The Benefits Of Commitment

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.

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Courtesy of Apple.

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. Based on an additional 82 in-depth interviews we conducted with managers in various industries in the United States, Germany and Shanghai, China, we found that committed exchange partners created a business environment of reduced uncertainty and more efficient exchange of complex knowledge. Improved coordination and more efficient collaboration efforts helped businesses with fewer exchange partners extract greater profits from their innovation efforts. Our findings indicate that relationship commitment enabled individual businesses to detect and evaluate the capabilities and resources of their exchange partners more effectively. As a result, innovation efforts were more likely to result in commercial success stories later on.

The results from our research need to be interpreted carefully. Collaboration and open innovation are important drivers of company performance, and we do not advocate the creation of corporate silos and groupthink. Our findings shed additional light on how to manage collaboration and innovation efforts more effectively for the generation of greater future profits. Consider Apple Inc. Often cited for its successful innovation, Apple collaborates with numerous businesses. However, Apple is highly selective in choosing its exchange partners and how it commits to them. For example, it conducts almost all of its R&D and product development near its headquarters in Cupertino, California.

We are currently in the midst of a global economic downturn, and many businesses are struggling simply to survive. Some companies will seek salvation in the diversification of their exchange partners. Our results, however, suggest that a combination of interorganizational relationship commitment and innovation focus is of critical importance to profitability. In fact, in our study, we found that a company’s focus on innovation was the strongest driver of future profits. Managers who commit to their exchange partners and to a strong focus on innovation today will frequently be rewarded by greater business performance in the future.

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