Lessons from Public-Private Innovation Strategic Alliances for SMEs

Strategic alliances are an effective way to provide diversity of resources and gain entry to new knowledge and markets. Large corporations have entered recently into alliances with public sector organizations to support innovation in SMEs, combining private and public policy agendas. This article looks into the structure and management of these strategic alliances, their strong practices and inhibitors and how they impact the different parties involved.

Background

The formation of a portfolio of alliances providing a diversity of technological resources and business inputs has emerged recently as a strategy of large corporations (Hoffman, 2007; Sampson, 2007; Ozcan and Eisenhardt, 2009; Jiang et al, 2010; Phelps, 2010; Vasudeva and Anand, 2011). Despite the obvious advantages, the alliances portfolio strategy can be very resource-intensive due to the complex knowledge transactions (Faems et al, 2008), the required governance capabilities (Sarkar et al, 2009; Schreiner et al, 2009) and the potential appearance of conflicts (Malhorta and Lumineau, 2011). At the same time, public sector organisations are increasingly under pressure to use taxpayers’ money to help a wider circle of economic actors – a pressure that became only stronger as the result of the recent economic crisis.

Professional coaching services can be subsidised, however a cost model needs to be in place so as to recognise the value added to the company and commitment undertaken.

Small and Medium-sized Enterprises (SMEs) need knowledge networks to innovate and grow (Thorpe et al, 2005; Macpherson and Holt, 2007). However, small firms find difficult to co-operate with universities and research organisations (Izushi, 2003). Meanwhile small firms perceive the partnership with a large corporation to include high risks and a range of pitfalls (Prashantham and Birkinshaw, 2008).

These concerns are much more than ill-perceived fears since the value created by an alliance can be appropriated by one of the engaging parties (Larsson et al, 1998; Agedbesan and Higgins, 2010), more likely the stronger one. Moreover, SMEs can only benefit from the cooperative R&D, if they manage to keep the transaction and coordination cost at a low level (Okamuro, 2007). As a result, SMEs are looking for schemes that can regulate the interaction with their bigger partner and cover a part of the relevant cost.

A new type of private-public alliance has recently emerged in Europe the so-called Innovation Strategic Alliances (ISAs). These are partnerships of large corporations with organisations from the wider public sector to support innovation in SMEs and ultimately serve their own innovation strategies. These partnerships have the following characteristics:

A new type of private-public alliance has recently emerged in Europe.

  •  a significant element of Knowledge and Technology Transfer
  • a proven capability in terms of having established a repetitive process and a set of offered services
  • direct participation of an organisation from the wider public sector (e.g. university, public research organisation, a government department)
  • a considerable contribution of resources from a large corporation (or a group of them)
  • focus on strengthening the innovation capabilities of SMEs.

Methodology

Over a period of three years, we identified and studied as part of the RAPPORT project thirty-five ISAs, out of which ten were selected for detailed analysis as the strongest initiatives with the support of a group of independent experts (Tsekouras and Kompis, 2014). Managers and executives from the ten ISAs were interviewed to identify the historical trajectory of the programs, their organizational structures, the alliance activities including the offered services and the resource or know-how contributions from large corporations and public sector organizations. Twenty participating SMEs were also interviewed to explore their innovation journey within the respective programs. A thematic analysis was carried out to identify configuration patterns, strong practices and inhibitors, decision making activities and the influence of the main parties (large corporations and public sector organizations) on strategic decision-making.

SMEs attracted to ISAs: Types and Motivations

From the sample of interviewed SMEs was found that the engaging SMEs are active in the sectors of Engineering; Information and communication technologies; Pharmaceuticals, biotechnology and medical; Clothing and textiles; and Business services (in descending order). The engaged SMEs are motivated mainly by the support they receive for product innovation,business innovation (e.g. development of appropriate business models) and access to markets. These are potentially followed by collaboration with the large corporation(s) to access their distribution channels. Finally, only a small portion of SMEs referred to the desire to engage in ISAs as part of a strategy to access funding.

Configuration of Innovation Strategic Alliances

The following three types of ISAs were identified:

  • Public-driven ISAs: a public organisation drives the strategic alliance in line with a public policy agenda. Typical example, the alliance of a (publicly-funded) space agency with its large size contractors, supporting SMEs to commercialise the developed space technologies for civil applications.
  • Private-driven ISAs: a large private corporation or a group of them set the strategic agenda of the alliance, developing hierarchical relationships with the participating SMEs and the other partners. Typical example is the alliance of a large pharmaceutical retail chain with a public university to support developing innovations from SMEs into fully-fledged products.
  • Ecology-shaped ISAs: characterized by a “flatter” structure with several stakeholders involved in the activities of the programme. A typical case is a large multinational in the electronics sector which has allied with a regional government and a local university to incubate start-ups and foster the development of promising technological concepts by established SMEs.

Each configuration of ISA was identified with some strong practices as well as some inhibiting factors as depicted in Table 1.

Table 1 Strong practices and inhibitors of each kind of ISA

Click to enlarge

Strategic Influence

The analysis of the ISAs reveals that the programmes with the most distributed strategic influence perform better than the ISAs with the strategic influence concentrated on one of the two parties (the large corporation or the public sector organisation). A relative balanced distribution of strategic influence between the private and public parties produces a more fertile environment for knowledge sharing and innovation support within SMEs, compared to single actor dominance. The programmes with the highest number of challenges are the programmes where a lot of strategic power is concentrated in one party of the partnership, public or private.

The ISAs with a projects portfolio strictly controlled by the dominant partner where only strategic interests fully aligned with the dominant partner are selected for support. The strategy of a strictly controlled portfolio is the result of resolving the emerged tensions through a perceived strategic clarity, namely the concentration of strategic influence into one party and the careful selection of a limited list of partners and SMEs to be involved.

Ecology-shaped programmes that operate as a constellation of alliances are the ones with the most effective mechanisms. Their success depends largely on progressive selection of partners with solid networks and reputation.

Secondly, the ISAs which use the power of a pivotal partner (or several pivotal partners) to create a number of alliances and projects around a core market or technology area, very much like a spider makes a web to catch valuable items. These ISAs create a web of interconnected alliances, which focus on the same theme and provide several opportunities for the participating partners to connect to each other, as far as they are working towards specific (alliance) aims and objectives. These ISAs develop a project portfolio as an agglomeration of different strategic priorities, generated by several concurring alliances which however must be orchestrated on a web of alliances in order to serve an overall strategic target.

Thirdly, the ISAs developing their project portfolio through a dynamic (and for times chaotic) interaction through a number of competing alliances organised as a constellation of alliances (several priorities and interests are accommodated within the alliance but only the fittest projects attract significant alliance resources). The dynamic constellation ISAs is the result of resolving the different interests and strategic priorities (potentially included in an alliance) through flat structures, active encouragement of openness and allow to as many players as possible to develop their own strategic space within the program. In this case, different alliances are co-located or co-exist in the same physical space with the aim of learning from each other and “interchange” partners.

Conclusions and Recommended Actions

ISAs, the new type of private-public alliances that has emerged recently in Europe, exhibits numerous characteristics that can support the delivery of effective innovation activities in changing environments as illustrated by several cases examined. ISAs go beyond the more-established open innovation business to business model, due to the public sector’s catalytic role. The public sector effectively reduces the risk for large enterprises, helps to lower the participation threshold and builds trust between SMEs and large enterprises despite having very diverse needs for innovation.

The majority of ISAs target SMEs that can master or adapt new technologies since the rest of SMEs are rarely of interest to large corporations for partnerships. An exception to this rule is the collective action of several large companies which have an obvious interest to upgrade the capabilities of the smaller firms which can find a place in their supply chains.

ISAs can thrive in a stable and predictable regulatory framework within which to invest and grow.

The analysis reveals that the ecology-shaped programmes that operate as a constellation of alliances are the ones with the most effective relational mechanisms. Their success depends largely on progressive selection of partners with solid networks and reputation. Apart from the range of strong practices identified, the inhibitors in this kind of ISAs, are more easily manageable. Proactive SMEs have the power to develop their creativity and manage their relationships, while in the private-led and public-led programmes it is much more difficult to do so, due to their more hierarchical structures.

Private-driven ISAs despite enjoying better focus to the market requirements, they tend to suffer from fluctuations in the committed resources. Public-driven ISAs programmes enjoy a good portfolio of resources but they can suffer from over reliance to expert sources, lack of market feedback and sustainability challenges. Successful programmes enjoyed a minimum of 3 years funding to aid recruitment of skilled delivery teams and ability to engage with SMEs throughout several key stages of their innovation journey.

Key recommendations

The key recommendations in the context of ISAs are:

  • ISAs can thrive in a stable and predictable regulatory frame work within which to invest and grow. Specific policies have to do with relaxing European rules for public support for companies, e.g. de minimis rules, simpler public procurement for SMEs and removing incentives to stay small.
  • Rather than spreading the support resources thinly across every sector, it is recommended to identify the industries and firms where Europe has clear potential to maintain or extend a competitive advantage.
  • Towards providing direct support and advice for close-to-market activities, this can be realised via a new network of professional coaches covering technological innovation, strategic innovation, or financing. Although professional coaching services can be subsidised, a cost model needs to be in place so as to recognise the value added to the company and commitment undertaken.
  • The study has shown that geographic proximity is a key success factor. It is thus essential to simplify planning regulations to develop places where enterprises can interact.
  • The role of serial entrepreneurs needs further backing and policies should be devised to encourage activities by those individuals can be implemented.
  • Policies are required to motivate staff from ISA participants to work flexibly across different organisations to catalyse exploitation of the science and technology base.

By Costis Kompis and George Tsekouras

About the Authors

Dr. Costis Kompis is Managing Partner at Vodera Ltd. He specializes in knowledge exchange, technology transfer and research strategy. His work combines R&D with innovation management.He leads a team of practitioners that provide innovation management services to R&D intensive organizations and government agencies across Europe interested in commercialization of technologies and business growth as well as their adoption as a key enabler in other industries.

 

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Dr. George Tsekouras is Principal Research Fellow at CENTRIM (Centre for Research in Innovation Management), University of Brighton. He leads the research in the area of innovation management in the Small and Medium-sized Enterprises. He has carried out research on a number of related areas like peer-to-peer learning for SMEs, Information and Communication Technologies for SMEs, innovation management challenges for SMEs and raising the absorptive capacity of non-high tech SMEs.

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Photo: company network, company mind mapping from shutterstock.com

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