Innovation, Strategic

Alliances and Networks

Nicolas Jonard

DIMETIC Strasbourg, March 30, 2009

Background
‡ We have seen, over the past 2 decades, a
changing perspective on firms:
„ From firms as atomistic, autonomous agents competing
in the anonymous marketplace
„ To firms as embedded in a rich network of horizontal
and vertical relationships with other organizational
actors
‡ Lasting, strategic relations tie firms to suppliers,
customers, competitors and other entities, across
and within industries and countries
‡ Is the conduct and performance of firms affected
by the network of relationships in which they are
embedded?
2
Strategic alliances and networks
‡ Alliance: Voluntarily initiated cooperative
agreement between firms that involves
exchange, sharing or co-development and can
include contributions by partners of capital,
technology or firm-specific assets

‡ Strategic network as a set of alliances

‡ Firms engaging in alliances are relationally and

structurally embedded

3
Neither markets nor hierarchies
‡ Make or buy depending on contracting hazard
and transaction costs
‡ Market exchange is better when contracts are
readily written and enforced, and transaction
costs are low
‡ Hierarchies are better when opportunism is likely
and transaction costs are high
‡ Alliances (and networks) make sense in between:
when transaction costs are not so high that they
require hierarchical control but not so low that
market exchange is simple
4
The resource-based view
‡ Enduring competitive advantage originates in the
firm holding inimitable and non-substitutable
resources (INSRs)

‡ Networking is a strategy for reaching beyond the

boundaries of the firm for complementary INSRs:
knowledge and information, labor, capital, goods
and services, access to further resources,…

‡ A firm's network attributes themselves constitute

INSRs (and constraints...), providing a possible
answer to the question of the origin of resources
5
Social capital
‡ Transactions/ties are embedded in a history of
interaction/ties

‡ Alliances do not exist in a vacuum, but in a larger

network of alliances

‡ Social capital theories tell us that there is value

from social network position

‡ Do firms differ in their conduct and profitability

because they hold different network positions?
6
Relational embeddedness
‡ Evidence that firms go back over and over to
their past partners

‡ Value of strong/repeated ties:

„ Exchange of high-quality information and tacit
knowledge: deeper understanding of the partner, shared
goals and representations,…
„ Part of a social control mechanism: trust facilitates
interaction, mitigates appropriation concerns (thus
perhaps implies simpler and less costly contracts):
knowledge-based trust

7
Structural embeddedness
‡ Local structure beyond neighbours: indirect ties
‡ Value from closure (Coleman):
„ Clustered neighbourhoods imply shared information
about others' trustworthiness, capabilities, objectives
(ex ante) and induce good behaviour
„ Deterrence-based trust from reputational concerns
‡ Value from holes (Burt):
„ Optimizing knowledge flows implies maintaining
structural holes to avoid redundancies
„ Connect distant parts of the network for rapid access to
resources and information
„ Insurance against technological surprises unforeseeable
from local cluster
8
Implications
‡ A network perspective can help understanding
the nature of competition/degree of
profitability/barriers to entry across industries
‡ A network perspective can help understanding
intra-industry differences, groups (cliques) and
barriers to mobility across groups
‡ Network characteristics (density, holes, structural
equivalence, core vs. periphery,…) matter:
„ Dense networks can be conducive to tacit or explicit
oligopoly coordination, implying increased profitability
„ Structural holes can confer power through control,
implying increased profitability

9
Networks
‡ Vertices
V={1,2,3,4,5,6,7,8}

‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering

‡ Betweenness 10
Networks
‡ Vertices
g={12,13,24,25,26,37,38,
45,46,56,78}
‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering

‡ Betweenness 11
Networks
‡ Vertices
N2(g)={1,4,5,6}

‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering

‡ Betweenness 12
Networks
‡ Vertices
d(2,i;g)=1 ∀ i∈N2(g)
d(2,7;g)=3
‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering

‡ Betweenness 13
Networks
‡ Vertices 3
c4= =1
3x2/2
‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering I

‡ Betweenness 14
Networks
‡ Vertices 3
c2= =1/2
4x3/2
‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering II

‡ Betweenness 15
Networks
‡ Vertices 0
c1= =0
2x1/2
‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering III

‡ Betweenness 16
Networks
‡ Vertices
b4= 0

‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering

‡ Betweenness I 17
Networks
‡ Vertices
b1= 4x3 = 12

‡ Edges
4 2 1

‡ Neighbourhood
5 6 3
‡ Distance
7 8
‡ Clustering

‡ Betweenness II 18
Innovation networks
‡ Innovation networks: networks emerging from
firms' decisions to form strategic alliances aimed
at learning and producing new knowledge

‡ R&D collaborative agreement, research joint

ventures,…

‡ Purpose: reaching beyond the boundaries of the

firm for complementary knowledge resources in
order to gain competitive advantage

19
Innovation in alliances
‡ Innovation as knowledge recombination

‡ Firms heterogeneous in their knowledge

endowments

‡ Properties of the innovation process:

„ Inverted-U relationship between “distance” and the
likelihood of success
„ Increased post-alliance overlap: learning from partners
makes partners less attractive

20
Properties of innovation networks

‡ Sparse

‡ Clustered

‡ Low diameter

‡ Asymmetric degree
distribution

21
Small worlds
‡ Are innovation networks small-world networks?

‡ Small worlds are ubiquitous:

„ 6 degrees of separation
„ Board membership and ownership networks
„ Power grid US
„ Neural network of worm
„ Kevin Bacon game
„ Scientific co-authorship
„ Biotech alliances
„ ...
22
Standard explanations
‡ Sparse: costs of link formation

‡ Skewed link distribution:

„ Heterogeneity in attributes and goals
„ Preferential attachment

‡ Clustered:
„ Relational and structural embeddedness, social capital,
trust and control
„ Agglomeration effects (innovation in the air, industrial
districts, labor, face-to-face interactions, tacit
knowledge,…)

23
But…
‡ Empirical studies emphasize the causal role of
network-oriented structural and strategic motives
in partner selection

‡ Very little (static), if any consideration at all of

partner complementarity in alliance formation

‡ Is partner complementarity or embeddedness

causal (spurious…)?

‡ What about the relationship between firm

position and firm performance?

24
A simple model
‡ Firms located in a knowledge space,
holding distinct endowments

‡ Strategic alliances form with partners

neither too similar nor too dissimilar

‡ Alliances permit learning: similarity ↑

‡ Alliances permit innovation: similarity ↓

25
Alliance decision
‡ Knowledge space: K=[0,1]×[0,1]

‡ Address of firm i: (xi,yi), with 0≤xi,yi≤1

‡ Distance between i and j in knowledge

space is standard Euclidean distance

‡ Alliance partners must be both similar and

complementary: δ1≤di,j(k)≤δ

26
Alliance decision
y
1
‡ Consider the red
vertex:
δ
„ Vertices in the white
area satisfy the δ1
similarity constraint
„ Vertices in the white
area satisfy the
complementarity
constraint
„ The red vertex forms
only 2 links 0 1 x

27
Alliance decision
y
‡ All firms behave in a 1
symmetric manner

‡ A network of strategic
alliances forms

‡ This one has 2

singletons and 2
connected components

0 1 x

28
Equilibrium
‡ The strategic alliance game is a
simultaneous link formation game

‡ Firms’ incentives to form (or not to form)

a partnership are symmetric

‡ There is a unique equilibrium network

g*={ij: δ1≤dij(k)≤δ}

29
Knowledge dynamics
‡ Twofold purpose of joint R&D activities:
„ Absorb existing knowledge (learning)
„ Produce new knowledge (innovation)

‡ Learning increases the overlap of the

technological portfolios of the partnering firms

‡ Firms move closer to each other in K (partial

linear adjustment): xi(t+1)=αxj(t)+ (1−α)xi(t)

30
Knowledge dynamics
‡ Innovation causes a random reorganization of
the knowledge space and partnering possibilities

‡ Dislocation for any firm is determined by:

„ Where in knowledge space the innovation takes place
„ How disruptive it is

‡ Formally, the (expected) shock on any firm is:

„ Decaying with the distance to the innovating partnership
„ Scaled by an industry-wide disruptiveness parameter θ

31
Knowledge dynamics
y

‡ The relationship 1/2

between the range
of dislocation and
the distance d from
0
the firm to the d
innovators:

Disruptive: black -1/2

Incremental: red
0

32
Numerical experiment
‡ At each time step firms form all possible alliances
‡ Firms learn from and move towards partners
‡ With small probability one innovation occurs,
imposing a relocation on all firms in the industry
‡ Settings:
„ Industry size n=75 firms
„ Similarity and complementary constraints: δ=0.2, δ1=0.06
„ Absorptive capacity α=0.01 (speed of partial adjustment)
„ History length: 1,500 periods
„ 25 replications
„ θ varies from 1/20 to 1

33
Snapshot results I (t=500)
‡ Industry network
‡ Incremental
innovation
„ Component sizes 32, 42
„ Average degree 12.7
„ Density 0.17
„ Clustering 0.56
„ Rescaled clustering 3.2
„ Average distance 2.01
„ Rescaled distance 1.02

34
Snapshot results II (t=500)
‡ Industry network
‡ Disruptive innovation
„ Component size 75
„ Average degree 7.01
„ Density 0.095
„ Clustering 0.52
„ Rescaled clustering 5.5
„ Average distance 4.05
„ Rescaled distance 1.67

35
Snapshot results III (t=500)
‡ Industry network
‡ Radical innovation
„ Component size 75
„ Average degree 5.01
„ Density 0.067
„ Clustering 0.40
„ Rescaled clustering 5.9
„ Average distance 7.80
„ Rescaled distance 2.76

36
Time series results I
‡ Average number of
partners per firm 20
(moving average) θ = 0.05
18
θ = 0.1
θ=1
16
‡ Time runs from 0
Average degree
to 1,500 14

12

‡ 3 levels of 10
disruptiveness
8

6
‡ Outbursts and
collapses in 4
1 201 401 601 801 1001 1201
network activity Time
37
Time series results II
‡ Average clustering
coefficient (moving 0.7
average) θ = 0.05
θ = 0.1
0.6 θ=1
‡ Time runs from 0
to 1,500
Clustering
0.5

‡ 3 levels of
disruptiveness 0.4

‡ Persistent
0.3
fluctuations in 1 201 401 601 801 1001 1201
network organization Time
38
Time series results III
‡ Distance among
reachable pairs 7
(moving average)
6

‡ Time runs from 0

Average distance
5
to 1,500
4

‡ 3 levels of 3
disruptiveness
θ = 0.05
2 θ = 0.1
θ=1
‡ Persistent
1
fluctuations in 1 201 401 601 801 1001 1201
network organization Time
39
Aggregate results I
‡ Relationship between
average degree and 50
the disruptiveness
45
of the innovation Median 25%-75%
regime 40

35
Degree
‡ Display the range 30
and central
25
tendency over the
set of replications 20

15

‡ Lowest for 10
0.05 0.08 0.14 0.22 0.37 0.61 1.00
intermediate
θ
disruptiveness
40
Aggregate results II
‡ Relationship between
rescaled weighted 5
clustering and
disruptiveness of

Rescaled weighted clustering

innovation regime 4

‡ Rescaling with 3
respect to random
benchmark
2
Median 25%-75%
‡ Always > 1,
strongest for 1
0.05 0.08 0.14 0.22 0.37 0.61 1.00
intermediate
θ
disruptiveness
41
Aggregate results III
‡ Relationship between
rescaled weighted 2.4
distance and
disruptiveness of 2.2

Rescaled weighted distance

innovation regime 2.0
Median 25%-75%

1.8
‡ Rescaling with
respect to random 1.6
benchmark
1.4

1.2
‡ Always > 1,
strongest for 1.0
0.05 0.08 0.14 0.22 0.37 0.61 1.00
intermediate
θ
disruptiveness
42
Implications
‡ High clustering and low characteristic path length
as produced by the model are the defining
features of small worlds

‡ Results so far suggest that small worlds arise

from the conjunction of randomness in innovation
and the short-term quest for suitable partners

‡ No sophisticated attempts from firms to

strategically manipulate their network, no social
capital value to specific positions

43
Position and performance I
‡ Performance:
total disruption 0.7

Correlation of degree and performance

imposed on other
firms 0.6

0.5
‡ Relation between
degree (number 0.4
of partners) and
performance? 0.3

Median 25%-75%
0.2
‡ Always positive,
strongest for 0.1
0.05 0.08 0.14 0.22 0.37 0.61 1.00
intermediate
θ
disruptiveness
44
Position and performance II
‡ Relation between
weighted clustering 0.2
(density of ego-

Correlation of weighted clustering and

network) and Median 25%-75%
performance? 0.1

‡ Positive for performance 0.0

incremental
regimes:
constraint is good -0.1

‡ Negative for -0.2

0.05 0.08 0.14 0.22 0.37 0.61 1.00
disruptive regimes:
θ
holes are good
45
Position and performance III
‡ Relation between
betweenness 0.4
(centrality) and

Correlation of betweenness and

performance? 0.3

0.2

performance
‡ Negative for 0.1
incremental
regimes: holes 0.0
are bad
-0.1 Median 25%-75%

-0.2
‡ Positive for
disruptive regimes: -0.3
0.05 0.08 0.14 0.22 0.37 0.61 1.00
holes are good
θ
46
Implications
‡ The relative benefits of structural holes and
cliques are contingent on industry life-cycles and
the extent to which innovation is disruptive

‡ Similar findings in the literature: cf. steel

(incremental) vs. semi-conductor (more
disruptive) industries

‡ Firms perform no sophisticated calculation in

order to optimize their network position:
„ No attempt to span holes in order to be insured against
“distant” innovations
„ No considerations of social capital such as partner
referrals or returning to known partners
47
Conclusions
‡ A network approach can help understand
persistent differences in the conduct and
performance of firms

‡ Allegedly, learning, social capital and network-

oriented strategic motives materialize in partner
selection

‡ A simple model has replicated all the conduct

(repeated ties and transitivity) and properties
(clustering and short distances) characteristic of
observed alliance networks
48
Conclusions
‡ Specifically, cliques enhance performance when
innovation is incremental; structural holes
enhance performance when innovation is
disruptive

‡ Moderately disruptive innovation yields

pronounced small world features and no impact
of position on performance

‡ Consistent with the small world view of cliques

and structural holes as complementary factors
jointly enhancing network efficiency in moving
resources 49
Conclusions
‡ Results stems from:
„ Complementarity in the knowledge space, combined
with learning, generates inertia and transitivity in firms’
partnering decisions
„ Discontinuities in knowledge endowments resulting from
innovations generate ties spanning cliques in
disconnected regions of the network

‡ Incorporating time-varying measures of partner

complementarity could allow to identify the real
effects of network position

50