Journal of Enterprise Information Management

Cooperative innovation: a value chain approach

David Walters, Mark Rainbird,
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Cooperative
Cooperative innovation: innovation
a value chain approach
David Walters
University of Sydney, Sydney, Australia, and 595
Mark Rainbird
Sydney Graduate School of Management, Sydney, Australia
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Abstract
Purpose – The purpose of this paper is to briefly review earlier contributions to partner/cooperative
innovation with the aim of evaluating the application of the concept to the increasingly popular
virtual/value chain business model.
Design/methodology/approach – A number of example cases of partner/cooperative innovation
are examined and, although these are limited in number, it would appear that a classification of types
of partner/cooperative innovation is possible.
Findings – Partner/cooperative innovation combines elements of process and product innovation
management within a “network structure” to create a product-service response that neither partner
could create using its own resources. They extend in both directions of the supply chain (upstream and
down stream) and include supplier relationship management such as that demonstrated between Dell
and its myriad of suppliers, and examples of customer relationship management such as the
relationship that Caterpillar has built with its distributor/service network.
Research limitations/implications – The findings need further validation through empirical data
analysis in appropriate industrial settings.
Practical implications – The paper includes a model that facilitates the evaluation of the “total
efficacy” of partner/cooperative innovation alternatives. As such, the paper offers a viewpoint to be
considered by management.
Originality/value – The paper describes partnership/cooperative innovation that combines
elements of process innovation management and product innovation management within a network
structure. Neither partner can independently create this network using its own resources to meet
customer/market determined expectations for product and/or service performance at an economic
(viable) cost. Third party involvement is typical.
Keywords Process management, Functional management, Virtual organizations, Economic cooperation,
Value chain, Innovation
Paper type Conceptual paper

Introduction
Changes in the business environment have resulted in consumer demand for increased
product-service innovation, product variety, high quality products, support services,
and immediacy for order satisfaction. The need for agile responses to meet these
expectations has resulted in creating virtual structures that network with each other,
using (or leveraging) the capital investments made by their partners and the distinctive
capabilities and processes that the virtual business model makes available.
Magretta (2002) suggests, using the example of American Express in the nineteenth
Journal of Enterprise Information
century, that: Management
Vol. 20 No. 5, 2007
. . . a successful business model represents a better way than the existing alternatives. It may pp. 595-607
q Emerald Group Publishing Limited
offer more value to a discrete group of customers. Or it may completely replace the old way of 1741-0398
doing things and become the standard for the next generation of entrepreneurs to beat. DOI 10.1108/17410390710823725
 JEIM Further:
20,5 . . . all new business models are variations on the generic value chain underlying all
businesses. Broadly speaking, this chain has two parts. Part one includes all the activities
associated with making something: designing it purchasing raw materials, manufacturing
and so on. Part two includes all the activities associated with selling something: finding and
reaching customers, transacting a sale, distributing the product or delivering the service. A
596 new business model’s plot may turn on designing a new product for an unmet need . . . Or it
may turn on a process innovation, a better way of making or selling or distributing an already
proven product or service.
Magretta cites Dell as a company that has created a powerful business model by
identifying value chain processes that it would like to undertake, and has sought
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partners, complementors, to undertake those it will not. In this way Dell, by selling
directly to end-users, has the vital information necessary to manage inventory better
than its competitors and avoids the high costs of holding inventory and the very high
cost of obsolescence due to the rapid application of technology. Magretta identifies the
notion that there are supplier and customer relationship management issues here that,
while they may appear as separate and distinct entities, they do in fact require
contiguous solutions. Another question is “Is there a generic approach or model that
may be used to understand the successes of Dell, Wal-Mart and others?”
If one of the key success factors for firms operating in a New Economy context is to
minimise actual ownership of assets and instead access resources by collaborating
with others in value chains, then the dynamics of that collaboration is critical. Being
able to supply part of the picture through a focused product capability and competency
is useless, if there are not other partners willing and capable of filling in the other bits
of the picture to offer a coherent whole to the end customer. Notions of business
“partnerships” have been around a long time, but this paper seeks to explore what are
the factors that drive true partnership innovations and therefore competitive
advantage. What makes a “willing partner” and a “capable partner”?
Effective organisations now work together to identify core assets, processes, and
capabilities and having done so work together at optimising their use and the “returns
to the assets managed”. Indeed we have begun to see new concepts appearing in the
management vocabulary. Co-productivity is a more operational role by suppliers,
distributors and customers in which they undertake tasks that hitherto were the role of
other channel/chain participants. These can and do involve aspects of cooperative
product and service innovation. Co-opetition (often known as co-ompetition) describes
the situation in which competitors work together to meet individual objectives using
mutual facilities. Co-destiny is used to ascertain the extent to which members of a
business coalition share the same objectives, strategies and values, thereby ensuring
that all aspects of cooperation are likely to be successful.

Cooperative innovation
It was apparent to Teece (1992) in the early 1990s that the understanding of innovation
required some revision as partnership arrangements became increasingly
commonplace. Tether (2002) investigated these trends and suggested a definition of
“innovation cooperation” within the context of research aimed at exploring the status
of collaborative innovation within UK industry:
 Innovation cooperation means active participation in joint R&D and other technological Cooperative
innovation projects with other organisations. It does not necessarily imply that both partners
derive immediate commercial benefits from the venture. Pure contracting out work (e.g. innovation
outsourcing to achieve lower costs) where there is no active participation, is not regarded as
cooperation (Tether, 2002).
This research identified patterns and motives for the approaches to partnership
innovation relationships. A significant proportion of the companies approached 597
cooperated with suppliers, customers and competitors, suggesting that cooperation
within the supply chain was by no means new.
Reasons for partnered innovation were reported as a matching of resources that
were not available in the one organisation, risk reduction and product-market
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development, i.e. by working with a customer on a development project there is the

possibility that other customers will accept an innovation. Of particular relevance to
customers within the supply chain, a number of motives were identified:
.
providing complementary knowledge and user know-how;
.
providing a balance between performance and price;
.
providing an insight into user behaviour that may modify or refine the
innovation; and
.
create an awareness of the innovation among other potential users.

The research suggested a more financially oriented approach to cooperation with

suppliers in which transactions costs are becoming increasingly inadequate to describe
the context of knowledge and technology management. It also identified the fact that
outsourcing decisions have strategic implications. This was highlighted recently in the
food processing industry in Australia. A leading company, short of production
capacity, arranged for its nearest competitor to manufacture a standard product on its
behalf while the company manufactured and introduced a new product.
McLoughlin (1999) also identifies the linkage between technology, organisation and
innovation, suggesting:
Increasingly, it has been argued, innovative capacity is dependent upon building linkages
through collaborative relationships (Coombs et al., 1996). . . . this enables learning which adds
to an organisation’s existing knowledge base and the creation of completely new knowledge
(Inkpen, 1996) and also contributes to “novelty and variety in the economic system” by
creating “new economic resources which otherwise simply would not exist” (Coombes et al.,
1996). Such collaboration might involve sub-contracting, strategic alliances or joint
ventures . . .
McLoughlin cites Schumpeter’s work as a principal starting point for linking economic
growth with technology, specifically with business cycles. Schumpeter directed
thinking along the lines that the distinction between product and process innovation
should be made. Product innovation involves the inclusion of new technology into new
and existing products and services. Process innovation involves the adoption of new
technology into the production processes of new products and services.
Our interests here are focussed more on the significance of innovation in the value
creation process and its role in creating competitive advantage. Sutton (1998) gives this
emphasis. He suggests innovation may: “ . . . involve the introduction of new or
modified products or services which are intended to be more attractive to consumers,
 JEIM or of new processes which lower costs or improve quality and so allow increased
20,5 sales . . . ”. Sutton also makes a point concerning organisational changes that “improve
a firm’s ability to deliver quickly and reliably”, suggesting that in manufacturing
industries the impact of an improvement in the service characteristics of a product may
be more important than changes to its physical characteristics in defining the value of
an innovation as it is seen by the purchaser. Depending upon the industry, it may be
598 that consumers may be strongly influenced by service characteristics offering benefits
that improve their management of assets and productivity, time, cost, performance and
risk.
The notion of partnered innovation is also suggested by Kay (1993) who considers
innovation as one of three distinctive capabilities required for competitive advantage;
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the others being organisational architecture and reputation (brand characteristics).

Kay sees them as necessary features and when combined into a mutually reinforcing
market force gives rise to competitive advantage.

Process management versus functional management

The growing interests that process orientation and, therefore, process innovation have
for the virtual organisation is its philosophy. It enables virtuality to become reality.
Virtuality defines the ability to create partnerships across companies using value chain
(or value net) structures with complementary companies that work together to
maximise the value delivered to customers. The network model (or virtual organisation
model) comprises independently owned enterprises that together are a virtual
corporation. It is a synchronised model of distributed processes that work together
towards a common goal. In the network model, information management becomes a
strategic asset. The incentive for organisations is to facilitate access to new market
value-creation opportunities.
Similarly the network model has nurtured cooperative product innovation. Product
innovation is driven by speed (time-to-market) as opposed to process innovation –
driven more by production economies of scope, integration and coordination, whereas
process innovation involves an evaluation of alternative ways in which an organisation
can create, produce, communicate, delver and service value for customers.
It follows that partner/cooperative innovation combines elements of process and
product innovation management within a “network structure” to create a
product-service response that neither partner could create using its own resources.
Examples of partnership innovation management extend in both directions of the
supply chain. They include supplier relationship management such as that
demonstrated between Dell and its myriad of suppliers and examples of customer
relationship management such as the relationship that Caterpillar has built with its
distributor/service network.
For Dell the partnership arrangements create a number of benefits; the ability to
leverage suppliers’ tangible and intangible assets together with ability to reduce the
company’s operating cycle and cash cycle has created huge competitive advantage for
the company. By contrast Caterpillar has generated strong relationships with
distributors to develop cooperative innovatory approaches to resolving service
problems that inevitably occur at a distance. For both Dell and Caterpillar,
communication through efficient ICT systems (information communications
technology) are a critical input to the partnership. Dell requires accurate two-way
 communication with its suppliers if the production schedules of both are to work Cooperative
efficiently. Similarly with Caterpillar the technology of remote diagnostics can only be innovation
useful as long as the communications and information transfer takes place.
When partner/cooperative innovations are closely examined they reveal an
interesting integration of all the relevant aspects of knowledge, technology, and
process and relationship management. This paper will suggest a model that
demonstrates the development of partnership innovation development and 599
management that can be used to evaluate both the strategic effectiveness and the
operational efficiencies. Thus our working definition becomes:
Partnership/cooperative innovation combines elements of process innovation management
and product innovation management within a network structure that neither partner can
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create using its own resources to meet customer/market determined expectations for product
and/or service performance at an economic (viable) cost. Third party involvement is typical.
This is a sufficient working definition to begin with. For the network structures that
are now commonplace in most industries the concept can be interpreted as a means by
which two or more partner organisations contribute exclusive resources that are
necessary to provide additional added value to a target customer group that may, or
may not, be common to all of the partners. Essentially the network offers the
partnership the ability to differentiate the product (or the service) or the service aspects
of the product-service offer.

The value chain/virtual organization model as a value creating system

The value chain concept offers management a means by which they can evaluate both
existing and new strategic opportunities to create customer and partner value.
Essentially the value creation system is an analytical tool; it facilitates the
identification and evaluation of strategic alternatives. It is interesting to note that while
the concept is widely referred too it is not so widely understood; this may be due to the
fact that many organisations continue to have difficulty with the process vs. function
concept. Essentially the “virtual” concept is one in which functions are outsourced and
become contributing activities to the processes that drive the value creation system. To
be effective as a method of business model analysis this requires a “clean sheet”,
assuming no restrictions from existing processes, capabilities or assets so they can
identify “ideal” strategy and structure alternatives. It also assumes the availability of
structured market information – an application of knowledge management. In the real
world there may be (indeed it is very likely there will be) constraints and reasons why
the “ideal” cannot be selected and implemented. However the analysis will have
provided an insight into how best the opportunity might be pursued and identify
potential problems for successful implementation of the selected strategy.
Industry-level value chain analysis is an effective way to identify the interplay
between different players in any specific industry. It helps identify the resources
required to compete successfully in an industry, and where individual organisations
should locate within that industry to maximise their “returns” and those of the value
chain. It is also potentially a useful method for describing the processes and activities
within and around an organisation and relating them to an analysis of the
organisation’s competitive strengths and weaknesses (Lindgren and Bandhold, 2003).
While the value chain is becoming more widely accepted as a planning and
 JEIM management model, much remains to be done concerning performance management
20,5 and the issues this presents for inter-organisational relationships. If a value chain only
operates based on altruistic cooperation between players, the model is clearly flawed.
Rather it is suggested that value chain analysis not only charts optimum strategic
options for a firm, but also highlights its perils.
This is not to suggest that the network model of virtual organisation is the only
600 approach. Value chain analysis is equally applicable to vertically integrated
organisations as it is to virtual organisations. The whole point of the approach is to
identify optimal solutions; solutions that are acceptable to all stakeholders –
customers, suppliers and investors. Any organisation should be aware of the structure
of the value adding processes within its industry and of its own location within this
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“structure”.
Value chain analysis identifies the flow of added value through the value creation
processes within both the industry and the firm. It follows that, regardless of its
configuration, it is the role of the firm’s executives to be aware of where and how value
is created and who benefits from the processes. If the value processes are monitored
frequently, a flexible and aware organisation can configure itself (and its partners if
these exist) and play an important role in capturing a dominant share of the value
created by these processes.
Customer-focused companies create additional value for their customers by
building value chains that identify, produce, deliver, and service customer needs. They
often create multi-enterprise organisations that integrate supply chain efficiencies with
demand chain management processes that anticipate customer expectations and
ensure the availability of products and services in the right place, at the right time, at
the required level of service, and at the lowest possible supply chain cost. However, it
would be somewhat trite to assume there to be no difficulties here.
In the business model of the future, value chains compete rather than individual companies,
and the connectivity and process excellence are key challenges. (AeIGT: 2003 cited in Johns
et al. (2005))
But there are other problems that offer challenges, such as coordination,
communication and overall control. These comments are not new; Johns and his
co-authors have identified “co-coordinating management” as a common theme in the
literature. They suggest that organisational structures that are functionally organised
have difficulties in meeting the primary requirements of value chain management –
defining and meeting end-customer needs, and ensuring that these are transparent
throughout the value chain organization. Johns et al. suggest that it is connectivity (and
communication) that is the problem; however, both connectivity and communication
are based on value optimisation and managed equity throughout the value chain. For
these to be effective, a timely, accurate and transparent information system is essential.
It follows that close monitoring of the value chain identifies significant changes in
value and value delivery opportunities. It also suggests that the approach will lend
itself to monitoring the business model and the business environment to identify how
the organisation’s business model could be modified such that even greater added
value might be created for customers; and how partnerships with other organisations
could make this effective.
 Clearly any partnership innovation must be beneficial to all parties. Furthermore Cooperative
partnership innovation can take place between any value chain partners – innovations innovation
can be upstream or downstream and often both! In this and the other examples we
must ask if there is some model or process that facilitates the procedure.
.
What drives industry competitiveness?
.
What are the customer value drivers – is there scope to add value? How? Where?
601
.
Can this added value opportunity be used to develop mutual competitive
advantage?
.
Is cooperative innovation in the value chain the pathway to creating added
value?
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.
Is there actually a need for other partners?
.
What resources are required and what is the impact on customer performance?
.
What are the information requirements for managing the complex interactions of
evaluation, integration and communication?

Examples of partnership innovation

The introduction of CFPR (collaborative planning, forecasting and replenishment) by
Metcash, an Australian fast moving consumer goods distributor with turnover of
$A7.6 billion, is an example. Initially introduced with 20 suppliers the mutual benefits
became readily apparent. Suppliers are given a “better picture of product flows
through the warehouses and stores”; this benefited both Metcash and its suppliers, and
supplier forecasting gained accuracy while, for Metcash, information on logistics
efficiencies became apparent very quickly. A downstream supply partnership
innovation involving Metcash and 7 Eleven offers 7 Eleven an opportunity to optimise
its delivery programme. Metcash will afford 7 Eleven access to a one stop buying and
delivery facility resulting in a reduction in administration and distribution costs; this
will result in 7 Eleven becoming more price competitive through increased
productivity. Metcash suggests that substantial savings are available over the next
five years for their retailer customers through the recently announced initiatives in
logistics and partnership arrangements with major manufacturers Crowe (2004).
A closer consideration of value chain cooperative innovation demonstrates
increasing leverage of selected partner expertise in one or more of these areas. Often
what is interesting is that, where collaboration between complementary organisations
may be expected, collaboration between competitors is the norm in a number of
industries. For example, a large number of marketplace competitors are R&D
collaborators in the automotive industry. Industry Week (2005) reports on GM and
Ford’s collaborative development of a six-speed automatic transmission for
front-wheel drive vehicles. “Shared risk, costs and technological capabilities” are
expressed as the reason for the development, together with the “advantage of realising
economies of scale working with a partner”. Other projects typically match non-core,
but essential, processes. Timken and SKF, bearing manufacturers, share logistics and
e-business activities. Panasonic and Hitachi are collaborating to develop and expand
the worldwide market for plasma TVs. Their agreement includes development,
production, marketing and intellectual property. However, there are potential issues.
For example, a comment in the Industry Week report suggests that market place issues
 JEIM of branding can create problems. It is suggested that collaboration works when the
20,5 shared interests concern cost and risk, but the customer and the shareholder views of
value may be more influenced by individual reputations for innovation, quality, and
reliability – the characteristics that create the brand.
AWA is an Australian company that has taken a focused view of value chain
management in the information technology (IT) services market. The company has its
602 origins in the early days of radio, being a pre-First World War amalgamation of the
local Telefunken and Marconi agents as part of a world wide settlement of patent
disputes over technology. These days the company’s principal operations are in the IT
services market, particularly for larger corporate users. Over the last 25 years an
interesting evolution has occurred.
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The genesis of the current business was in the early 1980s as an in-house service
arm directly supporting product sales of mid range computer systems based on the
PICK operating system. Service was entirely a derivative of hardware sales. The
customer’s principal acquisition decision was to buy a computer system, integrating
software and hardware as a large capital purchase. On-going service was generally
provided in form of annual lump sum maintenance contracts that were more akin to
insurance arrangements. The hardware vendor nearly always performed the service
and these maintenance contracts typically simply rolled forward for the life of the
system. The customer in effect acquired an entire solution for its computing needs from
one vendor.
The PICK operating system gradually lost out to Unix, and AWA’s hardware sales
operation was divested and eventually disappeared as the technology it sold largely
became defunct. However, the service operation did not die with its parent, but in the
early 1990s reinvented itself as a third party service organization acting as the service
arm for IT vendors such as Apple, and for large end users of IT equipment such as
government and education institutions. “Service” became a product in its own right –
acquired independently of the hardware manufacturer. This was at a time when
increasingly the various components of the IT value chain were splintering so that
hardware, operating system, application software and service all became discrete
elements that were provided by increasingly specialist providers (e.g. Intel, Microsoft,
Dell). This required both product innovation and process innovation. From a tight
direct linkage from manufacturer to end user through the value chain, new
independent partnerships and relationships developed.
In the mid 1990s the market context changed again with the advent of large-scale
outsourcing and the market entry of specialist outsourcing organizations such as EDS
and CSC. These organizations offered to take over the entire scope of their customers’
IT activities; in effect vertically integrating again along the whole of the IT services
value chain. AWA did not attempt to compete in offering end to end solutions, but
instead made its service offering more focused, forming a new partnership dynamic so
that it sat as a quite distinct element in the overall value chain. This enabled it to team
with these larger organizations to fulfil specialist roles, essentially as a sub-contractor.
The large outsourcer in effect became the value chain co-ordinator, with complex
process innovation a key to successfully co-ordinating the various partner inputs.
Arguably this trend to large scale outsourcing runs counter to historical trends in
the IT industry itself and in many other industries, where firms have tended to closely
define their competencies and maximise strategic positioning through alliances and
 networks, so that the ownership of assets becomes less important than the ability to Cooperative
access them through virtual integration. The success of large-scale outsourcing has innovation
been mixed, with the Australian Commonwealth Government moving away from large
block contracts. Perhaps not surprisingly then, the market has been changing again
with the advent of what is termed “multi-sourcing”. This involves large end users
retaining overall responsibility for their IT operations, but selectively outsourcing
activities where focussed operators can offer better service delivery and cost 603
efficiencies. Such relationships move well away from any notion of generic service
offers, but instead are based on service packages reflecting specific needs, with each
service partnership built to meet the specific dynamics of the customer.
From the service providers perspective this evolution has required constant
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re-invention. The nature of its relationship with its customers has changed from a set
piece maintenance contract at fixed rates that were rarely negotiated riding on the back
of hardware sales, to a dynamic relationship with a series of partners.
Apart from product innovation this has required significant process innovation. In
AWA’s case the centerpiece is its “AWAre” proprietary information management
system. This is the primary tool for interacting with partners and tailoring the
company’s services (supply) to meet partner/customer demands (managing service
calls). This is not owned but it is accessed and used by major customers, and it is a
major element in AWA’s access to the value chain and allows it to operate effectively
operating within it. While AWAre’s principal function is call management, it is in fact
the base for all AWA service activities, including interfacing with customers, its own
technicians, and agents. In addition, it encompasses not just field activities, but
workshops, logistics asset management, and billing. AWAre’s historical origins means
that it is essentially a relational database. This gives inherent flexibility in managing
information and it is very well suited to this type of application, compared to the
hierarchical architecture more common in legacy systems.
Perhaps most importantly, through a range of electronic interfaces AWA has been
giving customers direct access to its system for over 10 years. This means that the
customer or partner has equal visibility over the service delivery process, as does
AWA itself. This provides a quite unique platform for partnership innovation, with
information on key processes being highly visible.
It follows that partnership/cooperative innovation should be focused on longer-term
advantages. This suggests a focus on building on relevant core assets, processes and
capabilities, and seeking partners with necessary complementary resources, with the
clear objective of creating sustainable competitive advantage for the partnership. This
may result in a situation in which an organisation uses the expertise of a partner to
create a stronger position with its customer base (customer relationship management
or CRM). It may also be one in which an organisation uses its supplier relationship
management (SRM) skills to enhance its customer relationship management. In other
words CRM and SRM are integrated, or fused, to enhance value delivery to customers.
Often this would appear to require a multi-enterprise approach, whereby the
integration of a mix of partners’ resources are combined in some innovative way to
create, or to add value, for customers that exceeds the offer of competitors; as such this
creates competitive advantage.
No models exist to demonstrate how cooperative innovation decisions are
evaluated. However, with some reasonable assumptions, the implicit activities within
 JEIM the process can be deduced. Clearly the end-user customers’ value drivers must be
20,5 identified and understood. Typically this would follow the premise that these represent
some product-service characteristic that the customer does “value” and provides a
benefit that enables a customer to differentiate its offer to their customers (as in a B2B
market situation), or perhaps delivers some sought after “status” benefit as in the case
when the end-user is a consumer. Value drivers can be described as generic entities
604 such as asset management, performance enhancement, cost management, “time”
management, information management, and risk management. Clearly the
interpretation of each of these differs but the essential point to be understood is that
they are intrinsic elements to achieving customer satisfaction. The decisions to reach
are what, how, by who, where and when.
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While it is arguable that cooperation is essential throughout the value creation

system to create efficiencies it can also be argued that cooperative innovation
partnerships exist to create effective value creation and delivery. Efficiency is
operational, and reflects the implementation of a strategy designed to create added
value for customers and competitive advantage for the entire value system. As such it
operates with clear operational KPIs (Key Performance Indicators) and establishes an
information system that operates by monitoring and reporting variances from the
prescribed performance results. The strategic context of the value system requires
broader information inputs. First of all it requires an openness concerning the
objectives of partners and of their constraints. For example this may include
confidential planning information concerning financial and marketing resources; these
are essential if the full benefits of any type of cooperation are to be realised, and crucial
in the context of cooperative innovation potential.
Figure 1 suggests there are three approaches to cooperative innovation. First we
should understand that customer value can be created in a number of locations within
the value system. For example IKEA has a value proposition that focuses on a
combination of design, quality and competitive price. To deliver this offer IKEA has
upstream partnerships with its manufacturer suppliers each of whom employ
manufacturing methods worked out between them and IKEA to ensure an overall
congruity in style and quality. IKEA also has down stream partnerships with its
customers/consumers who, by and large, “sell” the products to themselves, undertake
the logistics function (transportation) and complete the manufacturing process by
assembling the product themselves. This relationship is an excellent example of
co-productivity as well as being one of cooperative innovation.
Figure 1 also identifies an upstream application, typical in pharmaceutical and
computer manufacturing, where R&D may be outsourced (pharmaceuticals) or
complex assembly work is outsourced and the modules assembled down stream
(computers). A typical downstream example is illustrated whereby the expertise and
resources of a distributor network are sought. Caterpillar, mentioned earlier, is a
typical example, as is the AWA example in which the essential “service the value”
process is delivered by AWA on behalf of the large hardware manufacturers.

Concluding comments
One question remains: how are decisions made and what information inputs are
required? Clearly there are a number of issues relating to the overall value delivery
decision. They include investment decisions about facilities and staff skills, and
 Cooperative
innovation

605
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Figure 1.
Exploring the scope of
co-operative/partnership
evaluation in value
systems

returns that these need to achieve, and whether the volume of activity will be sufficient
to justify the investment. Other major questions concern control and coordination
criteria; in a customer centric industry not only are customers “demanding” but
competition is intense, as response is seen as an important component of customer
satisfaction. Given such circumstances the cost of providing service may become very
high and may be disproportionate to the benefits realised from direct customer contact.
This can be the case with servicing complex equipment where managing very short
response times requires not only specialist staff but also requires specialist data
management systems (the AWA example explores this issue). If we are to be able to
make both cost effective and cost efficient decisions there is a need for an approach that
can manage this complex mix of qualitative and quantitative decisions.
Figure 2 identifies this “mix” of decisions. It suggests that the structure of the value
chain is first established; of particular importance is the identification of the target
customers and their value drivers. Having clearly determined these characteristics, the
optional approaches to deliver and service the customer value can then be identified,
and the important question concerning how customer satisfaction may be increased by
partnership/cooperative innovation. It is likely that a number of alternatives exist and
these need to be evaluated. Often the up stream/down stream options resolve
themselves because of specific customer expectations, but options do exist to influence
the decision at the product-service design process stage. However, there remains the
need to consider the implications that partnership activities involving assets, processes
and capabilities present for control and coordination.
Some examples may help. Among the decisions to be reached are those of which
“whose brand?” and “whose customer?” are among the most significant. These raise
 JEIM
20,5

606
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Figure 2.
Evaluating the
partnership/cooperative
innovation decision

questions concerning the extent to which control and coordination are important, and
the costs of the optional positions that are available. In the example of AWA the
computer manufacturers use AWA as a service supplier but their relationships vary,
depending upon the overall relationship they have with customers and the implications
of successful service delivery on the brand image they are attempting to maintain. For
this reason the considerations of cost structures (operational gearing) and financing the
corporate entity (financial gearing) become significant inputs. Both considerations
have market and financial risk implications that can be evaluated. Given the
alternatives and the qualitative control and coordination implications, the use of cash
flow analysis can be used to evaluate their financial efficacy.

References
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Further reading
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Schumpeter, J. (1934), The Theory of Economic Development, Harvard University Press,

Cambridge, MA.
Schumpeter, J. (1939), Business Cycles, McGraw Hill, New York, NY.

About the authors

David Walters – BA (Alberta), MSc (Bradford), PhD (Cranfield) – is currently Professor in
Logistics and Supply Chain Management, University of Sydney, Australia. David Walters is the
corresponding author and can be contacted at: davidw@itls.usyd.edu.au
Mark Rainbird – Degrees in Arts and Law (University of NSW), M.Phil (Oxford) – has been
working with David Walters in the area of Value Chain Management for several years and is a
Research Fellow at Sydney Graduate School of Management, and Managing Director of AWA
Limited.

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