19-PM2-09: ST 8.5 - Disclosure and Exclusion: The challenges of collaboration in Open Innovation
Competition in Markets with Complements: How Within-Component Firm Heterogeneity Shapes Ecosystem Strategies
HEC Paris, France
We study the contexts where firm’s value creation depends on complementary products – the contexts which have been recently dubbed business ecosystems (e.g., electric vehicles, smartphones, combination therapy). We explore strategies that firms adopt towards complements in such contexts, specifically whether they choose to be compatible with certain complements only.
A burgeoning body of research has emerged in recent years to study ecosystems and complements. One stream has focused on the value creation aspect of the ecosystems and showed that complements are crucial to value creation (e.g., Adner and Kapoor, 2010; Ethiraj, 2007; Hannah and Eisenhardt, 2018; Kapoor and Furr, 2015). On the other hand, the industry architecture literature has focused on the value capture aspect and showed that the value created may be unequally distributed among the ecosystem components, which comprise the producers of a similar type of product (e.g., Jacobides, Knudsen, and Augier, 2006; Jacobides and MacDuffie, 2013). Specifically, firms that find themselves in the “bottleneck” component, or “the part of the firms’ or the industry’s system that is in most scarce supply” (Jacobides et al., 2006) are able to capture a disproportionate share of value (Baldwin, 2015).
While we know that complements are crucial to value creation and that this value may be unequally distributed among the ecosystem participants we know less about how competition among the producers in the focal component affects the incentives of complementors and the value capture of the ecosystem participants.
In this paper we seek to answer the following questions: What drives the firms’ decision to make the complement compatible with multiple vs. just one product? How does a change in the value of the focal product affect this choice?
We use formal models and empirical methods to answer these questions. First we model competition between horizontally differentiated offerings of the focal product, and how the producers of complements and of the focal product react to unexpected changes in the value creating capabilities of these offerings. We then test our predictions in the context of anti-HIV drug market, where the standard treatment is a multi-drug combination that can be split into a base component and an add-on component. A clinical trial is needed to ensure compatibility between base and add-on drugs.
We use individual-level data on anti-HIV drug consumption to confirm changes in complements’ value. We use these insights to study the changes in firms’ R&D strategies with the data on clinical trials on anti-HIV drugs.
The first dataset comes from the Echantillon Generaliste Beneficiaire database provided by the main French healthcare insurance payer, which is a quasi-random sample of 1/97th of the French population tracking all healthcare consumption (including drug purchases) reimbursed at the individual level. We extracted all purchases of HIV drugs and identified the combinations of drugs used by each patient based on the purchase date and the time lag between consecutive purchases resulting in 893 HIV patients over 2004-2016.
The second dataset represents hand-collected data on clinical trials of anti-HIV drugs. We use the online clinicaltrials.gov database provided by the US National Library of Medicine, which is a conventional source of information in the pharmaceutical industry. We focus on the late-stage anti-HIV drug trials resulting in 333 trials for which we manually coded the key features of the trial design, including the focal drug of the trial and the complementary drugs used
We find that as one of the base drugs emerged as a base compatible with a broader patient population producers of the add-on complements sought to form bundles with that drug, but not with other bases. The owner of the broader base invested in the production of its own add-on drugs and developed them as a part of an exclusive bundle with its base. It tried to further restrict the access to its add-on drugs by integrating them with its base into a single pill and becoming a fully integrated actor instead of relying on other actors in the ecosystem. By contrast, the owner of the base compatible with a narrower patient population developed add-on drugs as compatible with both its own base and the rival base. When this strategy did not seem to work it attempted to re-shape the ecosystem by making the base component redundant striving to shift the bottleneck status to the add-on component. These findings highlight the importance of considering the heterogeneity in value creating capabilities in understanding firms’ strategies towards complements and the evolution of such systems.
Contribution to Scholarship
By incorporating both value creation and value capture considerations as the drivers of the firm’s ecosystem strategies we seek to bridge the literature on business ecosystems that looks at the value creation at firm level, and the industry architecture literature that looks at the value capture, but at the component level. Furthermore, we explore the impact of competition that has been studied less in both these literature streams. We show that different position in the focal product component leads to different strategic choices by the firms in terms of managing complements and excluding others from the access to these complements. Moreover, by looking at how changes in the value of the focal product affect firms’ strategies we further develop a dynamic perspective on ecosystems. Finally, we link the constructs of this literature to the fundamentals of the value-based strategy framework (Brandenburger and Stuart, 2007, 1996).
Contribution to Practice
Understanding strategic behavior of the producers of complements is essential in the contexts where the firm’s ability to create value depends on the aforementioned complements. We suggest how firms can foresee the behavior by the complements’ producers. We also show how a firm may increase its value capture and maintain its advantageous position within the ecosystem by excluding certain actors from the access to the high-value complements. Furthermore, by exploring the strategy of the “winning” firm as well as the “losing firm”, we are able to show how such a firm may survive in an ecosystem.
The paper naturally connects to literature on innovation and co-creation of value by the complements of an ecosystem. We study the contexts where firms have to rely on the innovation by external actors, and make strategic decision about excluding certain actors from the access to the new complements.
1. Adner R, Kapoor R. 2010. Value creation in innovation ecosystems: How the structure of technological interdependence affects firm performance in new technology generations. Strategic management journal 31(3): 306–333.
2. Baldwin CY. 2015, May 27. Bottlenecks, Modules and Dynamic Architectural Capabilities. Harvard Business School Finance Working Paper No. 15-028, . Available at: http://papers.ssrn.com/abstract=2512209.
3. Brandenburger AM, Stuart HW. 2007. Biform games. Management science 53(4): 537–549.
4. Brandenburger AM, Stuart HW. 1996. Value-based business strategy. Journal of Economics & Management Strategy 5(1): 5–24.
5. Ethiraj SK. 2007. Allocation of inventive effort in complex product systems. Strategic Management Journal 28(6): 563–584.
6. Hannah DP, Eisenhardt KM. 2018. How firms navigate cooperation and competition in nascent ecosystems. Strategic Management Journal.
7. Jacobides MG, Knudsen T, Augier M. 2006. Benefiting from innovation: Value creation, value appropriation and the role of industry architectures. Research Policy 35(8): 1200–1221.
8. Jacobides MG, MacDuffie JP. 2013. How to Drive Value Your Way. Harvard Business Review 91(July): 92–101.
9. Kapoor R, Furr NR. 2015. Complementarities and competition: Unpacking the drivers of entrants’ technology choices in the solar photovoltaic industry. Strategic Management Journal 36(3): 416–436.
Types of partnerships for innovation and atmosphere, a symbiotic relationship for performance
1Ecole polytechnique, France; 2ESSEC business school; 3HEC Paris
Researches on BtoB Open Innovation focus on the project level rather that on the dyadic level when it is recognized for a long time that the performance of a collaboration for innovation depends on the nature of the interaction of both firms and on the atmosphere the relationship.
Three overlapping streams of research:
(i) R&D alliances and technology partnerships (Faems, De Visser, Andries, & Van Looy, 2010; Hagedoorn & Duysters, 2002)
(ii) Open Innovation (Gassmann et al. 2010; Huizingh, 2011)
(iii) supplier involvement in new product development (Brattström, Löfsten, & Richtnér, 2012; Yeniyurt, Henke Jr, & Yalcinkaya, 2014)
Given the contradictory proposals between those who observed the positive role of atmosphere (Van Echtelt et al, 2008; Yeniyurt et al., 2014) and those who detected non-significant or negative effects of some dimensions, we want to delve into that question of the role of the atmosphere on BtoB OI performance
We propose that each type of partnership (X) leads to a certain level of performance (Y), because of the atmosphere of the relationship (M), which in turns impacts the performance of the collaboration
We test our hypotheses through a web-based survey resulting in the description of 160 client-supplier dyads collaborating in a joint innovation project.
Type of partnerships, atmosphere and performance of the relationship are evaluated through hierarchical ascendant classifications.
Mediation analysis is conducted by runningthe macro PROCESS of SPSS and following the guideline provided by Hayes & Preacher (2014)
Questionnaire design is based on the literature and on 35 qualitative semi-structured interviews with practitioners implicated in vertical Open Innovation collaboration.
The sample is made of 160 vertical dyads collaborating in one on-going innovation project, in France. The respondent are coming from Top Management (31%), Sales (32%) and Research & Development (26%) of the supplier firm,. 81% of them had been with their firm for more than 3 years. Our focus on innovation collaboration leads us to distinguish the stage of maturity of the innovation project at the time of the involvement of the supplier: “Research and feasibility” (101 projects), “Product design and Prototyping” (29 projects), and “Pilot and industrialization” (30 projects). 105 of these projects are targeting product innovation, 12 process (or organization) innovation and 43 product and process innovation.
Our analysis shows no a direct influence of the type of partnership on the performance of the relationship, but a mediated influence through the relationship atmosphere.
Second, we observe that such mediation is not systematic: the various component of the atmosphere mediates differently the influence of the types of partnerships on the performance.
Contribution to Scholarship
Our first result calls for a careful reconsideration of the links between the components of types of partnerships, such as the contractual arrangements and the relational mechanisms, and the atmosphere of the relationship. Our results suggest that studies considering the way a dyad is managed as a predictor of the performance, should examine how the type of management can influence the atmosphere that will then influence the performance.
The second kind of results is the assessment of how the type of partnership affects the performance both directly and indirectly through the atmosphere of the relationship. In line with all the studies on the role of trust in innovation collaboration (Brattström et al., 2012; Yeniyurt et al., 2014), our results show its central importance and its positive impact on every dimension of performance, whatever the type of partnership is.
Contribution to Practice
For practitioners, the main implication of the first result is to rethink the role of the partnership type, and therefore to reshape their way of building the dyadic management (contractual mechanisms and relational mechanisms). Partnership types first serve the quality of the atmosphere, who will in turn influence the performance. Though, this means a search for the partnership type that will influence the best possible the atmosphere.
Our research is an in-depth work on the functioning, and its link with performance of BtoB Open Innovation
Brattström, A., & Richtnér, A. (2013). Good Cop–Bad Cop: Trust, Control, and the Lure of Integration. Journal of Product Innovation Management, 31(3), 584–598. https://doi.org/10.1111/jpim.12115
Faems, D., De Visser, M., Andries, P., & Van Looy, B. (2010). Technology Alliance Portfolios and Financial Performance: Value-Enhancing and Cost-Increasing Effects of Open Innovation*. Journal of Product Innovation Management, 27(6), 785–796. https://doi.org/10.1111/j.1540-5885.2010.00752.x
Gassmann, O., Enkel, E., & Chesbrough, H. (2010). The future of open innovation. R&D Management, 40(3), 213–221. https://doi.org/10.1111/j.1467-9310.2010.00605.x
Hagedoorn, J., & Duysters, G. (2002). External sources of innovative capabilities: the preferences for strategic alliances or mergers and acquisitions. Journal of Management Studies, 39(2), 167–188.
Huizingh, E. K. R. E. (2011). Open innovation: State of the art and future perspectives. Technovation, 31(1), 2–9. https://doi.org/10.1016/j.technovation.2010.10.002
Nooteboom, B., Vanhaverbeke, W., Duysters, G., Gilsing, V., & van den Oord, A. (2007). Optimal cognitive distance and absorptive capacity. Research Policy, 36(7), 1016–1034. https://doi.org/10.1016/j.respol.2007.04.003
Van Echtelt, F. E. A., Wynstra, F., Van Weele, A. J., & Duysters, G. (2008). Managing Supplier Involvement in New Product Development: A Multiple-Case Study. Journal of Product Innovation Management, 25(2), 180–201. https://doi.org/10.1111/j.1540-5885.2008.00293.x
Yeniyurt, S., Henke Jr, J. W., & Yalcinkaya, G. (2014). A longitudinal analysis of supplier involvement in buyers’ new product development: working relations, inter-dependence, co-innovation, and performance outcomes. Journal of the Academy of Marketing Science, 42(3), 291–308. https://doi.org/10.1007/s11747-013-0360-7