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Coopetition for SMEs

Malin H. Näsholm, Maria Bengtsson, and Marlene Johansson

Introduction

The business landscape, particularly in knowledge-intensive and technologically advanced markets, is changing as a result of disruptive innovations, increased complexity of the technologies and systems, and the fast-paced development of markets. Therefore, SMEs face a number of challenges, such as increasing research and development costs, high risk and uncertainty in new technological developments, and market entrance. Small and medium-sized enterprises usually lack resources and are therefore more dependent on other firms (BarNir & Smith, 2002; Gnyawali & Park, 2009); they often need to cooperate with competitors (Bengtsson & Kock, 2000) to meet these challenges.

Small- and medium-sized enterprises (SMEs) are particularly vulnerable to environmental forces and may therefore seek to supplement their insufficient resources and reduce uncertainty by adopting coopetition strategies.

(Granata et al., 2016: 82)

Coopetition can be a necessity for survival for these firms, as the citation above illustrates; however, it is also a risky strategy for them. On the one hand, it can be argued that SMEs benefit the most from coopetition; on the other hand, they are also the most vulnerable when cooperating with competing firms. This chapter addresses the question of what capabilities are needed for coopetition to be a successful strategy for SMEs.

It is important to acknowledge that SMEs have specific characteristics. These types of businesses are often defined as having few employees and limited turnover and market presence, referred to as the liabilities of smallness and newness (Hannan & Freeman, 1984; Stinchcombe, 1965). Therefore, SMEs engage in alliances with other firms as a strategy to strengthen their competitive position (Van Gils & Zwart, 2009). Alliances have been argued to be especially important for new and entrepreneurial firms, since partnering with other firms can provide capabilities that enhance their performance and reputation (Stuart et al., 1999) and help SMEs to overcome challenges of resource constraints and limited market presence (Morris et al., 2007). Most inter-firm relationships are coopetitive as they comprise elements of both cooperation and competition (Zhang et al., 2010), and firms have different roles, such as customer, supplier, or competitor, in relation to each other in different activities, depending on the specific project (Ross & Robertson, 2007). Pursuing coopetition may be a particularly relevant strategy for SMEs to overcome their vulnerabilities and liabilities of being small and new (Bengtsson & Johansson, 2014). Small and medium-sized enterprises may benefit the most from cooperating with competing firms because of the threat of larger competitors and resource constraints (Gnyawali & Park, 2009). Small firms can cooperate with each other to join forces against larger firms, or they can partner with larger competitors to integrate into dominating technological platforms and gain access to larger markets. As a firm grows, relationships with competitors can become even more important (Lechner & Dowling, 2003).

While cooperating with competitors can be a proactive and successful strategy, Thomason et al. (2013) suggest that it can often be less intentional for small firms and can emerge, for example, due to customer demands. This implies that SMEs can be forced to engage in coopetition and adopt this strategy out of the necessity to obtain the benefits available, or even to survive. Coopetition has been found to be challenging, risky, and filled with tension (cf. Das & Teng, 2000; Gnyawali & Park, 2009; Raza-Ullah et al., 2014). These risks may be even more important for smaller firms, and making the wrong choice about who to coopete with can be critical for a small firm (Morris et al., 2007; Baum et al., 2000). If an alliance fails, it could even threaten the existence of a small firm (Rosenbusch et al., 2011). Coopetitive relationships are particularly challenging for small firms allying with larger firms due to the power disparities and asymmetry between the partners. Yet reviews of coopetition (Bouncken et al., 2015; Gast et al., 2015) point to the entrepreneurship context (SMEs, family firms, and start-ups) as a fairly underexplored area in coopetition research.

In this chapter, we address the specificities of coopetition for SMEs, particularly when allying with larger firms. We examine the research within coopetition that has specifically focused on SMEs, and we outline the specific benefits and challenges of coopetition for SMEs.

Coopetition has been argued to require specific capabilities (Bengtsson et al., 2016; Gnyawali & Park, 2011) in addition to general alliance management capabilities. This chapter discusses what such coopetition capabilities would entail for SMEs, and, drawing on the specific challenges that SMEs face when coopeting, we argue that additional dimensions of alliance and alliance portfolio management capabilities are required.

Benefits of coopetition for SMEs

In coopetition research, the focus has mainly been on larger firms, and there are only a few that have specifically focused on the situation and circumstances of SMEs (Gnyawali & Park, 2009). The few studies focusing on SMEs have noted the importance of coopetition in varied contexts, such as professional football (Robert et al., 2009), accounting firms (Huang & Chu, 2015), and tourism (Della Corte & Aria, 2016; von Friedrichs Grängsjö, 2003). Researchers have listed numerous benefits of cooperating with competitors for SMEs. Alliances with competing firms have, for example, been argued to provide access to resources, facilitate entry to new markets (BarNir & Smith, 2002), increase speed in technology development (Gnyawali & Park, 2009), help SMEs to meet risks, gain economies of scale (Morris et al., 2007), reduce uncertainty, and enhance financial performance (Levy et al., 2003).

Innovation has been noted as a key motive for SMEs to coopete, driven by increasingly high R&D costs and short product life cycles in high-tech industries (Gnyawali & Park, 2009). Through collaboration with competing firms, small firms can develop technologies that they could not have done on their own, since they have limited resources to invest in research and development and to more rapidly bring them to market (Morris et al., 2007). Coopetition is also a way for SMEs to strengthen their internationalization (cf. Vanyushyn et al., 2009). Coopetitive relations can be a source of international opportunities for SMEs (Kock et al., 2010), and SMEs may be willing to collaborate with domestic competitors in international markets to acquire resources (Chetty & Wilson, 2003). Jankowska (2011) found that smaller firms were more optimistic about the benefits of coopetition for their internationalization.

Soppe et al. (2014) found that the majority of entrepreneurial firms that they studied choose to coopete with smaller or equally sized firms. For small firms, joining together in business groups or networks can be a strategy for competing with larger firms (Lechner & Leyronas, 2009; Lindström & Polsa, 2016). Lin and Zhang (2005) argue that forming networks, even with competing firms, is a crucial strategy for SMEs to survive in a highly competitive industry. For SMEs, it may be an important strategy to partner with a larger competitor due to its strong and competitive position within the industry. Bengtsson and Johansson (2014), for example, demonstrate that allying with large competitors enables small firms to maneuver in global business landscapes and grow to secure a position in the market.

Specific challenges for SMEs when coopeting

One of the defining characteristics of SMEs is that they are small and therefore have limited resources compared to larger firms. The lack of resources and skills is described as a liability of smallness (Baum et al., 2000; Hannan & Freeman, 1984), and it is difficult to gain access to capital to develop internally. In addition, what has been referred to as a liability of newness describes the potential difficulties that entrepreneurial firms face in establishing a foothold in either an existing or new market—since they, for example, lack a track record, customer references, and legitimacy (Aldrich & Auster, 1986; Bengtsson & Johansson, 2014; Stinchcombe, 1965). Many SMEs have limited markets, and they depend on a niche customer base and narrow product or service lines (Storey, 1994; Van Gils & Zwart, 2009). These liabilities make the risks involved in coopetition particularly important for SMEs, as failure would be critical for them (Morris et al., 2007). The liabilities of small firms also make them particularly vulnerable to environmental forces (Morris et al., 2007; Granata et al., 2016). For example, the implications of the global financial crisis have been severe for SMEs, and coopetition has been suggested as an appropriate business strategy for overcoming these challenges (Kossyva et al., 2015).

As previously stated, coopetitive relationships are particularly challenging for small firms allying with larger firms due to the power disparities and asymmetry between the partners. While power asymmetry and unequal access to resources may be reasons to form a coopetitive relationship, they may also be the cause of additional unilateral actions, an emerging coopetive component (Czakon, 2009). Casciaro and Piskorski (2005) highlight the risks of needing a partner’s resources. There is a risk that the firm loses control of its partner or becomes too dependent on the partner (Gnyawali & Park, 2009). If the small firm becomes dependent on the partner for key resources, there is a potential for the partner to take advantage of this power (Chiambaretto, 2015). The small firm’s ability to defend itself against the power of a large firm is low once the relationship has been established (Katila et al., 2008). Bengtsson and Johansson (2014) argue that large firms that assemble and develop integrated systems often use strategies to either lock in or lock out the SME from integrated horizontal value systems. The small firm can be locked out if the large firm develops its own solutions that outcompete those provided by the SME, or it can be locked in as a supplier within the large firm’s own value chain.

Coopetition involves a number of risks, for example, unintentional knowledge leakage, imitation, opportunistic behavior of the partner, and loss of competitive advantage, which make it difficult to manage coopetition (Gnyawali & Park, 2009; Ritala & Hurmelinna-Laukkanen, 2009). Potential conflicts between partners and internal contradictions make alliances unstable and often unsuccessful (Das & Teng, 2000). In addition, coopetition, by its nature of simultaneously pursuing cooperation and competition between firms, involves a number of contradictory demands (such as knowledge sharing and protecting, and exploration and exploitation), which result in tensions at individual, organizational, and inter-organizational levels (Fernandez et al., 2014; Raza-Ullah et al., 2014). These inherent tensions make it difficult to manage coopetition (Fernandez et al., 2014; Gnyawali & Park, 2009). We argue that this tension could be particularly salient in SMEs because, with fewer employees, more of the employees would be involved in interaction with the coopetitor, which would mean that these individuals need to cope with these contradictory demands more directly (compared to larger firms, where competitive and collaborative activities could be more separate). On the other hand, in a smaller firm, more employees could have both better insight into the relation and a better understanding of why collaborating with a competing firm is necessary. The level of tension that an individual experiences is dependent on how involved he or she is in the coopetitive interaction and how much he or she interacts with the other firm (Näsholm & Bengtsson, 2014). Bengtsson et al. (2016) argue that the way in which top managers deal with this tension is important for how coopetition and tensions are perceived in the organization, and that the top managers could be more capable of handling the contradictory demands. However, in a small or new firm, the owner or manager may not have these capabilities or experience.

Capabilities needed by SMEs

Successful coopetition requires that partners are active and committed, and that they have the resources to be so (Lindström & Polsa, 2016). The time and additional costs that may be required to manage the relationship can offset the benefits of coopeting; however, with the flexibility of SMEs, coopetition can be less difficult to handle than for their larger, more rigid counterparts (Morris et al., 2007). For small firms, the owners or managers play a key role in the success of a coopetitive relationship, for example, in terms of their knowledge, social capital, perceptions (Thomason et al., 2013), and social networks (BarNir & Smith, 2002). Soppe et al. (2014) found that in small firms, coopetitive inter-firm relationships tended to be managed centrally, often directly by the CEO. Gnyawali and Park (2009; 2011) suggest that managers of SMES need coopetition experience, and they need to “develop a coopetition mindset” in order to meet the challenges of managing coopetitive alliances. Morris et al. (2007) and Thomason et al. (2013) suggest that for small businesses, successful coopetition is based on trust, mutual benefit, and commitment, and that they should develop policies and procedures to promote this. This view may be too harmonious, since a moderate level of tension and a balance between the cooperative and competitive aspects of the relationship have been found to be the most dynamic and ultimately beneficial (Bengtsson et al., 2010; Bengtsson et al., 2016). The tensions involved in coopeting should be seen as a source of competitive advantage, although managers need to handle them and prevent them from turning into conflicts (Fernandez et al., 2014). Bengtsson et al. (2016) argue that coopetition capability involves being able think paradoxically and to initiate processes that help firms to attain and maintain a moderate level of tension. In addition, the managers involved must also be able to deal with simultaneous conflicting emotions (Raza-Ullah et al., 2014). For small firms, the individuals’ capabilities to manage coopetition and cope with paradoxical or contradictory demands would be more crucial, since larger firms have greater human resources.

To manage the risks involved in alliances and to improve alliance success, a number of tools have been identified, such as setting up specifically dedicated alliance units or managers, creating databases, using external experts, and setting up training programs for staff (Heimeriks et al., 2009). However, these types of investments can be too costly for SMEs that are more dependent on individual managers to have the knowledge and alliance management experience (Kale & Singh, 2009). With their liabilities and the higher stakes involved, it is particularly important for smaller firms to develop alliance capabilities in order to manage their alliances. Although research has addressed the way in which alliance management capabilities are developed, more research is needed regarding what these capabilities actually consist of and which capabilities are needed to manage a firm’s entire portfolio of alliances (Schreiner et al., 2009; Wassmer, 2010).

Alliance management capabilities have been described as including dimensions of inter-organizational learning, alliance transformation, and inter-organizational coordination (Schilke & Goerzen, 2010). As described, due to the power asymmetry in alliances with larger partners, SMEs risk becoming locked into a larger firm’s value chain or locked out of the market if they are not able to protect their unique offer and competitive advantage. To maintain their independence and avoid unwanted knowledge leakage, we argue that SMEs’ alliance capabilities must involve an additional dimension of guarding, signifying an ability to both protect their own interests and keep their partners at an appropriate distance (Bengtsson et al., 2015).

To avoid becoming both too dependent on one partner and too vulnerable, SMEs need to develop a portfolio of alliances that can be used to balance and counter the asymmetry with larger firms (Bengtsson & Johansson, 2014). Kale and Singh (2009) argue that alliance portfolio management capability is distinct from alliance capability, and that there are additional advantages for SMEs to be gain by managing their alliances as a portfolio. Bengtsson et al. (2015) draw on case studies of high-tech SMEs and earlier studies of such capabilities (Kale & Singh, 2009; Schilke & Goerzen, 2010) to develop four dimensions of alliance portfolio management capability that SMEs specifically require. These dimensions take into consideration the specific challenges, tensions, and risks that SMEs face. They are named agility, balancing, portfolio proactiveness, and awareness (Bengtsson et al., 2015).

Agility signifies an SME’s need for speed and flexibility, not only in configuring but also in reconfiguring its alliance portfolio to meet the strategic moves of alliance partners (Bengtsson et al., 2015). The balancing dimension signifies that it is not enough for SMEs to coordinate across alliances and resolve conflicts, as argued by Kale and Singh (2009), but that smaller firms need to be able to use competing alliances to counter the hostile moves of large partners. The dimension of portfolio proactiveness is specific to SMEs in that, for them, it is not only crucial to identify alliance opportunities, but also to be proactive at a portfolio level to predict competitive moves, take initiative to form new alliances, and terminate alliances that become a threat (Bengtsson et al., 2015). This is supported by Soppe et al. (2014), who found that entrepreneurial firms need to be ready and able to end a collaboration that could become harmful. Finally, for SMEs, an important capability is awareness: to continually analyze and be updated on developments in the market, to understand the changing relationships between different actors in their industry, and to understand the collaborative and competitive landscape (Bengtsson et al., 2015).

Conclusion

It has been argued that coopetition is becoming the dominant logic in some industries, and that SMEs need to integrate coopetition into the firm’s daily routines and strategic thinking (Baumard, 2009). The few studies within coopetition that have focused specifically on SMEs have demonstrated that there is much for small firms to gain by collaborating with competing firms. Furthermore, only a few studies have addressed the challenges of partnering with a larger firm due to the power asymmetry and dependency. For some SMEs, coopeting may be necessary for the firm’s survival, and it can be a successful strategy to develop and grow. However, the liabilities of small firms also exaggerate make the risks involved, and failure could be fatal.

To make coopetition a strategy for success, SMEs require capabilities to manage the risks and tensions involved. Small and medium-sized enterprises are more dependent on their owners or managers, and more of their employees are directly involved in the coopetitive interaction. This makes the individuals’ capabilities and experience more important for SMEs, which could be both a strength and a weakness in comparison to larger firms. Firms also need to develop their alliance portfolio management capabilities, since they need to navigate relationships and use them to remain independent. Therefore, small firms must keep their entire portfolio of alliances in mind to be proactive and balance their alliances, especially if they partner with larger firms. As discussed, due to the power asymmetry these relationships are particularly challenging and place additional demands on SMEs’ capabilities.

Further empirical research is required regarding the specificities of small firms and the capabilities they need to make the most of their coopetitive strategies. Empirical studies focusing on coopetition relationships between small and large firms are lacking. It is important to further explore the effects of different forms of inter-firm asymmetries on an SME’s ability to sustain such relationships. If SMEs choose to partner with a large firm in areas of less strategic importance for the partner, it might be less likely that the partner attempts to lock in or lock out the SME. Therefore, studies are needed with regard to the ways in which such dimensions are dealt with when partners are selected. Furthermore, studies are required that consider the different constellations of dyadic coopetitive relationships between SMEs and between SMEs and larger partners. In addition, further research could address coopetitive alliance portfolios, from the focal firm’s perspective, and the capabilities needed to manage them. Additional research on both coopetition capabilities and alliance portfolio capabilities has been called for. Longitudinal in-depth studies are needed to further explore the dynamic interplay between different relationships and how they evolve over time to understand how SMEs can sustain themselves in dynamic and competitive industries.

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