The 5 rules of collaborative innovation

We have cause for celebration in Europe as the European Central Bank’s quantitative easing and cheaper lending strategies have brought some growth back to the Eurozone. But questions remain on the long-term viability of the economy. What would happen once the central bank’s intervention loses its efficacy, and how can Europe make economic growth sustainable in a longer run? The ideas brought forth by the World Economic Forum’s recent report on Collaborative Innovation suggest that this approach may provide the right framework for this very challenge.

Collaborative innovation refers to the strategic partnership specifically between a young, entrepreneurial firm, and an established firm, such as a multinational corporation. Collaborative innovation combines the strengths of these two firms – at uniquely different stages of business – to discover and commercialize new technologies, products, and services efficiently. At its best, collaborative innovation promotes long-term economic growth and regional competitiveness.

In addition to combining the strong suits of each firm, collaborative innovation allows for compensation of each company’s weak points. From the young firm’s perspective, the value of collaborative innovation lies in addressing one of the greatest obstacles for entrepreneurs: scaling up. Managing increasing output and high growth quickly are often challenging for a new company without extensive capital or experience. Partnering with an established firm can solve the problem by allowing startups to gain access to resources, capital, and markets as well as others’ experience in scaling a product or service. For the established firm, on the other hand, collaborative innovation brings creative entrepreneurialism to complement the company’s management expertise, brand strength, and reputation in order to expand existing markets and create new ones.

A new combination

While the process of innovation typically requires time for novel ideas to unfold, an alternate path for both the young and established firm to either test out a partnership or to get the most out of collaboration quickly is for the partners to investigate and strategically pursue fast expanding markets (FEMs).

FEMs are new market-based business opportunities that experience double-digit growth rate. FEMs tends to occur spontaneously and as a result fly under the radar of macroeconomic analysis, to the disadvantage of many companies, which often rely heavily on macroeconomic outlook when seeking new sources to boost profitability. We see that together collaborative innovation and FEMs makes it possible for the two firms to pursue of-the-moment business opportunities for more immediate gain. Moreover, while there is undoubtedly value in the long-term investment of new discoveries and innovations independent of existing market needs, the benefit of entering FEMs through collaborative innovation is that it provides the two partners a chance to find momentum working together as well as a chance to pursue an immediate business opportunity.

For companies considering collaborative innovation, there are five aspects to consider:

1) Understanding the business case for each partner. A young firm will be able to scale more quickly with an established partner that has more capital and business knowledge, while an established firm gains new industry knowledge and opportunity to act early on new discoveries and innovations offered by the young firm.

2) Networks are the best avenues to finding the right partner. Selecting the right partner matters, so it is necessary to spend time and effort culling one’s networks to identify potential partners with complementary knowledge and resources that can think strategically about collaborative innovation.

3) Partnership structures should be flexible to react to a wide range of scenarios. Have a clear vision of the goals of the collaboration before defining the conditions and boundaries in how the two companies will work together. The arrangement can be formal or informal, with structures ranging from simple knowledge-sharing to full acquisition.

4) Intellectual property agreements need to be mutually beneficial. Young firms will lose confidence in the partnership and becoming unwilling to collaborate in the longer term if the established firm views intellectual property as a commodity without taking into account the needs and interests of the smaller, entrepreneurial firm.

5) Employees need to be prepped for collaboration. Established firms should take care not to fall into the trap of attempting to assimilate the smaller firm. Instead, the two firms will have to build trust and learn to relate to one another. It is all too easy to forget that it is a partnership of equals. One way the established firm can help build trust is by having more transparency and sharing competitive insights and information.

While the benefits of collaborative innovation are immediate for a small entrepreneurial startup, the payoff from the investment of time, capital, and resources for the established firm is less clear. What is of immediate value to the established firm, however, is that collaborative innovation gives back to the entrenched firm a creative mentality and entrepreneurial drive that is in many ways essential for creating and detecting new markets and coming up with new innovations but hard to preserve under multiple layers of management.

Today, businesses of all sizes risk becoming irrelevant on a daily basis. Rapid technological change and the speed of communication have permanently altered the rate at which markets evolve. This is one of the reasons why FEMs are unplanned and unanticipated. It is by capitalizing on collaborative innovation that Europe now has a framework for sustainable growth in the long-term.

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Authors: Mark Esposito is an Associate Professor of Business & Economics at Grenoble Graduate School of Business in France, a Professor at Harvard University Extension School, and a Senior Associate at the University of Cambridge-CPSL (Twitter: @Exp_Mark). Terence Tse is Associate Professor in Finance at the London campus of ESCP Europe Business School (Twitter: @terencecmtse). 

Image: People walk on the esplanade of La Defense, in the financial and business district west of Paris April 10, 2014. REUTERS/Gonzalo Fuentes