New Business Growth in the Era of Collaboration

The recent interventions of central banks around the world, mainly the Federal Reserve in the United States and the European Central Bank in Frankfurt, have provided the fatigued global economy with some oxygen after the severe financial turmoil of 2007-2008. While quantitative easing has lowered interest rates and led to some relief, questions on the long-term viability of the economy remain. What would happen if the central bank’s intervention lost its efficacy, and how can we make and attain economic growth sustainably in a longer run? 

The ideas brought forth by the World Economic Forum meeting in Davos, Switzerland, last January, suggested that collaborative innovation—defined, in our context, as a strategic partnership specifically between a young, entrepreneurial firm or start-up, and an established one, such as a multinational corporation—may provide the right framework for this very challenge. Collaborative innovation stems from the opportunity of creating new ideas, products, or services that lead to the creation of new markets and new employment. It is an essential step for the renewal of any economic infrastructure.

Collaborative innovation combines the strengths of two companies that are at uniquely different stages of business to discover and commercialize new products and services efficiently. At its best, collaborative innovation promotes long-term economic growth and regional competitiveness. It also allows for compensation of each company’s weak points. For the young firm, the value lies in addressing one of the greatest obstacles for entrepreneurs: scaling up. Managing increasing output and high growth are often challenging for a new company without extensive capital or experience. Partnering with an established firm can help start-ups gain access to resources, capital, and markets, as well as others’ experience in scaling a product or service. For the established firm, collaborative innovation brings creative entrepreneurialism to complement its management expertise, brand strength, and reputation so that it can expand existing markets and create new ones.

One path for companies to either test out a partnership or get the most out of collaboration quickly is to investigate and strategically pursue fast-expanding markets (FEM). FEMs—a term we coined to label the phenomenon—are new, market-based business opportunities that experience double-digit growth rate. FEMs tend to occur spontaneously; thus, they fly under the radar of macroeconomic analysis and get missed by many companies seeking new sources to boost profitability. In a previous SSIR article, we explained how entrepreneurs and enterprises astute enough to recognize a FEM can easily pivot or diversify their suite of products and services, and thereby develop a new competitive edge. Research so far has demonstrated that FEMs are often the outcome of collaborative environment and emerge as grassroots ecosystems permeated by an inherited degree of innovative capability. We believe that collaborative innovation can become the context that harvests those unique business opportunities, which may in turn lead to the creation of new FEMs. 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 partners a chance to find momentum in working together and to pursue an immediate business opportunity.

Companies considering collaborative innovation should consider: 

• The business case for each partner. One example of a successful collaborative innovation partnership is between DiaSorin, an Italian company with a near-monopoly on the Vitamin D-testing market, and Trivitron, a late-stage start-up based in Chennai, India, that specializes in diagnostics and medical devices. The two companies formed a joint venture in 2012 to take advantage of the growing in-vitro diagnostics market in India. The benefits of the collaboration are clear: Trivitron is local to the market but doesn’t have the ability to augment its offerings; DiaSorin has the ability to scale, but lacks familiarity with the culture and India’s rules and regulations. Through their joint venture, DiaSorin Trivitron Healthcare Private Limited, the two companies have found a way to meet market demand while strengthening both companies’ positions.

• Using networks to find the right partner. It’s necessary to spend time and effort culling one’s networks to identify potential partners with complementary knowledge. This is something we learned from Dupont, which has engaged in several successful collaborative innovation projects with small and medium enterprises, in areas such as food security and environmental protection.

• Creating flexible partnership structures. Have a clear vision of the goals of the collaboration before defining the conditions and boundaries around how the two companies will work together. The arrangement can be formal or informal, with structures ranging from simple knowledge-sharing to full acquisition. This was very visible in a recent partnership between IE Business School in Madrid and the Financial Times in London, which created a new partnership structure called Corporate Learning Alliance. The Alliance is built on a shared-resource start-up model; each party helps define new products and services, and then develop new hybrid business models that evolve as those solutions take shape. The ability to custom-tailor models for each solution is the direct result of flexible business structures that span the corporate boundaries of both parties.

• Ensuring that intellectual property agreements are mutually beneficial. Young firms will lose confidence in the partnership and become unwilling to collaborate in the longer-term if the established firm views intellectual properties as a commodity without taking into account the needs and interests of the smaller, entrepreneurial firm. A good for-profit example of this was the creation of the animated film Toy Story, which resulted from a mutually beneficial agreement between Disney and the entrepreneurial film company Pixar. While the intellectual property agreement stayed with Pixar (the smaller/creative entity), Disney used its expansive distribution network to reach out globally and generate one of the most lucrative movies in its recent history.

• Prepping employees 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 by sharing competitive insights and information. 

Today, social enterprises and other 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 businesses can’t anticipate FEMs. Collaborative innovation, used in conjunction with FEMs, can provide a framework for sustainable economic growth worldwide.

Read more stories by Mark Esposito & Terence Tse.