the technology. Thereby, the exploration and exploitation of the latest technological know-how can be especially valuable for firms. The last type of intangible resources of that classification is organizational capital. This involves factors that influence the behavior and the communication within the organization like routines, norms or culture. In times of technological discontinuities the latter can play a crucial role when it fosters the ability and the willingness of employees to create and address the change by means of novel methods. As a consequence, organizational capital may make a significant contribution to the future existence of the organization (Fernandez et. al., 2000). Based on those differences in resources, the cooperation between new and established ventures are, besides the distinguishing characteristics of transactions, also examined in the following with respect to their resource-specific added value to each other.

Independent from the frequency of interaction, the duration of a single transaction also differs between the transaction forms. Likewise, the status of the involved parties, which includes the legal relationship in the interaction, is a criterion of differentiation. Moreover, interaction includes the potential of differences in opinions. As a consequence, mechanisms for the resolution of potential disputes must be clarified as well (Ring and Van de Ven, 1992).

The governance structure and the related contract law were elaborated before and it can be seen in the table that the whole spectrum of structures and contract law is applied in the different transaction forms.

In addition to that, it can be assumed that the forms of transaction are also subject to change. This is mainly based on the fact that the Internet enables fast and comprehensive handling of information between parties, which did not previously exist to this extent. As a consequence of the broader access to information, asset specificity as well as transaction and production costs are reduced, because any creation of value is essentially associated with information transfer. Hence, these information technologies promote the interaction between firms, which is related, for instance to the identification of partners and the gathering of product information. Consequently, lower information asymmetries facilitate the drafting of contracts and grant less space for opportunism (Afuah and Tucci, 2003). Nevertheless, it can be noted that the transactions in this case are still idiosyncratic. This is mainly based on the considerable challenge of commercializing that entrepreneurs and startups face. The development of a product or service into a market-ready and viable value proposition is an obstacle that only a relatively low number of startups are able to overcome. Associated with the low market experiences of new ventures uncertainty is quite high. In addition to that, technological discontinuities and the introduction of innovative technologies act contrary to the maturity process of markets. Hence, the uncertainty increases even more. As a consequence, it seems that a specialized governance structure is required for the cooperation between startups and established companies.

It has been previously shown that technological discontinuities as well as transaction costs have an influence on a company´s decision for the mode of interaction with other market players. Due to the fact that the successful commercialization of new technologies is probably the best way to deal with such discontinuities additional aspects must be considered.

The commercialization always has to be organized in the context of environmental conditions. In reality, companies cannot simply decide whether they want to initiate competence-destroying or enhancing discontinuities. When efforts to commercialize an invention are undertaken it can be assumed that the strategic choice is mainly driven by the returns that can be yielded from the innovation. These influencing factors are related to the regimes of appropriability and determine the extent to which the innovator benefits from the innovation (Teece, 1986).

This regime includes four main components. The first one is associated with the ownership of the innovation. These property rights, which are, for example, copyrights, patents, trademarks or secrets, are substantial determinants of the returns on innovation. The degree to which the innovation can be reconstructed and imitated is equally important and depends on the complexity and tacitness of the technology. But even if the degree is high and the technology cannot be replicated easily these barriers are not stable in the long term. Nevertheless, this time advantage, which is another factor, can be used to develop a stronger competitive advantage. But to strengthen the starting position of the innovator against followers complementary resources often play a crucial role. This last component of the appropriability regime is usually necessary to include certain activities like marketing to the value chain of new products (Grant, 2013). Associated with that, these assets can also be accessed through cooperation with other companies. It can be observed that mainly entrants drive the discovery and the development of new products, while incumbents operate as the party which commercializes these novel products. As a consequence, the cooperation between both enables them to concentrate on their strengths within the value chain. In the following the incumbent´s downstream value chain activities that are related to the commercialization serve as complementary assets to the new product or service of the entrant and vice versa (Rothaermel, 2001). This is at least the case when these capabilities of the established firm are still valuable to the startup and are not destroyed by the technological discontinuities (Hill and Rothaermel, 2003).

The previous explanations show the diversity of factors that determine the choice for cooperation. Nevertheless, this governance structure can still be advantageous for the involved parties. Furthermore, the focus on this type of interaction is motivated by the fact that one firm only can possess all necessary competencies in order to develop and introduce a product to the market in the rarest cases. This applies especially to industries that are characterized by technological discontinuities and also equally to small and large firms (Teece, 1986). Hence, the following paper emphasizes the cooperation between startups and established market players with the objective of commercializing inventions to address technological discontinuities.

The specific challenges that startups and incumbents face, especially when they follow the competitive interaction, have already been detailed. Moreover, issues also take place in relation to the cooperation. Consequently these obstacles, which can be up-front, during and after the cooperation, must be considered as well.

2.2.1 Challenges associated with cooperation

The precondition for cooperation is the identification of appropriate partners. That also includes the awareness and the willingness of the parties to collaborate. This is not always present from the beginning and therefore requires efforts of persuasion. That situation is also related to information asymmetries or imperfect information, which potential cooperation partners face. As a consequence, the assessment of complementary assets possessed by alliance partners is usually a considerable challenge for parties to address (Dyer and Singh, 1998). This difficulty is further reinforced by the following phenomenon. Companies that have experience and achieved a track record in a specific field or industry tend to generalize their own competence. That means when these firms undertake activities which they did not do before they overestimate themselves, because they compare the challenge related to prior success with new and different tasks (Levinthal and March, 1993). When it comes to the initiation of cooperation such behavior of established firms can influence the communication and negotiation. Consequently it is hard for the startup to assess the potential of the incumbent and its support regarding the different domain. This uncertainty may also come with concerns regarding the expropriation of intellectual property rights. That in turn reduces the willingness of startups to cooperate if other market players are not trustworthy. Hence, the identification of useful partners is costly for new ventures. On the other side, potential partners may be also not interested because of the relatively low level of business and product development and associated with that the lacking reputation of the startup (Hsu, 2006). It can be seen that even when established and new firms approach each other various contingencies can occur.

[...]

Excerpt out of 125 pages

Details

Title
Cooperation Between Established Firms and Startups in Order to Address Technological Discontinuities
College
University of Southern Denmark  (Department of Marketing & Management)
Course
Management of Innovation Processes
Grade
2,3
Author
Year
2014
Pages
125
Catalog Number
V298444
ISBN (eBook)
9783656948858
ISBN (Book)
9783656948865
File size
1109 KB
Language
English
Tags
startup, corporate, innovation, change, disruption, cooperation, incubator, VC, venturecapital, commercialization
Quote paper
Tobias Gebhardt (Author), 2014, Cooperation Between Established Firms and Startups in Order to Address Technological Discontinuities, Munich, GRIN Verlag, https://www.grin.com/document/298444

Comments

  • No comments yet.
Read the ebook
Title: Cooperation Between Established Firms and Startups in Order to Address Technological Discontinuities


Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free