For some time now it has been clear that firms need to innovate if they are to survive in a competitive industry. This can include minor improvements to its existing products and services, but to really thrive firms need to generate new breakthrough innovations. Research supports this proposition, and shows that firms that create breakthrough innovations perform better and survive longer.

Firms rarely develop breakthrough innovations on their own, however, and recognizing this, firms have increasingly opened up their innovation processes, and have formed strategic alliances with industry and/or university partners in their search for breakthrough innovations. Strategic alliances are formal arrangements, made by otherwise independent entities, to achieve a common objective, and by making strategic alliances firms hope to gain, externally, new knowledge and resources to spark a breakthrough.

In many industries, firms form multiple alliances simultaneously, and in the process, create extensive networks of alliances. Research suggests that ‘network position’ -- in the sense of how well-connected the firm is -- and ‘network make-up’ -- in terms of what types of partners the firm allies with -- affects its innovation performance. The implication is that to understand the performance effects of alliances, we need to understand alliance networks. We recently made this point in the pharmaceutical context, in an article to be published in a premier pharmacy journal Drug Discovery Today.

We constructed a model of the global pharmaceutical industry to demonstrate this point. We looked at 324 firms, and 2,298 alliances that they made in the period 1985 to 2001, and then considered how changes either in the firms position in the network, or changes in the composition of the network, in terms of more university or industry partners, affected the firms innovation outcome. From our results, we draw three conclusions, which we feel are relevant to all managers. Namely:

1. The network perspective is critical

We show that the position of the firm in the network, and the composition of the network, in terms of the share of university and industry partners, explain its ability to generate breakthrough innovations. This means that managers should adopt a network perspective, in which each new alliance is not only considered on its individual merits, but on how it affects the firm’s portfolio of alliances.

2. Alliances don’t follow the “more the merrier” principle

We show that each firm has a maximum level of information that it can make use of, and once the maximum capacity is reached, any additional alliances can be detrimental to the number of breakthrough innovations that it creates. In fact, we show that firms with too many alliances create even fewer breakthrough innovations than firms with no alliances at all.

3. Your alliance portfolio should include diversity

Our results show significant advantages for firms from working with a university. We find that an alliance portfolio, with a single university, is more likely to result in a breakthrough innovation than any portfolio, of any combination of homogenous industry partners. That’s not to say, however, that university partnerships are the perfect solution. In fact, the networks with 2 universities perform, on average, worse than those with 1, and those with 3 perform worse again. Universities, we surmise, bring new and different knowledge, which helps spark breakthroughs, but too much different information can become detrimental.

For more, see: Dong, J.Q., and McCarthy, K.J., 2019. When more isn’t merrier: Pharmaceutical alliance networks and breakthrough innovation. Drug Discovery Today, In Press.