A View From INSEAD
The Importance of R&D Alliances
Professors Jurgen Mihm and Vish Krishnan
By Jurgen Mihm, Programme Director, and Professor of Innovation, Technology & Operations at San Diego's Rady School of Management, Vish Krishnan
The accelerating pace of technological change and shortening product life cycles are forcing many firms to create and commercialise knowledge in a more timely and cost-efficient manner. Firms are thus engaged in deepening and broadening their innovative capabilities, which are crucial for their long-term survival and growth. Here, Strategic R&D Management programme director, Jurgen Mihm and San Diego's Professor of Innovation, Technology & Operations, Vish Krishnan speak about the importance of R&D alliances.
Would you agree that R&D alliances are a vital mechanism for creating new technological knowledge?
Jurgen: Think of it this way. How likely is it the next big innovation is going to come from within a given company? More often than not, it will come from the outside. Considering this, the questions that need to be asked are:
- How are you going to make sure that you reap all the benefits of what goes on around you?
- How do you make sure that external knowledge can be transferred into your company and used to make your product(s) better and more profitable?
Alliances are essential because the world is moving ever faster. There are so many breakpoints in so many industries. The landscape is getting more and more competitive and it is getting harder to stand out and continue to maintain and create market space.
To survive in this environment, it is vital to access the knowledge of others early on in the R&D process and alliances are the tool to do just this. They enable you to reap the benefits of what others understand and use this knowledge to enhance your products. This is what R&D alliances are about: getting knowledge from outside your company and making it work for you.
Vish: Organisations must also adapt their products, processes, and business models to changes in the market environment and alliances are helpful to bring complementary partners together and create a whole that is greater than the sum of the parts.
Are there any industries which benefit more from R&D alliances?
Jurgen: The industries that benefit most are those in which innovation is expensive. Industries like the pharmaceutical and automotive ones. Combustion engines are expensive to produce, for example. So how do you get around this? You tap outside knowledge from firms whose technological focus complements your own. By doing this, you extend what you can do way beyond your own capabilities and you avoid falling victim to the cost of innovation which risks hurting, or killing, you.
Vish: Life sciences is another area where there is increasing specialization; some firms excel in upstream discovery, while others have gained economies of scale and learning in downstream development and validation activities. Alliances help put together an end to end entity that is able to take promising discoveries from the lab to market in a cost and time effective manner.
Does the nature of R&D alliances vary depending on the industry?
Jurgen: Yes they do. In more mature industries, the alliance is characterised by companies of comparable size and reach. They are equal partners and often the main motivation is cost savings. They partner up because they have the same objectives. The automotive industry is a good example of this, particularly when it comes to emissions management.
For emerging industries, alliances are often between companies in different stages in their life-cycle. It’s a more dynamic environment in which a newly founded company will form an alliance with a mature one. The new company has made a discovery that the established one wants to benefit from.
What are the advantages to R&D alliances?
Jurgen: I would argue that the main advantages are as follows:
- Access to new knowledge and access to new resources and the increased potential that comes with this
- The increased learning opportunities
- Market access
- The cost savings achieved when working with a partner
How do R&D alliances differ to other types of alliances?
Jurgen: In R&D alliances, open communication is key. Intellectual property issues always exist and sometimes competition remains fierce. The one big thing to understand is that R&D alliances carry a lot more uncertainty compared to other types of alliances. The outcome can be very different from what you expect and perspectives can change very quickly. For this reason, communication is key. Because a great deal of uncertainty exists, it is important to communicate and constantly re-distribute and re-align interests. There needs to be ongoing discussions on what people what out of the alliance. In doing so, the alliance remains mutually beneficial.
Take, for example, sales alliances. The metrics are very simple and there is not a lot of uncertainty. In fact, it is very black and white. The results are easy to understand and what to expect out of it and how it is going to be run is clear. Not so in R&D alliances. You need to understand what you have and if it makes sense. How do we deal with side effects? This makes thinking about R&D alliances very different to other kinds of alliances. It’s a governance and mutual trust issue.
What would you like participants to take away from the programme?
Jurgen: I would like participants to understand that alliances require not only discussion on a technical level, but also a discussion on how best to carry the alliance forward. By this I am referring to the need for constant re-adjustment in search of meaning and common sense. Why are we in this alliance? How can we make it mutually beneficial every step of the way? More than in any other kind of alliance, it is a relationship that requires attention and the ability to cope with uncertainty and change.
Finally, R&D alliances are a complement to, rather than a substitute for, firm’s internal R&D efforts.
Vish: Alliance partners need to figure out ways to structure the alliance arrangement so that the optimal product with the most competitive terms is delivered to the market resulting in a winning partnership. In some cases they may share the development investment with one party doing most of the R&D work, while in other cases the R&D effort or generated revenue is shared across the alliance partners. It is useful to have a deep understanding of which approach works when to get the maximal profits and market coverage.
How is the concept of alliances taught on the programme?
Vish: We will discuss the topic of alliances with the rigour and enormous importance they deserve. Through case examples, we will examine the trade-offs underlying the different alliance arrangement. We will also consider the organisational and psycho-social issues in managing alliance partners and learn from experiences of firms who have navigated the transition in a dynamic marketplace.