Content M-5: Innovation ecosystems

Question 1

What is the relationship between ecosystems and customer value proposition?

Answer 1

Customer value creation increasingly requires a bundle of products and services rather than a standalone product.

Question 2

What are the consequences of interdependencies with ecosystem partners in terms of different types of risk?

Answer 2

• Initiative risks: Internal challenges to innovate
  > Will suppliers be able to provide components for the focal company to innovate?
• Interdependence risks: Availability of complementary products?
  > Will there be adequate complementary products to the focal company’s innovation?
• Integration risks: Availability of an integrated solution for customers
  > Will there be a meaningful offering to customers that bundles the focal company’s innovation with complementary products?

Question 3

Which type of risk is particularly important to manage?

Answer 3

• Interdependence risk, because relationships with complementors and suppliers can severely affect value creation and capture within the ecosystem!

Question 4

What conditions need to hold true for a company to create value in an ecosystem?

Answer 4

• Its suppliers need to be able to provide necessary inputs reliably.
• Its complementors need to be able to develop complementary products needed by the customer to fully benefit from the focal firm’s product.

Question 5

Governance of ecosystem transactions.
How does the form of governance of transactions within an ecosystem affect value capture by a company within an ecosystem?

Answer 5

Governance form of transactions affect a firm’s ability to generate a coordinated response to changing technology and market conditions.

Question 6

What are the types of governance of transactions and what do they entail?

Answer 6

• Hierarchy: Carrying out transactions internally
• Market: Simple buy-sell transactions. No contractual relationships with transaction partners.
• Alliance: Contractual collaboration agreements between a focal firm and its complementors.

Question 7

Which two dimensions in particular are important to consider to determine which form of governance would be most suitable?

Answer 7

• Adaptability of coordination: How easily can a firm influence the activities within its ecosystem to generate a coordinated response to changing technology and market conditions?
• Cost of coordination: How costly is it for a firm to influence the activities within its ecosystem to generate a coordinated response to change technology and market conditions?

Question 8

What are the characteristics of a hierarchy form of governance? What are the advantages and disadvantages?

Answer 8

• Hierarchy: Carrying out transactions internally
  > E.g. Tesla develops and produces batteries internally
  > E.g. Apple develops all hardware and software technologies internally
• Coordination through authority
  > Coordination is highly adaptable and is performed by managers’ decisions.
• Hierarchies are costly!!
  > Employees do not always have the same incentives as the company to produce the best output since they get paid anyway.
  > Companies pay for inputs (salaries) and hope that the output will be good
  > Intertia prevents effective innovation

–> A coordinated response to changing technology and market conditions can be generated easily, but it will be costly and may not be effective after all.

Question 9

What are the characteristics of a market form of governance? What are the advantages and disadvantages?

Answer 9

• Market: Arm’s length relationship. Simple buy-sell transactions.
• Coordination through market forces (supply & demand, competition)
  > Demand in the market determines which products will be offered
• Market transactions are usually cost-efficient
  > In market transactions companies pay for outputs.
  > Competition creates incentives to produce the best output.
• Coordination of the market’s response to changing technology and market conditions cannot be controlled by a single company!
  > Demand in the market determines which products will be offered
  > The needs and preferences of a specific company doe snot influence how the market responds to changing conditions.

–> The market itself response rapidly to changing conditions but this response cannot usually be influenced by a specific company!

Question 10

What are the characteristics of a alliance form of governance? What are the advantages and disadvantages?

Answer 10

• Alliance: Contractual collaboration agreements between a focal firm and its complementors.
• Coordination is through the alliance contract
• Alliances combine properties of markets and hierarchies
  > Like markets, alliances allow a company to chose the best partner for a given transaction
  > Like markets, alliances align incentives of partners to cooperate for the best result
  > Like hierarchies, alliances provide coordination mechanisms to partners
  » Alliance contracts provide some authority to alliance partners over each other’s actions through penalties and other contractual obligations

–> Alliances are not as costly as hierarchies to coordinate a coordinate response to changing technology and market conditions, provide firms a greater ability to do it than markets.

Question 11

Overview. Which governance mechanism is suitable when?

Answer 11

• Cost of coordination is low, adaptability of coordination is low
  –> Market
• Cost of coordination is low to medium, adaptability of coordination is medium to high
  –> Alliance
• Cost of coordination is high, adaptability of coordination is high
  –> Hierarchy (internal)

Question 12

According to Knowledge-based view of the firm, why do firms carry out innovation activities in-house, even though buying from market is often easier, quicker, and cheaper?

Answer 12

Internal innovation activities -> Innovation know-how -> Combinative capabilities -> Ability to re-combine knowledge elements in unique ways -> Enhanced competitiveness

Question 13

What is the main prediction of transaction cost theory (TCT)?

Answer 13

That boundaries of firms are determined by assigning transactions to governance structures in a way that minimizes exchange hazards associated with each transaction.

Question 14

What is a transaction? (TCT)

Answer 14

Any activity that an organization undertakes

Question 15

What are the governance structures? (TCT)

Answer 15

• Market
• Alliance
• Hierarchy

Question 16

What are exchange hazards? (TCT)

Answer 16

The possibility that a transaction partner will request a better contract than originally negotiated

(the possibility that a transaction partner will attempt to cheat)

Question 17

Which two dimensions increase the behavioral uncertainty of the transaction partner (in terms of exchange hazards)?

Answer 17

• Existence of specialized assets
  > If Tesla outsources the development of battery technology to another partner, this will give that partner leverage over Tesla.
• Technological uncertainty
  > Technological uncertainty increases the difficulty of specifying the conditions of an exchange transaction at the beginning, which can be used by a transaction partner as an excuse to deviate from the initial contract.

Question 18

What is the relationship between exchange hazards and governance structures?

Answer 18

When exchange hazards are perceived as high in a transaction, firms prefer governance structures that provide them with safeguards (protection) form possible exchange hazards.

–> The adaptability of coordination determines the degree of protection against exchange hazards!

Question 19

Governance for and exchange hazards.
How is the hierarchy form of governance coordinated and what degree of protection does it give against exchange hazards?

Answer 19

• Coordination through authority
  > Coordination is highly adaptable and is performed by managers’ decisions
  –> Strong protection against exchange hazards!
  > There is no exchange, everything is internal.

Question 20

Governance for and exchange hazards.
How is the market form of governance coordinated and what degree of protection does it give against exchange hazards?

Answer 20

• Coordination through market forces (supply & demand, competition)
  > Demand int he market determines which products will be offered
  –> Weak protection against exchange hazards.
  > Companies cannot control the actions of other market players.

Question 21

Governance for and exchange hazards.
How is the alliance form of governance coordinated and what degree of protection does it give against exchange hazards?

Answer 21

• Coordination through alliance contract
  > Some authority to alliance partners over each other’s actions
  –> Moderate protection against exchange hazards.

Question 22

Which governance is suitable when? There is a tradeoff between protection against exchange hazards and cost of governance!

Answer 22

• When exchange hazards are evaluated as low, the most efficient governance form is market because it is the least costly.
• When exchange hazards are evaluated as high, the most efficient governance form is hierarchy because it provides the best protection against exchange hazards.
• When exchange hazards are evaluated as moderate, the most efficient governance form is alliance because it provides more protection than markets and is loss costly than hierarchy .

Question 23

According to transaction-cost theory, why do firms carry out innovation activities in-house, even though buying form market is often easier, quicker and cheaper?

Answer 23

Specialized assets/technological uncertainty -> Need for protection from exchange hazards -> Hierarchical governance -> Protection of value capture in a transaction -> enhanced competitiveness.

Question 24

Conclusion.

Answer 24

• Value creation efforts of companies increasingly depend on activities of ecosystem partners that offer complementary products.
• Considering ecosystem interdependencies is important when making strategic decisions.
• Innovation challenges of supplier can be ultimately beneficial to create value for a company within an ecosystem.
• Governing transactions with a suitable governance form is important to capture vale within an ecosystem.

Question 25

What does the ecosystem view entail?

Answer 25

A view that explicitly acknowledges that the products of a company need to be combined with other companies’ products or services to create their value. So customer value creation increasingly requires a bundle of products and services rather than a standalone product.

Question 26

Focal firm innovation risk are what we previously defined as initiative risk. What is the risk for suppliers called?

Answer 26

• External component challenges (constraint production): Suppliers need to produce innovative components so that they can supply them to the focal firm. If they fail, the focal firm faces constraints in their production.

Question 27

Focal firm innovation risk are what we previously defined as initiative risk. What is the risk for complementors called?

Answer 27

• External complement challenges (constrain consumption): These challenges place constraints on the consumption. Customers will simply not buy products whose value is based on complements that are not available (yet).

Question 28

Summarize the innovation challenges of suppliers and complementors

Answer 28

• Innovation challenges of suppliers (if resolved) enhance the performance advantage of the focal firm, through the development of relational routines that are hard to duplicate by rivals.
• Innovation challenges of complementors reduces the performance advantage of the focal firm, because rivals have more time to catch up to the focal company and the focal company itself has limited customer experience to improve the product and increase value creation .

Question 29

Is it true that companies that coordinate with complementors through alliances are more likely to make risky investments in new technologies?

Answer 29

Yes!