Broad-based strategic alliances promote innovation

August 16, 2007

The merger frenzy that accompanied the new millennium has transformed major imaging vendors, expanding their reach and market share into first imaging equipment, then imaging agents, and most recently, in vitro diagnostics. Some companies, however, have chosen strategic alliances over mergers. Which approach leads to more innovation, the lifeblood of commercial success, is debatable. One camp contends that large organizations stunt creativity with a stifling bureaucracy. The other cites cross-fertilization of ideas through multidisciplinary interaction.

The merger frenzy that accompanied the new millennium has transformed major imaging vendors, expanding their reach and market share into first imaging equipment, then imaging agents, and most recently, in vitro diagnostics. Some companies, however, have chosen strategic alliances over mergers. Which approach leads to more innovation, the lifeblood of commercial success, is debatable. One camp contends that large organizations stunt creativity with a stifling bureaucracy. The other cites cross-fertilization of ideas through multidisciplinary interaction.

Researchers at the University of Washington and New York University believe they have evidence that large and broadly based alliances are especially fruitful. They have found that companies are more innovative when they are indirectly linked in a network of strategic alliances. These relationships are most effective when they are broadly based, yet involve relatively few degrees of separation.

"This is the essence of a small world," said Corey Phelps, an assistant professor of management and organization at the UW business school. "We know a small subset of people well who also know each other, but thanks to a few boundary spanners, it only takes a few links to connect to anyone in the world."

Phelps and Melissa Schilling, an associate professor of management at the NYU Stern School of Business, analyzed innovations at 1106 companies in 11 different industries during a six-year period. They examined the pattern or structure of strategic alliances and found that the number of patents that grew from these alliances correlated with the types of connections forged among the companies involved.

Companies reap greater benefits when they are part of a large network that exhibits a high degree of clustering and only a few degrees of separation, according to study results, which were published in the July issue of Management Science. Both are characteristic of a small-world network.

Because social networks typically consist of clusters, it might be expected that many connections would be needed to link two people or two firms from different parts of the world, Phelps said. But if only a small number of individuals have ties that bridge these clusters, then the average number of intermediaries between any two individuals in the network decreases dramatically.

A network in which companies are directly or indirectly connected to many others amplifies the amount and diversity of information available. It does so by increasing the number of companies that provide information and by shortening the path the information has to travel. Based on their analysis, the authors conclude that companies involved in large-scale alliances exhibit high levels of clustering and are more innovative.

"When a small-world network structure emerges within an industry, all companies in the network benefit in terms of increased innovation," Phelps said.