The distributed 'open' model of innovation development has been increasingly applied in service sectors to grasp the opportunities of networking. Till now, there have been many competing theoretical frameworks, with no universal model or consensus, to open innovation through networking. This paper applies a three-perspective theoretical framework, which embodies considerations of resource acquisition, opportunism minimization, flexibility and commitment to innovation and growth to build a decision tree opting for the organization form (hereinafter referred to as structural or governance mode) of innovation-targeted alliances in services. The model builds on a number of contingencies describing the joint impact of four decision parameters (trust, resource position, environment uncertainty and expected value) on firms' strategic concerns, and subsequently their preference for alliance governance.
complementarity of their resources and capabilities to create innovative service offerings
While distributed innovation offers exciting possibilities for a firm to capitalize on the creativity of its partners, the management of distributed innovation requires firms to re-examine the mechanisms they use to govern innovation-targeted alliances (Sawhney & Prandelli, 2000). At the one extreme, a firm can choose a hierarchical form of management and control by establishing a new entity (joint venture) or partially integrating the partner through a minority investment agreement. At the other extreme, a firm can choose to contract with the partners in order to settle their responsibilities and contribution to the alliance. Since these alternative forms of collaboration give a firm varied degrees of control and interdependence with its partners and require different resource commitments, choosing the appropriate governance mode constitutes a critical firm decision. The decision on governance becomes even more salient for firms operating in service markets where technology constitutes a challenge to increase effectiveness (cost minimization, quality improvement) or achieving diversification (innovation development). This is because the technology possesses a key strategic role as enabler of service innovation by firms.
A special feature of technology-based service industries is the rapid rate of change and the difficulty of forecasting change. Strategic decision making is difficult in such environments, not only because change is fast and sudden, but also because it is difficult to predict the significance of a change as it is occurring. The managers of firms operating in high-tech industries face several dilemmas. Successful strategies must be responsive to changing market conditions, and therefore must assure flexibility, but successful strategies also require long-term commitment to innovation. Moreover, while innovation exploitation strategies require decisions that aim at optimizing risk management and value creation, traditional strategies involve decisions that aim at acquisition of valuable resources and capabilities and cost-minimization.
This paper aims at unveiling the contingencies that firms’ decision-makers face on the preferred structural mode (organizational form) of their alliance under the analysis of a three-perspective theoretical framework (Transaction Cost Economics, Resource- and Knowledge-based View of the firm, Real Options), which embodies considerations of resource acquisition, opportunism minimization, flexibility and commitment to innovation and growth. The proposed contingencies that are hereinafter used to build our decision tree prescribe alternative conditions that favour either the quasi-hierarchy (Q-H) or the quasi-market (Q-M) or an intermediate (I) structural mode of service innovation alliances. The proposed alternative conditions derive from the joint examination of critical decision parameters, which are associated with the prime strategic concerns of firms in alliances, as expressed by each of the above three theoretical perspectives.
Most studies in the alliance governance literature have been based on the dichotomy of equity
versus non-equity alliances
Under TCE, the alliance governance mode is dependent on two critical parameters: the type and degree of asset specificity involved in supplying the good or service of the alliance, and the uncertainty to which transactions are subject (Williamson, 1991).
Asset specificity can take a variety of forms, such as ownership of a rare resource, development of an advanced competence, a special privilege, or a patent. The higher the asset specificity, the higher the need for, and thus the costs of, alliance coordination. Thus, high asset specificity requires more complex institutional forms of alliance, where common administrative systems are set to govern the partner dependencies and appropriate resolution mechanisms are employed to handle possible disputes and contracting hazards (Williamson, 1991).
Benefit from High Asset Specificity ---------------------------->
Service innovation-targeted alliances involve high levels of asset specificity, required to produce
the recombinative mode of service innovation. Thus, the asset specificity is not handled as
contingency factor in the context where strategic alliances are investigated in this paper.
Uncertainty about sources of opportunism is an important variable in transaction cost models of
governance. Under conditions of no uncertainty about the sources of opportunism in an exchange,
parties to that exchange are able to rely on relatively simple market-based cooperative agreements
to manage their exchange. However, as uncertainty about partners’ opportunistic behavior
increases, it may be necessary for parties to adopt more hierarchical forms of alliances, including
minority investment and joint ventures
The factor that can moderate the influence of such an objective is the existence of trust among
partners. Specifically,
RBV considers strategic alliances as strategies used to access partner resources for the purpose of concentrating otherwise unavailable competitive advantages and values to the firm. Thus, the overall rationale for entering into a strategic alliance is simple; to aggregate, share or exchange valuable resources with other firms, when these resources cannot be efficiently obtained through market exchanges or mergers and acquisitions (Das and Teng, 2000).
In knowledge-intensive service industries, equity alliances are preferred for the safe exchange of
valuable knowledge, since contract-based alliances do not offer sufficient protection against
opportunistic behavior and unintended transfer of resources (Das & Teng, 2000). According to
Oxley and Sampson (2004), where the costs of knowledge leakage are deemed to be particularly
high, a firm may choose between narrowing down the alliance scope to limit exposure and opting
for a protective (equity-based) governance structure to control partner opportunism.
KBV emphasizes the significance of knowledge as a competitive asset to produce new products and
services. It is not so much the cost of the transfer, as would be the focus of the transaction cost
approach, but the effectiveness of the transfer and the ability or experience of the firm in accessing
and handling new resources that may create the need for collaboration
The essence of RBV is that sustained competitive advantage for a firm comes from access to
resources that are valuable, rare, and imperfectly imitable
The real options theory approaches the environment uncertainty and its impact on the governance mode of alliances through the definition of two value options. Each of these value options describe a different way in which firms may lay claim to future rent generating opportunities through current investments.
The first and simplest means through which organizational governance decisions may create value is through “the option to defer” investment, also called as the “option of waiting”. This option refers to cases where the critical objective of firms, when making governance choices under conditions of uncertainty, is the maintenance of their flexibility. Flexibility is desired in cases where firms wish to avoid the risk of committing irreversible resources to an alliance, since the expected future value of this investment is still uncertain. In these situations, there is more value for firms from delaying or deferring the investment to a quasi-hierarchy alliance. The value associated with the “option to defer” is greatest when uncertainty about the transaction environment is high and the estimated cash flows lost due to postponing in the innovation targeted alliance are relatively small. Thus, under conditions of high uncertainty about the viability and the success of the investment, service firms are more liable to opt for less hierarchical forms of governance to assure flexibility.
<---------------------------- Maximize Flexibility
The second means through which real options analysis guides governance decisions is through the
“growth option”, also referred to as “call option”. When firms have a clear strategic goal of growth,
and do not address alliances as a survival or competition means, then they have greatest interest in
high investment through more hierarchical alliances, which give them the right to further expand or
innovate.
Maximize Growth Opportunities ----------------------------> As partners’ current value of resources (resource position) is a priori known, mainly through the value of assets in place, the firm estimations on the alliance’s expected value differentiate from partner to partner and become gradually fixed over the alliance duration, as firms gain information on the alliance, the partner(s) and the environment. The following table summarizes the diverse strategic concerns of firms when entering networks, and more specifically alliances, as well as the factors (Column 3) that affect the intensity with which each concern is expressed (Column 2). The logic specifying the impact of each factor as well as the underlying strategic concern on the governance decision is prescribed by the abovementioned theoretical perspectives (Column 1).
Theoretical Perspectives
Strategic Concerns
Decision Factors Transaction Cost Economics
Protect from Partners’ Opportunism (O)
Trust (T) Resource- & Knowledge-based Sustain Current and Obtain View of the Firm Competitive Advantage (CA) New
Resource Position (RP) Real Options
Increase Flexibility (F) Pursue Growth (G)
Environment Uncertainty (EU) Expected Value (EA) The above analysis has revealed that each theoretical perspective adopts overly simplistic characterizations of the concerns of firms in making governance decisions. Transaction Cost Economics, the most commonly applied theory for explaining the governance issues of strategic alliances, addresses the cost aspects of strategic alliances and affect the balance between partners’ protection and alliance efficiency. Nevertheless, factors that relate to value realized under conditions of uncertainty have been rather neglected by TCE. Such aspects are addressed by the Resource and Knowledge-based View of the firm in terms of competitive advantage, as well as the most recently applied Real Options theory in terms of gaining the option to future growth. This last perspective is especially applicable in examining decisions made under conditions of high uncertainty, which resemble those of service innovation alliances in high-tech sectors. In the strategic management literature, little effort has been put to linking insights from Real Options with insights from Transaction Cost Economics and Resource- and Knowledge-based View of the firm in order to define an innovation-related strategic decision. In this paper, we argue that only by recognizing and taking into account the full range of the firms’ concerns when forming innovation-targeted alliances, and how these concerns interact with each other, it will be possible to explain the way in which firms decide the organizational form that suits their innovation objectives.
After that, the governance decision can be considered as a multi-criteria/ multi-purpose decision problem. The proposed contingency model includes definition of these criteria, as well as of the parameters (criteria) that guide the outcome of the decision function.
The development of a contingency model for the selection of decision strategies involves four steps
which are jointly evolved as research progresses
In our research, the selection of structural mode of service innovation alliances in high-tech sectors constitutes the behavior of interest. The primary characteristics of the decision-making environment that are herein examined are environment uncertainty, including a number of sub-characteristics (e.g. innovation rate of the industry, technology evolution, market demand, etc.), as well as trust between partners. The principal features of the decision-makers that may cause variance of the governance decision made are current resource position as well as expectations for the expected value of the investment made.
In order to build a decision tree on the structural mode of service innovation alliances, we examine
the impact that each decision factor may have on the four above-mentioned strategic concerns.
More specifically, we examine the impact of: a) high environment uncertainty, which stimulates the
flexibility increase (F) objective, b) low trust, which stimulates the opportunity minimization
objective (O), b) high resource position, which stimulates the pursuance of competitive advantage
(CA) objective, and d) high expected value, which stimulates the growth (G) objective.
After that, we develop a number of contingencies prescribing conditions that guide the selection of
each structural mode (quasi-hierarchy, intermediate, quasi-market). Based on these contingencies, a
decision tree is finally built and a number of propositions are provided for further investigation and
empirical testing.
3.1 Effect of Decision Factors on Objectives
Effect of High Environment Uncertainty on Objectives
Environment uncertainty may derive from a number of other sources, the most well-known of
which are technology uncertainty, market uncertainty and competition unpredictability. Technology
uncertainty is of prime importance for strategic technology alliances and primarily concerns the
maturity stage of the technology that partners develop or exploit. The less mature the technology
employed, the more uncertainty it generates for the technology partners. Market uncertainty derives
from the customers’ attitude towards new technology-based products and services, while
competition predictability refers to the frequency of competition shifts in the partners’ industry. In
markets where changes in technology are not only fast but also discontinuous, market preferences
are volatile, and there are frequent shifts of relative competitive positions, the increased need for
flexibility may urge firms towards more flexible forms of collaboration
Real options logic suggests that the critical objective of firms making governance choices under
conditions of uncertainty is the maintenance of their flexibility. The maintenance of flexibility
under conditions of high uncertainty becomes a governance issue because some forms of
governance are less flexible than others
Apart from its obvious positive effect on the objective of maximizing flexibility, environment uncertainty has also a negative effect on the objective of pursuing growth. Under conditions of uncertainty, firm cannot trust their current estimations on expected value of the innovation and thus, however high it may currently seem, they cannot be based on that for pursuing expansion and growth.
However, uncertainty in the environment of the alliance is expected to have a negative influence on the firm’s aggressive strategy towards sustaining and obtaining new competitive advantage. Based on Resource-based View, firms are interested in assuring safe conditions for the exchange of their resources. Moreover, environment uncertainty increases risk of exchanging valuable resources and knowledge, and thus has a negative effect on pursuing competitive advantage through quasihierarchy alliances. Following the basic assumptions of game theory, under conditions of high instability, the behavior of firms is determined by a tendency to cheat in order to maximize their individual gains at the expense of others. After that, firms increase their suspicions on their partners and raise their requirement for protection.
Effect of Low Trust on Objectives
Numerous definitions of trust and trustworthiness have been presented in the literature
Lack of trust by investing partner creates preference for control over decision-making which often
manifests in equity ownership
There is evidence that trust has important implications for market performance and efficiency
Further, trust influences positively any expansion of the area of co-operation, thus increasing the
possibility for growth in either the existing or new markets
Effect of High Resource Position on Objectives
Sapienza et al. (1997) argue that firms owning resources of competitive advantage are more likely
to enter into alliances and are more attractive alliance partners as well. Based on argumentation of
RBV/KBV, we can also argue that competitive companies are more likely to opt towards
quasihierarchy alliances, which entail higher degree of control against property leakages, in order both to
protect the value of their competitive resources and skills, and thus sustain current competitive
advantage, as well as to obtain new competitive advantage.
Thus, firms that possess high resource position, and thus are considered highly competitive, are
expected to have increased concern on their partners’ opportunistic behaviour, but also increased
interest in pursuing growth through collaboration. Instead, the concern of assuring flexibility
becomes of lower importance, and thus its impact towards quasi-market alliances gets moderated.
Effect of High Expected Value on Objectives
Real option theory recognizes the importance of expected value in making heavy investments in
complex alliances and thus pursuing growth. In fact, the option to defer investments and the option
to growth and flexibility include two diverse options through which organizational governance
decision may create value
High expected value of investment is also expected to decrease concerns on partners’ opportunism as well as intensify the need for obtaining new competitive advantage through the investment made. After that, the presence of high expected value is anticipated to favour quasi-hierarchy and oppose to quasi-market alliances.
The following table summarizes the impact of each decision factor on each of the four objectives, derived from the background theory. Based on this table, in the next section, we extract a number of contingencies for the formation of service innovation alliances.
TO:
+
Contingency 2: Low Environment Uncertainty and Low Trust The following matrix illustrates the impact of the two contingency factors (low uncertainty and low trust) on the prime strategic concerns, mentioned above. The signs in parentheses () express the reverse effect of each decision factor on the corresponding objectives. If the sign is (+) then the objective’s effect is reinforced, otherwise the objective’s effect is weakened. For instance, low uncertainty has a negative impact on (O) objective, which means that it weakens the favourable impact of the corresponding concern on quasi-hierarchy alliances. More specifically, low uncertainty decreases possibilities for the formation of quasi-hierarchical alliances. Nevertheless, this factor is not considered strong enough to lead to the exact opposite governance mode, that is quasi-market alliances. Instead, an intermediate form of alliance is most probable.
TO:
Protect from Opportunism + (primary effect) In contrast to the previous contingency, the combined impact of low uncertainty and low trust on each objective does not indicate a clear preference for any organization form. Thus, there is a need for also examining the impact of the rest two decision factors, current resource position and expectations for future value.
In this contingency, the prime objectives that are reinforced include opportunism minimization (O) and sustaining competitive advantage (CA), and growth (G), all of them driving to Q-H alliances. The following matrix illustrates the impact of each decision parameter on the alliance’s prime objective.
Influence FROM Low Uncertainty
TO: + (primary effect)
+ Q-H (CA) (+) + (primary effect) (-) Q-H
+ (primary effect)
Q-H
In this contingency, the prime objectives that are reinforced include opportunism minimization (O) and sustaining competitive advantage (CA), both driving to Q-H alliances. The following matrix illustrates the impact of each decision parameter on the alliance’s prime objective.
TO:
Protect from Opportunism
In this contingency, the prime objectives that are reinforced include opportunism minimization (O) and pursuing growth (CA), both driving to Q-H alliances. The following matrix illustrates the impact of each decision parameter on the alliance’s prime objective.
Influence FROM Low Uncertainty Low Trust
TO:
Protect from Opportunism Low Resource Position Preference for Governance Mode + (-) Q-H (-) I (+)
In this contingency, the prime objective that is reinforced includes opportunism minimization (O) driving to Q-H alliances. The following matrix illustrates the impact of each decision parameter on the alliance’s prime objective.
Contingency 3: Low Environment Uncertainty, High Trust and High Resource Position In this contingency, the prime objective that is reinforced includes sustaining competitive advantage (CA), driving to Q-H alliances. The following matrix illustrates the impact of each decision parameter on the alliance’s prime objective. The impact of high resource position, combined with the impact of low uncertainty and high trust, is such that a definitive governance preference can be made, and there is no need for further investigating the impact of either low or high expected value.
Influence FROM Low Uncertainty High Trust High Resource Position + (-) I (+) (-) (-)
I
Q-H or I
Contingency 4: Low Environment Uncertainty, High Trust, Low Resource Position and High Expected Value In this contingency, the prime objectives that are reinforced include pursuing growth (G), driving to Q-H alliances. The following matrix illustrates the impact of each decision parameter on the alliance’s prime objective.
TO:
Contingency 5: Low Environment Uncertainty, High Trust, Low Resource Position and Low Expected Value In this contingency, neither of the above objectives is directly reinforced by any decision factor. In such cases, we assume that other, less strategic, motives may drive alliances, and thus quasi-market alliances would be preferred to achieve the collaboration goals and avoid the risk of equity investments.
TO:
Following, we present the decision tree that has resulted from the definition and analysis of the above nine contingency matrices. Each leaf corresponds to one research proposition, provided by this paper for further investigation and empirical testing.
This paper describes a research effort to combine the literature of TCE, RBV/KBV and RO in order to define the parameters that affect the decision on the governance of alliances aiming at developing technology-based service innovation. The prime features of the technology-based service industries have influenced the researchers in identifying the theories to be used as well as defining the parameters that play an important role in such alliances. After that, the theoretical investigations have resulted with a set of primary alliance objectives as well as a number of parameters affecting alliance decisions (e.g. formation, governance, management). The issue examined in this paper involves the governance, and more specifically the selection of the organization form under which alliances are structured in order to meet their strategic objectives.
Our literature research results with a number of propositions, described hereinafter as the baseline of a research model to be empirically tested in the future. More specifically, our literature research has concluded with the following arguments.
Quasi-market (Q-M) alliances are preferred by firms mostly concerned about increasing flexibility (F) in an uncertain environment, or by firms that have low expectations for the future value of their alliance.
Quasi-hierarchy (Q-H) alliances are preferred by firms having most highly rated the objectives of sustaining current or obtaining new competitive advantage (CA), pursuing growth (G), while at the same time they are highly concerned about their partners’ opportunistic behavior (O). Intermediate alliances are preferred by firms having either low resource position or low expectations for the future value of their investment in an alliance.
Following the argumentation provided in building the proposed decision tree, the objective of flexibility is strong enough to drive towards Q-M alliances, regardless of the rest factors, while the objectives of growth (G) and sustaining competitive advantage (CA) are less strong and can drive to Q-H, only if resource position (RP) and expected value (EV) are high enough to justify the investment and commitment. If either the resource position (RP) or expected value (EV) is considered low, then intermediate forms of alliances may be preferred. Moreover, we argue that the objective of O is less important in the context examined, and thus can drive to any governance mode depending on the value of the decision factors. Specifically, if trust (T) is low and resource position (RP) and expected value (EV) are highly rated, then the need to protect from opportunism drives to Quasi-Hierarchy alliances. However, if trust is low but either the uncertainty is high or both the resource position (RP) and expected value (EV) is low, then the need to flexibility will surpass the need to protection leading to Quasi-Market alliances. Finally, if trust is low but either resource position (RP) or expected value (EV) is high, then the need to either sustaining competitive advantage or growth will increase the need to protect from partners through intermediate governance modes.
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