Service businesses that collaborate with many organizations tend to be less innovative — and less profitable — than those that work with a smaller number of partners.
Today, businesses are often encouraged to collaborate widely; collaboration with other organizations that differ in size, age, capabilities and geographic location has been hailed as providing access to novel ideas and business opportunities. The idea is that companies can trade upon new, nonredundant information when working with a diverse range of exchange partners. But do benefits from such interactions materialize down the road?
Not always. In fact, a recent study we and Gaia Rubera of Michigan State University conducted found that service businesses dealing with a diverse set of business partners focused less on innovation and generated lower profits than counterparts with fewer partners. In contrast, businesses that committed to a smaller number of exchange partners had a significantly greater focus on the introduction of new service processes and products. Committed companies also were more efficient in turning new ideas into greater net profits later on.
We conducted 152 in-depth interviews with service company managers across different industries on the U.S. east coast and throughout the United Kingdom and Germany. (The complete study is contained in “Managing Service Innovation and Interorganizational Relationships for Firm Performance: To Commit or Diversify?” published in the May 2009 issue of the Journal of Service Research.) Unlike prior research, we did not rely on self-assessed levels of innovativeness; because of social-desirability bias, managers tend to overrate their focus on innovation in self-assessments. Instead, we elicited a company’s innovation focus through in-depth interviewing and through examination of a portion of our sample companies’ actual commercialization of new service solutions. We employed longitudinal performance data to examine the effects of diversifying or committing to business partners on a company’s innovation focus and subsequent profits.
In that study, service businesses that committed to their exchange partners had a greater focus on innovation. In contrast, we found that companies that managed a diverse range of business exchange partners were less focused on the commercialization of new service processes and products and earned less money from their innovation efforts down the road. In such companies, the efforts required to manage exchanges with a diverse set of business partners may have resulted in less efficient communication and knowledge-sharing processes.
We then conducted follow-up research to explore why committing to a smaller number of exchange partners was conducive to innovation.