How to choose your partner for better service innovation

Teaming up with competitors may be the last thing on the mind of most business leaders, but new research suggests that firms should cooperate with rivals to boost service innovation.

In a research paper published in Industrial Marketing Management, Esade’s Cristina Sancha and Yuqian Qiu – together with Copenhagen Business School’s Stefan Markovic, Marija Sarafinovska and Marin Jovanovic, plus NEOMA Business School’s Mehdi Bagherzadeh – examined over 16,000 Spanish firms across a range of industries.

They found that while firms benefit from working alongside suppliers in product innovation, those who want to drive service innovation should choose competitors as partners.

The research, say the authors, has particular implications for managers of firms who are concerned with choosing the right type of business partner to cooperate with to improve service innovation. It also has implications for recruitment, talent management and leadership, with a requirement for teams that have strong skills in relationship-building as well as knowledge gathering and driving innovation.

The cost of knowledge

In an increasingly competitive service-centric business landscape, more and more firms are focusing on developing new or significantly improved services. To develop and introduce these service innovations into the marketplace, they need to cooperate with a diverse set of business partners: suppliers, competitors, distributors, and research institutions. Each of these partners brings a different knowledge set into the equation, providing the firm driving the innovation with a unique set of insights and ideas.

partners service innovation
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And while firms generally have no issues cooperating with suppliers or distributors to drive innovation (vertical partners), choosing a rival firm to join forces with – a horizontal partner – proves more problematic.

Cooperating with suppliers and competitors brings the benefit of external knowledge, but it comes at a cost: the structural requirements of integrating the knowledge within the firm needs investment. But cooperating with competitors also brings obvious risks: the rival firm taking the ideas, or staff members defecting with their knowledge.

The path to innovation

So, when it comes to service innovation, should firms prioritise suppliers or competitors? In a business environment largely dominated by services, it’s a very pertinent question.

Product innovation follows a relatively simple path: developing new or improved goods to secure a competitive advantage, protected by intellectual property law. Service innovation, however, is less easy to define and protect. But the two can’t be separated: the competitive advantage that product innovation brings needs service innovation to successfully introduce it into the marketplace.

The competitive advantage that product innovation brings needs service innovation to successfully introduce it into the marketplace

What’s your priority?

According to the Spanish data the researchers studied, firms do not need to prioritise between cooperating with suppliers and competitors to boost service innovation.

Instead, they can benefit from cooperating with both types of business partners, as the respective contributions of suppliers and competitors to service innovation are almost equally valuable. This implies that, although suppliers' and competitors' insights and ideas for service innovation may differ, focal firms can take advantage of their different knowledge sets to boost service innovation. It also suggests that the costs of knowledge integration and opportunistic use of knowledge leakage are not prominent enough to hinder service innovation when cooperating with suppliers and competitors.

But the findings also show that firms that embrace product innovation should prioritise cooperating with competitors – rather than suppliers – to also boost service innovation.

partners service innovation

Product innovation weakens the positive relationship between cooperation with suppliers and service innovation, but it does not affect the positive relationship between cooperation with competitors and service innovation. If firms embrace product innovation, cooperating with suppliers can still help them to improve service innovation, but the improvement will be lower than when cooperating with competitors.

Focus on relationships

The findings have particular importance for businesses that want to choose the right type of partner to improve service innovation. Suppliers and competitors have different knowledge sets, each approaching innovation from a different perspective. Both vertical and horizontal partners can bring valid insight into developing new and improved services, providing knowledge the business would otherwise not have access to. When this extra level of insight is combined with the internal knowledge the business already has, it drives service innovation for the focal firm.

Cooperating with business partners outside of the supply chain requires disclosing knowledge and could introduce intellectual property issues

To ensure fruitful cooperation with both types of business partners, managers should establish a dedicated team with advanced innovation-related skills that is well aware of the focal firm's knowledge needs and capabilities for developing relevant service innovations.

This dedicated team should have advanced relational skills so it can effectively gather the required external knowledge and spread it internally. Managers should be aware that these relational skills – as well as innovation-related skills – are essential for a team dedicated to cooperating with business partners in order to boost service innovation. Accordingly, managers should seriously consider employees' relational competences when designing recruitment, training, and promotion policies.

Proceed with caution

While the evidence shows that businesses that cooperate with rivals can boost service innovation, it’s a situation that many are uncomfortable with. Cooperating with business partners outside of the supply chain requires disclosing knowledge and could introduce intellectual property issues.

For those who err on the side of caution, supply chain partners can still bring valuable insight – but the benefits will be less far-reaching.

Article based on research by Cristina Sancha and Yuqian Qiu (Esade), Stefan Markovic, Marija Sarafinovska and Marin Jovanovic (Copenhagen Business School) and Mehdi Bagherzadeh (NEOMA Business School)

All written content is licensed under a Creative Commons Attribution 4.0 International license.