Co-opetition : a study on how co-opetitive partnerships emerge and develop

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© Final Draft – Lody Versteegen

Co-opetition

A study on how co-opetitive partnerships emerge and

develop

Date: June 29, 2015 Author: Lody Versteegen

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THESIS

How do co-opetitive partnerships between tech companies emerge and develop?

submitted for the degree of MASTER OF SCIENCE

in

BUSINESS ADMINISTRATION specializing in

ENTREPRENEURSHIP AND INNOVATION (2014-2015)

Author: Lody Versteegen - 10617396 Supervisor: A.C.C. Gruijters

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Statement of originality

This document is written by Student Lody Versteegen who declares to take full

responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no

sources other than those mentioned in the text and its references have been used in creating

it.

The Faculty of Economics and Business is responsible solely for the supervision of

completion of the work, not for the contents.

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ABSTRACT

This research is focused on the question how co-opetitive (simultaneously collaborating and competing) partnerships between tech companies emerge and develop. An extensive literature research on the motives and partner selection process of a co-opetitive partnership, the collaboration process and the possible co-opetition outcomes was conducted. Due to the fact that a lot of information on co-opetitive partnership is classified and these partnerships often last for several years, the empirical research focused only on the motives for co-opetition and the partner selection process.

Five semi-structured interviews with higher managers of the four international tech companies: Canon, IBM, FulcrumWay and Oracle, were conducted, along with an in-depth study of an exemplar co-opetition case between Microsoft and Yahoo. The partner selection model of Emden et al. (2006) and the drivers of Gnyawali and Park (2011) were used as a starting point in this data collection and refined.

The findings of this study demonstrate that the formation process of a co-opetitive relationship has a large impact on the development and outcome of the co-opetive partnership. There are five phases within this formation stage: 1) motives that lead to co-opetition, 2) a technological perspective on partner selection, 3) a strategic perspective on partner selection, 4) a relational perspective on partner selection, and 5) terms and conditions. A co-opetitive relationship always starts with the motives that lead to co-opetition. However, there is no linear order in the phases of the partner selection process. Also the terms and conditions are based upon categories from the other phases. Other important findings of this research are the importance of trust, intuition and the organizational culture in co-opetitive relationships. These concepts are not only important during the establishment of a co-opetitive relationship but also for the development of the partnership.

Based upon this research these two concepts should be explored more in depth, followed by a longitudinal study, to gain more insight in the development of a co-opetitive relationship and the outcomes of these partnerships.

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1. Introduction

The tech industry is a dynamic, fast growing and complex industry with ongoing technological developments (Foley, 2014), resulting in constant changes within the industry (de Spiegeleire, 2010). A lot of new tech companies arise and a lot of new collaborations come into being. Tech companies all over the world are collaborating more and more and using each other’s

technological expertise for their own activities (Davis, 2014). There is a wealth of research in the literature about successful partnerships and the collaboration processes, but this research has been focussed mainly on the complementarity of companies. Companies may collaborate in order to learn from each other’s expertise or to outsource parts of the company’s supply-chain (Tether, 2002). Small companies in particular combine their resources with larger firms in order to facilitate innovation and increase market share (King, Covin & Hegarty, 2003).

However, the aspect that makes collaboration in the tech industry so unique, is the fact that a lot of competitors are collaborating. This phenomenon is called ‘co-opetition’. Co-opetition, is a strategy in which firms simultaneously cooperate and compete (Brandenburger & Nalebuff, 1996) and is especially common in the tech industry. This is because the tech industry faces several challenges, including: shrinking product life cycles, convergence of multiple

technologies, the importance of technological standards and the need for high investments in R&D (Gnyawali & Park, 2011). Despite the fact that many firms in the tech industry are in competition with one other, they still collaborate in order to manage these challenges, allowing the firms to share and acquire new technological knowledge and ultimately use this knowledge in innovations.

Although co-opetition is a well-known phenomenon, limited research exists on why these companies start to collaborate, and how the co-opetition process itself can lead to successful outcomes for all companies involved. In this research I want to explore these areas further by focusing on the following research question:

“How do co-opetitive partnerships between tech companies emerge and develop?”

In order to answer this question the following sub questions are addressed.  What are the drivers to start a co-opetitive relationship?

 What factors are involved in choosing the right co-opetition partner?  How does the co-opetitive process evolve over time?

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In the first part of this research an intensive literature investigation was conducted to determine what motives exist for co-opetition, as well as what the consequences of co-opetition are for companies and the market in which they operate. Over the course of this investigation, it became clear that there was little information about the formation of a co-opetitive relationship,

including which factors play a role in the decision to collaborate or not. Furthermore, there is a limited amount of research about the collaboration process itself and the possible outcomes of a co-opetitive relationship, as well as research on what obstacles there are from a practical perspective and how companies handle these. These areas were explored more in depth, through interviews with employees of four large international tech companies involved in co-opetition. This research was only focused solely on large companies because these large

companies often possess more than the financial resources and competencies required to adapt to market developments (Brandenburger & Nalebuff, 1996). Therefore, these companies do not necessarily need a collaboration partner. Due to the fact that there was not enough material from these interviews alone, a case study on the collaboration between Microsoft and Yahoo was also conducted. This case study not only exemplifies an exceptional instance of co-opetition that has so far lasted over five years, but is also a good source of readily available information on co-opetition.

Goal

It would be a logical assumption, that the risk of failure increases when competitors decide to collaborate. However, the large amount of co-opetition in today’s society would seem to create a paradoxical contradiction. This research attempts to find an explanation for this. From a

managerial point of view, managers of tech companies can use this research to learn more about the process of co-opetition. The different phases in the collaboration process have been

described as well as the risks and difficulties that are involved. Managers can assess the advantages and disadvantages of co-opetition and determine whether the collaboration may lead to successful outcomes for the company.

From a theoretical point of view, this research confirms whether the existing models on partner selection and the collaboration process are also applicable to situations where the collaboration partner is a competitor. Moreover, existing models and theories described in the upcoming chapters may also be refined through this research.

Research Structure

As mentioned before, this research starts with an extensive literature study on existing research that relates to co-opetition. After gaining a clear overview of the relevant information, the empirical research was introduced to research more extensively some of the concepts that were

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found. The way this empirical research was conducted is explained in the ‘methods’ section of this study. After this empirical research was executed the findings were published in this report. In the ‘discussion’ chapter the results of this research were critically examined. Finally, a

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2. Theoretical Foundation

In this section, an overview of the co-opetition literature is given. The motives for co-opetition, the partner selection process, the collaboration process and the outcomes of co-opetition will be discussed.

2.1 Co-opetition

As mentioned before co-opetition is a strategy that is based on the benefits of collaboration and competition (Brandenburger & Nalebuff, 1996). This phenomenon is especially popular within the tech industry. Research by Harbison and Pekar in 1998 demonstrated that at this time already over 50% of the strategic alliances were between competing firms (Gnyawali & Park, 2011). The reasons why these companies establish a strategic alliance are that it helps firms to access, acquire and leverage important resources in pursuing innovation. Collaboration

furthermore saves companies time and knowledge. They can combine each other’s resources, share costs and are not solely responsible for the risks involved in the project (Brandenburger & Nalebuff, 1996).

However, even though it would seem to be straight-forward that co-opetition denotes a combination of collaboration and competition, there are still a number of different definitions and perspectives about the concept. Co-opetition can be seen from a relatively broad perspective or it can be more narrowly defined. Brandenburger and Nalebuff (1996) have a rather broad view on co-opetition and define co-opetition as a “value-net in which two competitors can be complementors through their collaboration with a third firm”. They experience co-opetition as many different relationships where collaboration and competition is divided between the different actors within the organization (Bengtsson, Eriksson & Wincent, 2010). A more narrow view on co-opetition is the one of Bengtsson and Kock (1999), who state that co-opetition is “simultaneously collaboration and competition between two firms and the different parts of the relationship are divided between activities”. This definition if focused on activities instead of on the people within the organization. To conduct this research as precise as possible, a

combination of both definitions is used.

2.2 Motives and partner selection for a co-opetitive relationship

As mentioned before, co-opetition is an extremely popular phenomenon in the tech industry. Yet lots of firms struggle with the question of whether they should or should not work together. If firms start a co-opetitive relationship there is a high degree of interdependence with each other and there are huge risks involved (Gnyawali & Park, 2011). For this reason several researchers

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tried to define what the exact drivers are to start a co-opetitive relationship. Hagedoorn (1993) researched the motives for technological collaboration. He defined three different motives: 1) motives related to basic and applied research and some general characteristics of technological development, 2) motives related to concrete innovation processes, and 3) motives related to market access and the search for opportunities. Even though this research was focused on technological collaboration, the co-opetition aspect was not taken into account. Thus, in 2011, Gnyawali and Park devised three different drivers that lead to co-opetition 1) industry and technological challenges/opportunities, 2) superior and relevant partners

resources/capabilities, and 3) firm strategies and aspirations. They based these drivers on an intensive case study they conducted about Samsung and Sony. The fact that product life cycles are shrinking makes it hard for companies to adapt to rapidly changing customer preferences. Both a variety of technology available and an opportunity to share the risks involved can be drivers for companies to start with co-opetition. High R&D costs are also a motive for companies to collaborate. Therefore, sharing R&D costs, expertise and other resources may result in a win-win situation for both companies (Gnyawali & Park, 2011).

After deciding that a company wants to collaborate, the collaboration partner is selected. Elmuti and Kathawala (2001) state that this is the most important phase within the collaboration process. Emden, Calantone and Droge (2006) developed a model in which they defined three phases that are essential in deciding if a company would be a good partner with maximum potential to create value.

Figure 1: Emden, Calantone & Droge (2006). Collaborating for New Product Development: Selecting the Partner with

Maximum Potential to Create Value

According to the research of Emden et al. (2006) following the steps in this model should help in creating a successful partnership. The study also suggests that the technological alignment of the

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partners is the initial concept in the partner-evaluation process. The technical abilities of a company and its partner, along with the resource and market knowledge complementarity are essential in this phase. This corresponds to the resource based view of Barney (1991) who states that firms should look for partners that have unique technological resources that they can leverage But in the case of co-opetition the core knowledge, technical ability and resources of competing companies are often relatively similar. Gnyawali and Park (2011) adapt this notion further, stating that it is important to find out on what level the technical abilities or resources overlap. In the current economy it is not about overall complementarity anymore, but about the complementarity within the different channels of a company.

A challenge in the formation of a co-opetitive relationship is the fact that competing partners may be protective about sharing their knowledge and resources because these give them a competitive advantage (Prahalad & Hamel, 1991). In this case partners may restrict the knowledge sharing and this may affect the outcome of the collaboration. But an overlapping knowledge base among partners can also be valuable, as it can be used to see each other’s potential. Successful innovations are more likely to emerge from a combination of

complementary skills (Prahalad & Hamel, 1991). “Overlapping knowledge may provide the necessary common ground to realize the technology’s potential, to discover complementarities of their competencies and to communicate these interorganizationally” (Emden et al., 2006). The second phase in the partner selection process is the strategic alignment. During the partner selection phase it is important that both partners will gain something from the partnership. This means that the motives of both partners need to correspond with one another (Elmuti and Kathawala, 2001). “Correspondence of motivation signals whether partners have mutually beneficial intentions and determines the likelihood that the partners will engage in

opportunistic behaviours” (Emden et al., 2006). It is also important that the goals of both

partners involved are not competing. This does not mean that these goals need to be in common, but they should not be conflicting, otherwise a common business model during the collaboration process cannot be used (Brandenburger & Nalebuff, 1996).

The final stage is that in which the relational alignment is evaluated. The companies culture influences the decision making process and affects employees’ behaviour. According to the definition of O’reilly, Chatman and Caldwell (1991) “Culture is the collection of cognitions, expectations, mindsets, norms and values within an organization” (Emden et al., 2006). In case any conflicts arise during the collaboration process, culture helps overcome these relatively easy (Emden et al., 2006). It is important that the norms and procedures between the two partners

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correspond in order to have effective communication and an exchange of knowledge. Cultural differences between the organizations or different expectations of the collaboration can negatively affect the quality of a partnership (Elmuti & Kathawala, 2001). It is also important that companies are willing to adapt to their partners. The collaboration process is a dynamic process which continuously evolves (Gnyawali & Park, 2011). Both companies need to be able to be flexible and to adapt to these changes. The most important thing is to stay focused on the long term goals instead of on the short-term sacrifices.

The feasibility and the success of a partnership are, to a great extent, determined by the partners chosen. Even though the collaboration process is dynamic and the business conditions may change, most failures and issues occur due to inappropriate partner selection (Emden et al., 2006).

2.3 Collaboration Process

It is not only the formation phase that has influence on the success of a collaboration. Owen, Goldwasser, Choate and Blitz (2007) state that “to establish an appropriate partnership, with an appropriate partner, the appropriate collaboration mode is the key element to success.”

Collaboration between competitors is often unstable and dynamic in nature. This can cause a high level of tension for firms (Gnyawali & Park, 2011). It is hard to define what kind of information can be shared, how companies should communicate and to balance the benefits of the partnership in regard to the benefits of the individual company. Pisano and Verganti (2008) say that there is no single approach for collaborative innovation. Companies are constantly partnering up with other firms to innovate, but they face challenges in how to share power with these partners. This is a crucial factor, especially in co-opetition (Gnyawali & Park, 2009), raising questions of how open a company should be against his competitor and how the hierarchy of a company influences the partnership.

Pisano and Verganti (2008) developed a model that states four basic modes of collaboration, which can be found in Figure 2. Every mode of collaboration will be applicable to a different type of situation. The appropriate collaboration mode that is chosen in order to develop new technologies, designs, or services, must be adapted to the evolving business strategies

(Brandenburger & Nalebuff, 1996). “In order to decide which mode to choose there are two basic issues that executives should consider; should membership in a network be open or closed, and should the network’s governance structure for selecting problems and solutions be flat or hierarchical” (Pisano & Verganti, 2008).

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Figure 2: Pisano & Verganti (2006). What kind of collaboration is right for you: Four basic modes of collaboration

Gnyawali and Park (2009) say that in co-opetition the dynamic between the companies is

important. They state that not only are the mind-set of the firms and the organizational structure important in the collaboration process itself, but also previous experience, and resources and capabilities, have influence on the process. In the process the relationship between the firms will evolve and this will affect the outcome of the partnership. The development of the co-opetitive relationship is dependent on the industry and partner conditions, as well as firms’ capability to pursue a win-win approach, ability to manage tension, and communication skills (Elmuti & Kathawala, 2001).

An obstacle that may occur during the collaboration process is knowledge overflow. According to Yan, Luo and Child (2000) when the two competing firms maintain the same level of

knowledge, it could lead to the fact that both companies feel that they have the right to be in charge of the collaboration (Rijnders, 2013), which could lead to tension during the

collaboration process.

The constant need for firms to strive for value creation is another challenge in a co-opetitive relationship. To maintain the stability in a co-opetitive relationship it is important to find a balance in competition and collaboration (Gnyawali & Park, 2011). Even though most firms are forced to take advantage of their internal strengths with their partners’ core competencies to enhance or sustain their capabilities, the challenge during the collaboration process is to build cross-enterprise processes and innovative ways to manage these processes (Deck & Strom, 2002).

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2.4 Outcomes of co-opetitive relationship

Everything in the partner selection process and the collaboration process, influences the outcome of the collaboration (Teece, 1992). A lot of different case studies have been done to examine what the outcomes of a co-opetitive relationship are. There are two things that all these studies have in common: the outcome for the co-opetition partners and the effect that this partnership has on the industry. Gnyawali and Park (2011) summarize these as: 1) value creation or appropriation for both firms, and 2) the industry dynamics.

Value creation and value appropriation are central to co-opetition (Brandenburger and Nalebuff, 1996). The outcomes of competition and collaboration differ from each other. “Collaboration is based on the expectation to enlarge and-/or protect the size of value through joint efforts. On the other hand competition is driven by the desire to capture a bigger proportion of the value

privately” (Gnyawali & Park, 2011). As mentioned earlier, in co-opetition common benefits are essential. According to Pfeffer and Salancik (1978), the main rule in co-opetition is that the partner who brings the more critical resources to the relationship can appropriate a higher percentage of the benefits (Gnyawali & Park, 2011). Through collaboration with competing firms new knowledge can be gained that can be used for new product- or technological development (Brandenburger & Nalebuff, 1996). This aspect makes co-opetition even more challenging and interesting for companies, as sharing knowledge, while simultaneously combining research- and development costs, and sharing the risks, results in an advantage for both of the partnering companies. Thus, by means of a co-opetitive partnership a competitive advantage can be created for both of the firms (Das & Teng, 2000).

Co-opetition not only influences the companies themselves but also the market in which these companies operate (Teece, 1992). Companies with lots of market power that establish a co-opetitive relationship have a major impact on the industry they are operating in. If big players within the tech industry promote innovation via co-opetition, other companies may follow soon (Brandenburger & Nalebuff, 1996). Gnyawali and Park (2011) state that “co-opetition between leading firms may cause subsequent co-opetition among other firms because many followers typically imitate and respond to industry leaders’ actions”. Therefore, by using co-opetition, firms are able to create new market segments for their mutual product (Emden et al., 2006). On the other hand, co-opetition can also lead to a decrease in product prices and to higher quality products, resulting in a competitive advantage for the company that also has influence on the industry as a whole. Collaboration between competing firms may lead to multi-feature products and due to the economies of scale the costs for the development of these products is

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relatively low (Gnyawali & Park, 2011). Continuing, the fact that complementary resources are used to develop more integrative technologies contributes to higher standards of quality. The fact that companies in some cases decide to collaborate instead of compete, reduces the duplication efforts and competition within the industry becomes even more intense (Brandenburger & Nalebuff, 1996).

2.5 Outcome of literature research

A lot has been said and written about co-opetition. It is clear that co-opetition may lead to interesting and beneficial outcomes for companies. However, a lot of the prior research is not specifically focused on opetition examples or it was not applied to multiple real-life co-opetition cases. So there are three questions that are the focus in the upcoming empirical research.

1. How are co-opetition drivers and the partner selection process related in the formation phase of co-opetitive relationships?

Gnyawali and Park (2011) came up with three different drivers for starting a co-opetitive relationship. However, these drivers are completely based upon one single case study: the collaboration between Samsung and Sony. Besides this they do not focus on the partner selection process which was addressed by Emden et al. (2006) as the most important step within a collaboration. They state that most of the issues during a collaboration between two companies occur due to inappropriate partner selection. For this reason they developed a model that should help in selecting the right partner. However, this model focuses on regular

partnerships and not on co-opetitive relationships.

2. How do different collaboration modes influence the collaboration process of a co-opetitive relationship?

How to share power and how open a company should be, are questions that are particularly relevant for co-opetitive partnerships. Pisano and Verganti (2008) developed a model that focuses on these challenges; however, this model is not focused on co-opetitive partnerships. In a co-opetitive relationship, knowledge overflow is a common phenomenon, which may lead to the fact that both companies want to take the lead (Rijnders, 2013). Competing firms are wary of sharing information with each other and therefore restrict this to a minimum (Prahalad & Hamel, 1991).

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3. How do the previous mentioned steps influence the outcome of a co-opetitive relationship?

The selected partner and the collaboration process itself will have an influence on the outcome of the partnership. As mentioned earlier the success of the collaboration can be determined by the outcome of the partnership. Gnyawali and Park (2011) mention two different kind of outcomes for this: value creation or appropriation for both firms, and the effect that the partnership has on the industry dynamics. The collaboration process has an influence on this (Das & Teng, 2000). However, prior research does not mention the way the partner selection procedure and the collaboration process influence the outcome of the partnership, while the two outcomes mentioned by Gnyawali and Park (2011) were only based upon the partnership between Samsung and Sony.

More information on how these three questions were answered within the empirical research can be found within the next chapter.

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3. Empirical Research

This study aims to identify how the formation phase of a co-opetitive partnership and the collaboration process itself have an influence on a successful outcome of a co-opetitive partnership. As seen in the previous literature study, co-opetition has an influence on the companies involved as well as on the industry itself. However, although the formation phase of the partnership and the collaboration process itself, contribute to the success of the partnership, little information is available on these particular aspects. For this reason these three points are the focus in this empirical research.

To find an answer to the earlier mentioned questions, several different qualitative research methods were used. Five semi-structured interviews and a case study were conducted in order to find out if the existing partner selection model of Emden et al. (2006) is also applicable in the case of co-opetition. It should become clear if the technological-, strategic-, and relational alignment are also essential when the two collaborating companies are also competitors from each other, or whether there are other aspects that play a role within the partner selection process. Besides this the co-opetition drivers of Gnyawali and Park (2011) will be tested among other cases apart from the Samsung and Sony case, in order to see how these drivers play a role within the formation phase of a co-opetitive relationship.

To gain greater insights into the collaboration process itself, experiences of the interviewees will be used, as well as the information that is available on the Yahoo and Microsoft partnership. It would be interesting to see what challenges occur during co-opetition processes, what phases there are within these collaborations and how the collaboration process evolves over time. Is it true that the organizational culture and mind-set described by Pisano and Verganti (2008) influence the collaboration process, and that according to Yan, Luo and Child (2000) knowledge overflow leads to tension within the collaboration process (Rijnders, 2013), just as other aspects may also influence this process.

However, during the execution of this empirical study it became clear that it was difficult to get enough insight on the collaboration process itself as well as on the co-opetition outcomes. There were not enough people interviewed who were involved in the execution of the co-opetitive partnership to get a clear overview of the collaboration process. Besides this, the partnership often lasts for a long period of time, making it challenging to analyse this process in the amount of time that there was for this research. This also made it impossible to analyse the outcome of the researched partnerships. For this reason, the main focus of this empirical research will be on

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the drivers and partner selection process in the formation stage of the co-opetitive relationship. The findings of this research should help in defining how the formation process of a co-opetitive relationship works and if the existing theory on general partner selection is also applicable in co-opetition cases.

The research started as an exploratory research to gain more insight into the relatively new phenomenon of co-opetition. The existing literature was used as a guideline in the

semi-structured interviews to keep the interviewee focused on certain topics during the interview. It also helped the interviewer to focus on specific aspects, like resource complementarity, that were mentioned during the partner selection process. This deductive approach changed during the data analysis into a more inductive approach. During the interview coding process,

numerous codes were applied without looking to the existing data from the literature. Patterns were identified with the help of memos and finally the categories were compared to the existing theory. This process will be described more in-depth within the upcoming chapter. All of this was to determine how the existing theory should be adapted or refined in the case of opetitive partnerships, so that greater insights may be gained on how the formation of a co-opetitive partnership actually works.

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4. Methods

The first step was to find at least two real life examples of co-opetition that could be analysed through documents and interviews with the different people from the companies involved. During the search for interviewees, it became clear how relatively unknown this topic is among people. Most of the companies that were approached were unaware who was responsible for the co-opetition decisions within the organization and who to talk to besides higher managers. Furthermore, a lot of information about co-opetitive relationships is kept secret within the organization, evidenced in the way that interviewees referred to public information about partnerships on their website. Eventually there were five people from four different companies that were willing to talk about their view on co-opetition: Canon, FulcrumWay, Oracle and two people from IBM.

However, these five interviews alone were not enough to base this research on. Thus, to enhance this research and make it more reliable, an in-depth case study was conducted. Microsoft and Yahoo is a typical example of a successful long lasting co-opetitive relationship. This partnership started in 2009, and has had a huge impact on the tech industry as a whole. A lot of information about this partnership is made public via annual reports, interviews and news articles. In this case study, the drivers to collaborate, and the different phases in the partner selection process of the co-opetition relationship were analysed. This was done in order to get a deeper

understanding of the aspects that are involved in this kind of partnership. 4.1 Research design

The research started as exploratory research. The goal of this research is to give a better understanding of the formation phase in co-opetitive relationships. It should provide greater insight into the reason why tech companies sometimes collaborate with their direct competitors and on how companies choose the right co-opetition partner. The results of this research can be used in defining how co-opetitive partnerships between tech companies emerge.

The research started relatively broadly by studying the different literature available about opetition and partnerships in general. To see if these existing theories were applicable to co-opetiton cases, a more deductive approach was used. Five semi-structured interviews were conducted among the employees of four large tech companies: Canon, IBM, Oracle and

FulcrumWay. During the period of this research all of these interviewees were interviewed once. As explained earlier, the reason why large tech companies were chosen is the fact that these companies often possess more than enough financial resources and competencies themselves, in

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order to adapt to the market without the need of a partner (Brandenburger & Nalebuff, 1996). In

Figure 3 some general information about the interviewees and their companies can be found

Figure 3: Overview of the interviewees

In addition to these interviews an in-depth case study was conducted. Microsoft and Yahoo are competitors who have been collaborating together for over five years. The partnership began in 2009. Microsoft powers the search algorithms of Yahoo in exchange for serving Bing advertising as a revenue driver (Microsoft Annual Report, 2009). The goal of this partnership was to

compete against Google and to decrease the position of Google’s Internet searches (Hart & Ahrens, 2008, D01). These two large companies are a good example of competitors that start a collaboration. Both firms possess similar resources and products, and they have an overlapping target market worldwide. They have been competing over the worldwide search engine market and face the same challenges within the rapidly changing tech industry.

The interview topics and the analysis of the Microsoft and Yahoo case was based upon the existing literature on co-opetition, the partner selection model of Emden et al. (2006) and the co-opetitive drivers of Gnyawali and Park (2011). Aspects like technological alignment, strategic alignment and relational alignment were used as a starting point in the data collection- and data analysis phase.

4.2 Data collection

Five semi-structured interviews were conducted among the employees of Canon, IBM, Oracle and FulcrumWay. To gain these participants, purposive sampling was done (Boeije, 2009). First several large tech companies that are involved in co-opetition were approached. Since there was not enough response, due to the fact that companies did not want to make information public or did not know who to talk to within the organization, snowball sampling was applied.

Case Company Business Description Interviewee’s Position

1 IBM World leader in hardware and

software development

 Strategy & Transformation Consultant

 Global Executive Director Risk and

Compliance

2 Canon Worldwide producer of optical and

electronic devices

 VP / Director Business Services & Solutions The Netherlands

3 Oracle World leader in software

development

 Global Advanced Controls Specialist

4 FulcrumWay Leader in risk base management

controls

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Cooperating companies asked their business relations to collaborate in this research. An advantage of this is that two different co-opetitive partnerships could be analysed from the perspectives of both partners involved; the partnership between FulcrumWay and IBM, and the partnership between FulcrumWay and Oracle. This contributed to the internal validity of the research.

The topics that were discussed in this interview were based upon the earlier described literature. The employees that were interviewed were all people with the authority to make decisions about collaboration partners, which was crucial to gain insights about the formation stage of a co-opetitive partnership. Topics like the motives for a co-opetitive partnership, reasons for choosing a particular partner, risks of a co-opetitive partnership, and the division of tasks and power within a co-opetitive partnership were addressed during the interview. All topics that derived from the literature including the partner selection model of Emden et al. (2006), the theory about co-opetitive drivers from Gnyawali and Park (2011) and the deviation of power from Verganti and Pisano (2008). Besides this the interviewees were also asked about their personal experience and view on co-opetition. Due to the fact that there were no specific questions established before the interview, interviewees had more freedom to add their own insight on the topic to the interview. All of the interviews were audio recorded with the

permission of the interviewees. More extensive information on the content of these interviews and the way these interviews were conducted can be found in the ‘Interview Protocol’ in

Appendix 9.1.

In addition to these interviews a case study of Microsoft and Yahoo was conducted. In order to do this, secondary data was used. First, data was collected using the two firms’ annual reports of the years 2007, 2008 (2 years prior to the partnership) and 2009 (the year the partnership was formed). These are the years in which the co-opetitive formation phase took place, and this may help in developing a better understanding of the companies, the various technologies and trends, the industry and the related aspects that may have had an influence on the co-opetitive

relationship. Second, using the LexisNexis database over 3000 worldwide newspaper articles about Microsoft and Yahoo were found in the period between 2007 and 2009. To conduct this case study as objectively as possible, and to decrease the amount of articles, only articles from the New York Times, the Washington Post and the San Jose Mercury News were used. The Washington Post is the biggest newspaper in Washington, the state where the headquarters of Microsoft is located. The headquarters of Yahoo is located in California, with the state’s largest newspaper being the San Jose Mercury News. Finally, the New York Times was used as it is the biggest newspaper in the US. In order to make sure that there was an equal proportion of

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information from a Microsoft perspective as well as from a Yahoo perspective, all the obtained information was assessed precisely. Dates of the documents were compared with each other as well as the types of information. Altogether, 92 articles were used for this case study. A summary of the assessed information for the case study and the selection criteria of this information can be found in Appendix 9.2.

4.3 Data analysis

All data that was recorded from the interviews was verbally transcribed. After this the

transcribed data was screened and coded. All of this was done immediately after the interview took place. The initial coding was done by assigning numerous codes to the text without thinking about the used literature nor the variety of categories. In total there were 231 codes assigned over all five of the interviews. Due to the fact that these codes are not mutually exclusive, one piece of information could be assigned to several codes. During the coding process, memos were created in order to help the interpretation of the different codes. Relationships, overall thoughts or other relevant things were written down on these memos. An example of how this looks can be found in Appendix 9.3. After the initial coding, focused coding was used. All codes were reviewed and compared with each other to find patterns in the coding. Similar codes were combined and divided into categories. By comparing these categories with the variables from the literature, categories were combined, subdivided and eliminated. After this the categories were compared among the different interviewees and allocated to five larger themes. Important information that could not be addressed to a particular category was placed in a separated category but still taken into consideration for this research. An example of the coding process can be found in Appendix 9.3 and 9.4.

All the information regarding the Microsoft and Yahoo organization was reviewed. Important events were marked, as well as the key decisions that were made during the formation phase. The findings from the literature research was the starting point in this process. Information in the case study was organized in the following manner: 1) what factors led Microsoft and Yahoo to engage in co-opetition, and 2)what was the influence of developments on the tech industry on the co-opetitive relationship. The selected data was used to illustrate these points. In Appendix

9.2 a summary of the relevant information can be found and a short explanation on how this

relates to the various aspects described above.

Finally, the information from the interviews was compared with the findings in the case study. This cross-data analysis was necessary in order to find similarities and differences among the different cases and to refine the existing literature. The results give extensive insight in the

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formation stage of a co-opetitive relationship, that will help in defining an answer to the question: “How do co-opetitive partnerships between tech companies emerge and develop?”

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5. Results

The focus of this empirical research was on the formation phase of a co-opetitive partnership. All five interviewees are involved in this formation phase and possess over the authority to make decisions about collaboration partners. Initially there were 231 codes found during the transcription of the interviews, that eventually led to five different themes. As a guideline the partner selection model of Emden et al. (2006) and the drivers mentioned by Gnyawali and Park (2011) were used to see if the defined themes overlap. During the analysis of the data it became clear that there are five steps in the formation phase that led to the start of a co-opetitive

relationship. As the Global Senior Director of FulcrumWay states: “In our industry and I also think

in co-opetition in general there is a constant assessment in finding the balance in collaborating or competing. This is a really difficult question. There are some undefined phases before you start a collaboration. So until you made the final decision to collaborate with a competitor, a whole time period already passed.” These ‘undefined phases’ were also mentioned by the other four

interviewees and each step exists out of different categories. The challenge during the analysis was to define these steps and categories, and name them, with the existing literature acting as a guide. Eventually five different phases / themes were established based upon the interviews. In order to find out if these five steps also related to the Microsoft-Yahoo case study, a time line about the formation of this partnership was created. In this timeline, Figure 5, the key activities and decisions in the formation phase of the partnership (2007, 2008, 2009) were mentioned.

Figure 5: Timeline Microsoft and Yahoo partnership formation

This timeline is completely based upon the annual reports and news articles that were found. Activities of this timeline corresponded to the defined themes of the co-opetitive relationship formation phase.

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The first phase / theme relates highly to the theory of Gnyawali and Park (2011) on drivers for co-opetition, which is always the starting point within a co-opetitive relationship.

Phase two, three and four correspond with the steps within the partner selection model of Emden et al. (2006), however the order of these steps is not always linear. Phase two, is always the first thing companies look at in the initial selection of a co-opetition partner, however phases three and four are often mixed up and during the partner selection process companies often go back and forth between these phases. Besides this, the categories within phase three and four were adjusted during this research, which will be explained later in this chapter. Also the phases’ names within the partner selection process are different from the original model. In the original model the authors talk about; technological alignment, strategic alignment and relational alignment. However, due to the fact that the categories within these phases were adjusted and some new categories were added, alignment did not fully cover the content anymore. For this reason ‘alignment’ was replaced by ‘perspective’.

The fifth and final phase within the formation process is a completely new step, that was created based upon the input from the interviewees. These terms and conditions are always set up last, however aspects from the earlier partner selection procedure are highly influential on these terms and conditions and, for this reason, this phase relates back to the previous phases. The five themes / phases and the associated categories can be found in Figure 6 below and will be explained more in-depth within the upcoming chapter.

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5.1 Drivers

All of the interviewees stated that the starting point of a co-opetitive relationship always lies within the technology industry itself. This corresponds with what Gnyawali and Park (2011) found out in their research. They claim that one of the drivers for co-opetition is industry- and technological challenges / opportunities. The fact that the tech industry is developing rapidly is a challenge for many tech companies. The entry barriers are low and there is high competition within the market (Brandenburger and Nalebuff, 1996) . This is in line with the case of Microsoft and Yahoo. Both of these companies operate in Internet products-, services- and content

markets, which are competitive and characterized by rapid change, converging technologies and increasing competition (Whoriskey, 2008, D01). These industry developments lead to challenges and opportunities for technology companies. The biggest players within the Internet services market are Google, Microsoft, Time Warner – AOL, and Yahoo. Each of them offers an integrated variety of Internet products, online advertising services, Internet technologies, online services and online content in a similar way (Annual Report Yahoo, 2007; 2008; 2009) which makes the competition intense.

Besides these industry developments, customers’ needs are also changing. One example of this is the new market segments that are arising due to these developments. “More and more people

make use of the Internet, and more things can be done on the Internet. First, we only provided risk management for internal company systems, now we receive requests for risk management in Social Media, a completely new market” (Global Executive Director Risk and Compliance - IBM). Four

out of the five interviewees said that these changing customers’ needs motivated companies to improve their product quality and their market position. Companies want to focus on new market segments or are driven to specialize in new areas. These company ambitions correspond with what was named by Gnyawali and Park (2011) as the firm’s aspirations. In the Microsoft and Yahoo case, Microsoft had the desire to become more specialized in the area of the online search market. This led to the company to pursue ways in how they could achieve this.

Developing their own capabilities, taking over another company or starting a co-opetitive partnership were all possibilities (Microsoft Annual Report, 2007) considered in order for Microsoft to achieve their goal of becoming a big player in the online search market.

Gnyawali and Park (2011) also mentioned a third driver in their research: superior and relevant partner resources / capabilities. However ,during the conducted interviews, it became clear that this was the next phase in the formation of a co-opetitive relationship. The method that was used to determine this was using memos during the coding process.

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Terms as ‘gaps within own offering’ and ‘no comprehensive infrastructure’ were found during this coding process. The Strategy and Transformation Consultant from IBM mentioned in the beginning of his interview that IBM operates within several niche markets of the tech industry. One of these niche markets was later mentioned by the Global Executive Director Risk and Compliance of IBM as; risk and compliance management. Yet, even though IBM is a world leader in hardware- and software development, they are not number one in the field of risk and

compliance management. The Global Executive Director Risk and Compliance from IBM stated during the interview that this is the reason that the group of specialists in the field of enterprise governance, risk and compliance (eGRC) solutions and services is relatively small. “If you look at

the over 500 000 employees that IBM has, the risk and compliance people, like myself, we are not the big population. We are a very small group of specialists. But the demand for highly specialized employees within this area is growing, because more and more companies ask for eGRC ”. This

corresponds with the global report of MarketsandMarkets (June 2015) on the eGRC Market – Forecast to 2020. The market asks for more eGRC solutions and services.

In this way, IBM needs to adapt to these market developments. However, further on in the interview IBM stated “We don’t have comprehensive infrastructure in place for hiring highly

specialized eGRC people, but we also want to keep eGRC within our offering. A company like

FulcrumWay does have this infrastructure in place, that is why they helped us in the Hertz project”.

FulcrumWay is able to fill in the gap of IBM in the field of eGRC, they complement the offering of IBM. This corresponds to what FulcrumWay addressed within their interview, saying that they are completely focused only on risk base management controls and highly specialized in this field. The industry forces IBM to start looking for ways to adapt to the increasing eGRC demand, followed by a possible solution which is selecting a partner with complementary capabilities to start a co-opetitive relationship with, which in this case is FulcrumWay. To find these

relationships between the different people and different companies, memos were necessary. More examples of memos can be found in Appendix 9.3.

5.2 Technological Perspective

After the drivers that led to the decision of starting a co-opetitive relationship, choosing the right co-opetition partner is the next step. This is where the partner selection model of Emden et al. (2006) comes in. In this second phase companies consider a possible co-opetition partner from a technological perspective. In the model of Emden et al. (2006) this is called the technological alignment, which also corresponds with the third driver of Gnayawali and Park (2011): superior and relevant partner resources / capabilities. However, the category ‘technical ability’ of the Emden et al. (2006) model is not reflected during this research.

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Complementarity was the first thing that all five of the interviewees mentioned during the interviews. As said by Canon; “In the old days you did everything yourself, the production,

distribution and marketing. But due to the developments within the tech industry a ‘network’ economy arises, you don’t have to do everything yourself anymore.” This statement aligns with

the vision of the other interviewees from the other tech companies. Companies have started specializing themselves in specific areas and maintain superior resources, knowledge or capabilities in comparison to each other. “When IBM partners up with Deloitte it is because

Deloitte is in the top 3 list in the area of auditing. We also do auditing, but we are not as qualified and specialized as Deloitte. So you team up if you complement each other. When IBM partners up with Accenture this niche of complementarity is even smaller and it is even more specialized on a certain aspect within the offering. But one firm always has a strength which the other firm does not have” (Global Executive Director Risk and Compliance, IBM). A good example for this is the

collaboration between IBM and FulcrumWay for Hertz, the car and equipment rental company, which was already explained earlier in this research.

This is also the case with Microsoft and Yahoo. With over 137 million online visitors each month in 2008 and a strong online display advertising business that places graphical ads on websites, Yahoo was one of the Internet’s most recognizable brands (Helft & Sorkin, 2008, 1). But is has lost ground to Google in Web searches and the accompanying advertising, which was one of the fastest growing segments of online marketing. On the other hand, Microsoft’s financial

performance was led by its diversified business model focused on the entertainment division; like the Xbox 360, personal computer operating systems, office productivity programs and other business products (Microsoft Annual Report 2007; 2008; 2009). However, even though

Microsoft is a market leader in this industry, they were not specialized enough in the online search market to compete with companies like Yahoo and Google (Stross, 2008, 3). But Yahoo did have one of the world’s most trafficked site but could not compete against Google’s search engine. Thus, both companies operate in the same industry, however each of the companies has its own strength. Ryan Jacob, a portfolio manager of the Jacob Internet Fund and a Yahoo shareholder, said in 2008: “a merger would be a good fit, combining Microsoft technological

strength with Yahoo’s leading role in media and Internet consumer services”. So, with this

partnership Microsoft would power Yahoo search, while Yahoo would become the exclusive worldwide relationship sales force for both companies’ premium search advertisers (Press Release Microsoft, 2008). Omid Kordestani, Google’s senior vice president of global sales and business development, wrote in a blog post (2008): “Toyota sells its hybrid technology to General

Motors, even though they are the number one and number two car manufacturers globally. Canon provides laser printer engines for HP, despite also competing in the broader laser printer market”

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(Whoriskey, 2008, D01). So collaborating with a competitor could be a beneficial option in some situations. The global senior director of FulcrumWay agrees with this, stating: “If you start a

collaboration it is essential that you complement each other, even though you are competitors. You have to add additional value, no matter how small this is. There needs to be a win-win situation”.

It is possible to complement each other on capabilities, knowledge or resources. In the case of Yahoo and Microsoft, there was a gap in both of the companies’ offerings. Building capabilities yourself is a time consuming and expensive process. In the case of the tech industry there are a lot of product extensions or additional services needed in order to adapt the product or service to the wishes of the customer (MarketsandMarkets, 2015). As the Strategy and Transformation Consultant from IBM stated: “The Internet and mobile technology had a big impact on the

technology market. Due to the Internet, the barriers to entry the tech market are much lower because a lot of the products are intangible and based in the cloud. So the competition on a global level became more intense. Customers demand a constant extension of their software, and there are a lot of players within the tech industry that try to offer this. So ‘time’ became a crucial factor for companies.” This corresponds with the fact that all of the interviewed tech companies said they

often feel forced by the market to start a co-opetitive partnership, in order to fulfil the customers’ wishes.

5.3 Strategic Perspective

After the complementary resources or capabilities, the strategic motives for selecting a partner are evaluated. The first thing that all four of the interviewed companies mentioned is the previous experience of the collaboration partner. A concept that did not correspond to the original partner selection model of Emden et al. (2006). Although, the importance of a

company’s previous experience was mentioned by Gnyawali and Park (2011), in their research this was seen as part of the evolution of a co-opetitive relationship instead of part in the formation phase. Nevertheless, terms like reputation, track record and qualifications were named as important drivers in the partner selection process by the interviewees. Company experience can be defined as the company’s prior knowledge and expertise with its network partners’s technology and process know-how (Liu & Hart, 2011). The Global Director Risk and Compliance, IBM, also endorsed the importance of this by saying that having a reliable track record is not only essential for the partner company but also for the end-client; “When you go to

a customer, and you are proposing to them with a product or service, honestly there are three simple things a customer will look at. The first thing a customer is looking at is your approach, how do you approach their problem. Number two is your qualifications, qualifications of your firm in general and qualifications of the individuals that will work on the project, this is also your

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reputation. Number three are your costs.” The five interviewees also mentioned that not only the

general track record, but also the experience of past partnerships between the two companies plays a big role. In the case of Microsoft and Yahoo it is difficult to find out if this factor also played a role in their partner selection process. However, at the time the partner selection phase took place, 2008 until 2009, it was clear that both companies were big players within the online tech industry (Microsoft Annual Report, 2008; 2009; Yahoo Annual Report, 2008; 2009)

The second aspect from a strategic perspective is the goal similarity. If companies decide to collaborate they need to know each other’s goal. It is important to know what the other company wants to achieve with the partnership in order to decide whether or not both companies’ visions align (Emden et al., 2006). The interviewees also reiterated this point. But the two goals do not necessarily have to be the same: the most important thing is that they do not conflict with each other (Brandenburger & Nalebuff, 1996). This was affirmed by FulcrumWay and IBM. “It does

not matter if one company only wants to make money and the other company wants to extend their service, but at least these goals are not conflicting and both companies profit from a successful outcome of the partnership” (IBM, Strategy and Transformation Consultant). In the case of

Microsoft and Yahoo their goal was clear; both companies wanted to compete against Google. Microsoft wanted to focus more on the online search market and Yahoo wanted to compete against the search engine of Google (Ackerman, 2008). This goal similarity highly relates to the motivational correspondence.

The motivational correspondence is in agreement with the existing partner selection model of Emden et al. (2006). In the motivational correspondence it is not about the future goal but the current reason why a company wants to collaborate (Emden et al., 2006). Reasons such as lower production costs, maximization of stakeholder value and a higher return on investment are mentioned several times by all the interviewees. All interviewees stated that in the end every company wants to earn money. When collaboration with a competitor leads to lower production costs and increases margins on the product prices, this can be a motivation to start a

collaboration (Brandenburger & Nalebuff, 1996). “..Yes we are selfishly driven, and this is all

driven by revenue that I try to achieve for Oracle, what will give me income to support my family, so ultimately it is driven by the fact; how do we earn the most money. At the end of the day, it is all about earning money” (Advanced Control Specialist, Oracle). A good example for this is the

collaboration between Hewlett Packard (HP) and Canon. Both companies develop and sell printers. However several years ago they decided to start a partnership. Canon supports HP in the production of printers, and HP is distributes these printers to the market with their own brand name. So customers see these printers as HP printers, even though they were produced

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with the support of Canon. The reason for this is that Canon possesses superior knowledge, resources and capabilities to produce high quality printers. By collaborating with HP they earn money without selling printers to the market themselves. “If Canon does not collaborate with HP,

HP will ask another company that will do it. We can earn money, by collaborating with HP, a win-win situation right?” (Director Business Services and Solutions, Canon The Netherlands). This is

also seen back in the case study of Microsoft and Yahoo. Both of the companies wanted to maximize the value for all of their stakeholders. They evaluated their strategic options and they found that in order to compete with Google and to make more money, a partnership could help them in not only expanding their services but also offering these for good market prices (Yahoo Annual Report 2007; 2008).

5.4 Relational Perspective

In the fourth phase the relational perspective on partner selection was addressed. In this phase the category ‘personal motives’ was added and plays an important role. This is a category that is not in the original model of Emden et al. (2006) but which is addressed by every interviewee as a crucial aspect within the partner selection procedure and is addressed as an essential element within the formation stage. In the case of Microsoft and Yahoo, no information could be found within the secondary documents about this step. However, the interviewees did have a clear opinion on this part. A term that came back several times within each of the interviews was the term ‘trust’. All of the interviewees said that this is a crucial factor and that they personally need to have a good feeling about the potential partner. Factors as enthusiasm and honesty play an important role in this. According to the Global Director of IBM risk management, these skills in the selection procedure can be called the ‘soft skill set’ you need to possess. The decision makers of Canon, IBM and FulcrumWay mentioned the fact that they are experienced enough to trust their own ‘gut’ feeling. “..You need to have a positive feeling about your potential partner. Trust

and belief are essential in this. If you don’t have the feeling you can trust someone, you better not start with the partnership. And the more you are involved in these partner selection processes, the more you can rely on your personal feelings and experience..” (Director Business Services and

Solutions, Canon The Netherlands).

The second category is compatible cultures, a category that corresponds to the original model. According to the response in this research, it is important to address the flexibility, adaptability and work attitude of a company. Due to the fact that the tech industry is developing rapidly, it is important that the collaborating companies can adapt to possible changes fast. “Think of it as a

ship. The captain says that he wants to go 22 degrees north. A good navigator finds out that they are actually going 25 degrees north, so there is a gap. Between the expected goal to the actual

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performance. And that means the navigator has to take corrective actions. If you identify you go off course within a few hours than it is a very small issue to take corrective initiatives. But if already five days went by before you figured it out, the problems will be much bigger and the corrective actions are very large..” (Global Director Risk and Compliance, IBM). Within the organizational

culture the mindset of the people and the communication style are crucial (Pisano & Verganti, 2008). Analysts of the Microsoft – Yahoo case agreed on this by saying in the Washington Post (May 5, 2007): “A merger could also prove unwieldy, involving a marriage of companies with

divergent cultures and leadership structures”. Communication between the two partners and

communication with the customers are mentioned by all the interviewees as factors that help define the success of a co-opetitive relationship. A good example for this is the Meritor project between Oracle and FulcrumWay. Oracle approached FulcrumWay and asked them to

collaborate in a project for Meritor, a large auto parts supplier with a market capacity over 1 billion dollars. “We already worked on several other projects together and Oracle saw FulcrumWay

as a reliable partner” (Global Risk and Compliance Specialist, Oracle). During the collaboration

process the tech industry had already evolved and an upgrade of the Meritor software was required. In 2014, Meritor undertook a global ERP upgrade project and required to redesign the security roles bases on the new requirements. FulcrumWay reached out to Meritor to offer risk assessment with the intention to create a business case for Oracle. After a demonstration which they did with Oracle, about the latest eGRC Controls software in early 2015, Meritor made the decision that only FulcrumWay was required to address the business needs and Oracle eGRC controls did not meet the current requirements. So, even though FulcumWay and Oracle started as partners, they turned into competitors.

According to both FulcrumWay and Oracle, this is a case where both the organizational culture and soft skills set played a role, as Oracle was displeased with the outcomes of the Merritor project. However, due to the fact that FulcrumWay and Oracle had already partnered up on several past projects, Oracle understood that FulcrumWay did not take over their client

dishonourably, and through honest communication they overcame this issue. Trust is therefore also highlighted in this example. Oracle trusts FulcrumWay and FulcrumWay thinks it is

important to maintain a good relationship with Oracle, for this reason FulcrumWay will try to find an opportunity for Oracle within the execution process of this project, to bring Oracle back in. “They brought us into contact with this customer, so we owe this to them” (Global Director, FulcrumWay).

Therefore, as also stated in the example above, the aspect of long term orientation is another important category in the partner selection procedure. Paul Saffo, tech forecaster stated in 2008: “This isn’t just about grabbing market share. It’s about innovation. Google has been innovating its