External Knowledge Sourcing for Innovation Innovation, Management and Entrepreneurship (BMAN73112)

By the end of this unit you will be able to:

• Understand why firms consider knowledge from a variety of external sources to help boost innovation efforts
• Identify a range of external knowledge sourcing options
• Differentiate the advantages and disadvantages of using different mechanisms for external knowledge acquisition.

1. Why do firms acquire Knowledge from External Sources?

2. External knowledge sourcing mechanisms

Firms can acquire knowledge from a range of external sources. Some of the different mechanisms are universities and public research labs, outsourcing, licensing, suppliers/ customers, contract research, research consortia, alliances and joint ventures, mergers & acquisitions, equity in New Start-Ups, crowdsourcing, social media, consultancies and others (conferences, informal contacts etc.).

2.1 Universities as knowledge providers

Universities are not only teaching establishments, they invest in research activities and develop some external engagement becoming a potentially important partner for a firm. Universities are usually considered pre-competitive basic research partners. So if a company does not do basic research (due to the high cost, uncertainties, etc.), it could potentially share those risks with a partner, in this case, a university partner. The firm will gain knowledge on the state of the art and will have access to university particular facilities that are not available at the company level. The last lecture of this course will be dedicated to the relationship between universities and firms.

So we will define academic engagement with the private sector as the:

knowledge-related collaboration by academic researchers with non-academic organisations. These interactions include formal activities such as collaborative research, contract research, and consulting, as well as informal activities like providing ad hoc advice and networking with practitioners.

Perkmann et al. (2013)

2.2 Licensing

Licensing is probably one of the most widely used technology acquisition routes. The advantage is that firms gain rapid access to a "proven technology". That means that another firm went already through the experimentation phase and proved that the technology works. However, the disadvantage is that the firm will need to commit internal resources to acquire and commercialize licensed-in technology.

Watch the video with an example of a firm licensing its production process. It will help to understand how innovative changes in the Pilkington (a glass manufacturer) production lead towards a more efficient production process that they have licensed to other firms. It is entitled the ‘Process technology license’.

2.3 Mergers and acquisitions

Mergers and acquisitions (M&As) are business transactions involving quite large sums of money, lots of speculation and can take years to implement. They are another way of acquiring knowledge from external sources. The knowledge acquired includes gaining control of an important technology. Although technology is not normally the main motivation in most M&As. When a firm discovers some gaps in its area of expertise, in its innovation process, they look for skills and capabilities outside the company. Through M&As, the company will be able to internalize the knowledge and technology that was available outside, in other companies. That means that the company does not need to develop its own knowledge and technology, the firm acquires them from another company that already had the expertise. The history of the pharmaceutical sector is a story of continuous M&As where firms have acquired external knowledge using this mechanism. Take a look at the GSK history and the three centuries of innovation as an example.

However, at the same time, firms face some challenges in acquiring a company for its technology:

• The fragility of organisational knowledge and routines. Each company has a historical legacy in its organizational practices that could have been established many years ago. M&As imply the combination of the business practices of at least two companies including their particular organizational culture. So it is important a mutual understanding of both companies in relation to the routines and practices to guarantee a successful process. This would be even more important in the case of international M&As where cultural differences could be more difficult to integrate. Part of the challenges includes different business practices, cultures, management of human resources, ...
• Ownership of technological assets can prevent competitors from acquiring that company and its technology. This means that company A could not be the only one interested in the M&As of company B, other competitor firms could also be interested. That is why in M&As time is a key variable as if firm A is the first mover to acquire company B, it will be considered as an improvement in the market position.
• Valuation of technological assets. One of the most difficult parts of M&As is the valuation of technological assets for acquiring the other company. That is, the company to be merged or acquired includes tangible (for example laboratory facilities, professionals working in the lab, new product development,...) and intangible assets (e.g. the intellectual capital, a potential technology under development,..). So sometimes unexpected problems will arise because to bring the technology you have acquired to the market requires testing, scaling-up, finding market acceptance, etc. and this will require a considerable amount of resources difficult to originally assess.

2.4 Equity in new-start-ups

Linked to M&As is taking out some equity from a different company. Many companies will take this option rather than outright acquisitions. Actually, equity might be a precursor of an outright acquisition. As part of the equity stage, Company A is buying a percentage of Company B (10%, 20%,...) with a possible view of outright acquisition later on. So for many large companies, they will have equity stakes in many small, promising start-ups or new technology-based firms. Companies use this knowledge acquisition route to establish a position quickly in a particular technology field without a large-scale investment and commitment. The main drawback is that Company A can have some lack of control or direction of the technology because there could be other stakeholders also buying some equity stake in Company B first. Company A might miss out if for example some competitors are also having some equity in Company B, or they have a majority state in that Company B.