Collaboration in Market Systems
This article was originally written by PSDI founding contributor Will Rutter as coursework for Carnegie Mellon University School of Design Professor Andrew Twigg’s course Designing to Collaborate, held in the fall semester of 2020. The piece was written for and included in the course’s final project document A Collaboration Guidebook. While the entire Guidebook is relevant to Positive Sum Design (and worth a read), we thought this might be an especially interesting piece to include for PSDI readers.
The false paradox of collaboration in a competitive market system.
Traditional knowledge generally suggests that capitalist market systems thrive on competition. It follows, therefore, that collaboration in a market setting may be unproductive, if not entirely destructive, to a business or entity navigating a capitalist system. While no one disputes that competition is the backbone of capitalist markets, business scholars and economists have also enumerated the many opportunities posed by intelligent collaborative efforts in capitalist contexts. These collaborations can increase innovation, distribute risk, and take advantage of disparate knowledge amongst business entities in order to unlock new markets and create new products and services.
Models of collaboration in the market
Several models of market-based collaboration exist. Each model approaches collaboration from a different frame of reference, providing insight into a certain set of qualities about defined collaboration styles.
The Governance-Participation Framework
Proposed by Pisano and Verganti in the Harvard Business Review’s December 2008 issue, the governance-participation framework of business collaboration advocates a two by-to matrix model of collaboration where governance and participation are plotted on perpendicular axes from low to high. (Pisano and Verganti) This creates four general quadrants of unique combinations of low or high participation in governance. Each business collaboration is suggested to fall within one of these “Four Ways to Collaborate.” (Pisano and Verganti)
The governance-participation framework uses “governance” to refer to ways of deciding “who gets to define the problem and choose the solution.”(Pisano and Verganti) Flat governance schemes take a collaborative approach to defining the problem and solution space, generally involving a subset, or even the entire group of the collaborators. Flat governance generally thrives in environments where sharing cost and risks is advantageous. Hierarchical governance refers to situations where a single entity has control over defining the problem and solution space. Hierarchical governance collaborations are generally effective when the entity or organization at the top of the hierarchy has the knowledge to effectively define the problem and assess potential solutions. Hierarchical governance also generally allows the overseeing entity to absorb more of the value from an innovation. (Pisano and Verganti)
The Governance-Participation framework uses participation to broadly describe how collaborators are sourced for the collaboration. Participation is described as either open or closed: open-participation collaborations allows any collaborator in who would like to join, where closed-participation collaborations allow only chosen collaborators into the collaborative effort. (Pisano and Verganti)
The two-by-two Governance-Participation Framework matrix, pictured to the right, defines the following four fundamental types of business collaboration.
Governance-Participation Framework figure from Pisano and Verganti’s 2008 Harvard Business Review article Which Kind of Collaboration Is Right for You? (Pisano and Verganti)
The Innovation Mall (hierarchical governance/open participation): the innovation mall style of collaboration involves a “lead” business posing a problem that any organization may then try to solve. The “lead” business then chooses the proposed solution it thinks is best. This form of collaboration best suits organizations that want to attract unorthodox or interdisciplinary solutions, yet have enough domain knowledge to reliably select the best of the proffered solution options. (Pisano and Verganti)
The Innovation Community (flat governance/open participation): The innovation community is a style of collaboration where any entity can enter the community, pose a problem, suggest a solution, and select an answer to move forward with. Open-source software communities are often innovation communities. The innovation community is appropriate for situations in which no one organization has the capabilities necessary to pose the right problem or evaluate the solution, and when unorthodox solutions are appealing. (Pisano and Verganti)
The Elite Circle (hierarchical governance/ close participation): The elite circle is a style of collaboration where participants are selected by a “lead” organization that will define the problem and identify the solution. This mode of collaboration is most appropriate when the “lead” organization has the ability to correctly evaluate solutions and pick the best participants for the problem. (Pisano and Verganti)
The Consortium (flat governance/closed participation): The consortium approach to collaboration involves a self-defined group of collaborating organizations that jointly define the problems and select the solutions generated by the collaborative effort. This form of collaboration is best undertaken by groups of organizations that have complementary areas of expertise but want to retain some control over a project. (Pisano and Verganti)
Value Creation, Capture, and Delivery
Ard-Pieter de Man and Dave Luvison take a value-centered approach to analyzing business collaborations in their paper, Collaborative business models: Aligning and operationalizing alliances. (de Man and Luvison) They propose that business collaboration arises in three major forms—sharing, specialization, and allocation—then analyzed each form with respect to value creation, value capture, and value delivery. Value creation refers to how collaborations create greater value through their members working together. Value capture refers to how each member of the collaboration collects value from the collaboration (for instance, how revenues and expenses are split). Value delivery refers to the management of the complications and challenges of bringing collaboratively created value to the market. (de Man and Luvison)
Value plays the following roles in the three major forms of collaboration:
The above table provides a high-level view of how different collaboration forms correspond to aspects of value creation, capture, and delivery. Table procured from de Man and Luvison’s “Collaborative business models: Aligning and operationalizing alliances.” (de Man and Luvison)
Sharing: Collaborators in a sharing partnership create value through creating greater reach with similar expertise using economies of scale. Generally, value is captured by each collaborator through an agreement made prior to the finalization of the collaboration. Sharing collaborations usually require high integration and reciprocality in value delivery since the collaborators work closely and deliver very similar, perhaps even blended, products or services. An example of a sharing collaboration is an airline alliance. (de Man and Luvison)
Specialization: Collaborators in a specialization partnership create value by bringing organizations with different skills and expertise together to deliver services none of the collaborators could deliver alone. Generally, each collaborator carries their own revenues and expenses, capturing value according to their own business validity. Because each collaborator contributes their own specialization to the team, integration between collaborators is usually low. (de Man and Luvison) An example of a specialization partnership is that between different types of building contractors (electrical, structural, etc.) constructing a skyscraper.
Allocation: Collaborators in an allocation partnership create value by allocating risk amongst the partners with respect to which partner is best set up to handle that particular type of risk. Generally, value is captured by collaborators in allocation partnerships through performance- or success-driven incentives. Allocation partnerships usually involve sequential hand-offs in value delivery as each partner takes care of the portion of value the risks of which it is best equipped to handle. An example of an allocation partnership is the collaboration between a government transit bureau and a transportation contractor running a train network. (de Man and Luvison)
Collective Impact and Ecosystems of Shared Value
Business organizations generally conceive of themselves as independent entities, especially in the capitalist market systems currently in vogue around the world. A close examination of the systems in which the organizations find themselves, however, reveals a different picture: businesses exist in a complex economic and social ecosystem, along with all other businesses. Further, by working together, many businesses have unlocked further potential for economic success, and done so in a way that also created societal benefits. In their paper The Ecosystem of Shared Value, Marc Kramer and Marc Pfizer call this “creating shared value.” (Kramer and Pfitzer) In the same vein, the socioeconomic systems which pose opportunities for the creation of shared value can be thought of as “ecosystems of shared value.” To access the economic value and societal benefits available in these ecosystems, however, businesses must first be willing to work with other organizations to create “collective impact” (a term originally coined by John Kania and Mark Kramer in the Stanford Social Innovation Review). Five elements are required to create collective impact and realize the potential of ecosystems of shared value: (Kramer and Pfitzer)
A Common Agenda: Collaborators attempting collective impact must have a shared vision for the impact they intend to achieve or “ideal future” they wish to bring about. (Kramer and Pfitzer)
A Shared Measurement System: Collaborators attempting collective impact need to have an agreed-upon system for how success will be measured. (Kramer and Pfitzer)
Mutually Reinforcing Activities: Collaborators should not only undertake activities that they can do well, but also ensure that their activities reinforce and support one another. (Kramer and Pfitzer)
Constant Communication: Collaborators attempting collective impact must be in constant communication to discuss what is working well, what is working poorly, and how success metrics are changing. (Kramer and Pfitzer)
Dedicated Backbone of Support: Every attempt at collective impact needs a dedicated, independent team to guide the overall effort and keep collaborators on track. (Kramer and Pfitzer)
Using Market-Focused Collaboration Frameworks
The frameworks outlined above are intended to guide thinking around collaborating in market systems. These frameworks can be used on their own or in conjunction with one another: for instance, an organization could choose to join a consortium-style collaboration in service of collective impact and unlocking potential in ecosystems of shared value. The most important factor, however, is the deliberate attention paid to the aspects of your organization’s individual situation and needs. Does your organization have the necessary expertise to evaluate proper solutions? If so, perhaps consider hierarchical governance. Does your planned collaboration create value through economies of skill? Ensure you have your value capture and delivery planned in a way that agrees with a specialization collaboration model. Collaboration is not mutually exclusive with capitalist markets: with careful planning and preparation, collaborative efforts can bring huge success to market-driven organizations.
References
Ard-Pieter de Man and Dave Luvison, “Collaborative Business Models: Aligning and Operationalizing Alliances,” Business Horizons 62, no. 4 (July 1, 2019): 473–82, https://doi. org/10.1016/j.bushor.2019.02.004.
Gary P. Pisano and Roberto Verganti, “Which Kind of Collaboration Is Right for You?,” Harvard Business Review, December 1, 2008, https://hbr. org/2008/12/which-kind-of-collaboration-isright-for-you.
Mark R. Kramer and Marc W. Pfitzer, “The Ecosystem of Shared Value,” Harvard Business Review, October 1, 2016, https://hbr. org/2016/10/the-ecosystem-of-shared-value.