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Co-opetition and Technological Innovation inSmall and Medium-Sized Enterprises:A Multilevel Conceptual Modeljsbm_273 308..330

by Devi R. Gnyawali and Byung-Jin (Robert) Park

Small and Medium-Sized Enterprises (SMEs) face tremendous challenges in theirattempt to pursue technological innovations. This paper argues that co-opetitionstrategy—simultaneous pursuit of competition and collaboration—helps SMEs todevelop their ability to effectively pursue technological innovations. We developed amultilevel conceptual model consisting of factors at the industry, dyadic, and firmlevel to understand the drivers of co-opetition and discuss benefits and costs ofco-opetition for SMEs. We believe that this paper will stimulate future conceptual andempirical research on this important topic and has implications for SME managersand policymakers.

The phenomenon of co-opetition, thatis, simultaneous cooperation and com-petition between firms, has becomeincreasingly popular in recent years(Gnyawali, He, and Madhavan 2008,2006; Chen 2008; Luo 2007; Ketchen,Snow, and Hoover 2004; Bengtsson andKock 2000). Research shows that over 50percent of collaborative relations (strate-gic alliances) occur between firms withinthe same industry or among competitors(Harbison and Pekar 1998). Recent busi-ness press (Coy 2006, pp. 96–97) sug-

gests that “Sleeping with the Enemy” orlearning to work with rivals is becomingvery important. As SAP CEO HenningKagermann stated, “power of co-opetition will only grow as productsbecome more complex and as competi-tion widens globally” (Coy 2006).Co-opetition helps to increase techno-logical diversity and combine comple-mentary resources of rival firms indeveloping new technologies and prod-ucts (Quintana-García and Benavides-Velasco 2004). Co-opetition seems to be

Devi R. Gnyawali is associate professor of strategic management in the Department ofManagement, R. B. Pamplin College of Business, Virginia Polytechnic Institute and StateUniversity (Virginia Tech).

Byung-Jin (Robert) Park is a Ph.D. student in the Department of Management, VirginiaPolytechnic Institute and State University (Virginia Tech).

Address correspondence to: Devi R. Gnyawali, 2106 Pamplin Hall (0233), Virginia Tech,Blacksburg, VA 24061. E-mail: [email protected].

Journal of Small Business Management 2009 47(3), pp. 308–330

JOURNAL OF SMALL BUSINESS MANAGEMENT308

mailto:[email protected]

particularly important for innovation inindustries that are knowledge-intensive,dynamic, and complex (Carayannis andAlexander 1999).

The importance of co-opetition seemsto be even greater in the context of Smalland Medium-Sized Enterprises (SMEs).As technological battles have intensifiedand technologies have become morecomplex, SMEs face numerous chal-lenges such as rising R&D costs, highrisk and uncertainty in technologicaldevelopment, as well as a lack ofresources to pursue large-scale innova-tion projects (BarNir and Smith 2002;Gomes-Casseres 1997). Recently, schol-ars have suggested that SMEs in anindustry need to collaborate with com-petitors so that they can create econo-mies of scale, mitigate risk, and leverageresources together (Morris, Kocak, andÖzer 2007). Competitors are likely toface similar challenges and possessresources and capabilities that aredirectly relevant to each other as theyhave high market commonality andresource similarity (Chen 1996). SMEscould more effectively compete againstlarge players if they collaborate witheach other (competitors) and access,acquire, and use relevant resources heldby each other. Along those lines, somescholars suggest that SMEs’ tendency toengage in co-opetition is likely to posi-tively relate to financial performance(Levy, Loebbecke, and Powell 2003).Thus, though the importance ofco-opetition as a strategy for SMEs hasbeen recognized, much of the currentresearch on co-opetition has focusedmainly on large companies and neglectsthe SMEs. Therefore, we know very littleabout drivers and consequences ofco-opetition in SMEs. An examination ofco-opetition is important for the litera-ture on SMEs for two major reasons.First, because it is an emerging conceptwith increasing practice in high-technology sectors, a basic understand-ing of co-opetition and its implications

helps to stimulate and advanceco-opetition research in the context ofSMEs. Second, managers of SMEs need tobe prepared to face opportunities andchallenges wrought by the increasingpopularity of co-opetition and preparethemselves accordingly. Managers needto pay attention to the forces in theirindustries that may lead to co-opetitionin their industry, be proactive and adeptin pursuing co-opetition, and benefitfrom it. Availability of a conceptualframework is a natural starting pointto more systematically examine co-opetition in SMEs and to provide practi-cal guidelines for managers. Accordingly,the goal of this paper was to developa conceptual framework that helps tounderstand factors influencing co-opetition strategies in SMEs and implica-tions of co-opetition in the context oftechnological innovation.

We built several of our conceptualarguments using the resource-basedview (RBV), game theory, and networktheory. Developing and leveragingresources is a key goal of co-opetition;the RBV therefore provides a useful lensfor developing arguments related toresources and technologies. Because awin–win relationship is critical for SMEs,we discuss the issues of partners’ goalalignment and balance of value creation(common benefits) and value appropria-tion (private benefits) based on the gametheory (Brandenburger and Nalebuff1996). Perspectives of the networktheory help to explain and articulate howto access and extend knowledge andresources outside the firm, how to lever-age them, and what types of relations areappropriate for doing so.

This paper makes several noteworthycontributions. First, it helps to under-stand major industry-level forces thatmay be driving co-opetition for techno-logical innovation in a particular indus-try. Second, it identifies and articulatesseveral key factors that increase the like-lihood of a given pair of firms engaging

GNYAWALI AND PARK 309

in co-opetition to pursue technologicalinnovations. It also explains firm-specificdrivers and illustrates benefits and chal-lenges. Third, the paper provides practi-cal guidelines to managers of SMEs intheir efforts to understand co-opetitionand devise their co-opetition strategy.Finally and more broadly, we not onlyencourage SME managers to considerco-opetition as a key part of their strate-gic agenda but also provide ideas foranalyzing their industry and competitorsto better understand the forces ofco-opetition and their effects. We suggestthat SME managers need to monitor andanalyze environmental changes to assessthe need to engage in co-opetition and, ifco-opetition is intensifying in the indus-try, they should explicitly considercompetitors when pursuing technology-intensive alliances.

Conceptual BackgroundChallenges of SMEs and theImportance of Co-opetition

Research suggests that SMEs facenumerous challenges. Morris, Kocak,and Özer (2007, p. 38) argue that “com-pared to their medium- and large-sizedcounterparts, small ventures are morevulnerable to environmental forces.”Sources of vulnerability include a nichecustomer base, limited market presence,and demand fluctuations. Similarly,Winch and Bianchi (2006) demonstratethat SMEs, due to their limited resourcesand capabilities, face numerous pres-sures in their R&D and innovationefforts. Strategic collaborations are veryimportant for technological developmentbecause small firms cannot develop tech-nologies on their own due to high costs,uncertainties, and risks involved in theprocess. As a result of such challenges,scholars have suggested that collabora-tive relationships and networks play animportant role in the strategy and perfor-mance of SMEs. Alliances help SMEsimprove their capability to outmatch astronger competitor, help facilitate entry

into new markets, and provide access toexternal resources (BarNir and Smith2002). Merrifield (2007) is even moreforceful and suggests that collaborationsare critical for the survival of SMEs.

An early discussion of collaborationamong competitors in SMEs wasprovided by Gomes-Casseres (1997).He argued and demonstrated throughexamples that firms that are small rela-tive to their rivals need to form allianceswith each other so that they can achieveeconomies of scale and scope in R&D, aswell as work together to develop tech-nological standards. He argued that MipsComputer Systems, a small firm employ-ing less than 1,000 people, was able totake on well-established players such asIBM and Hewlett-Packard by creating aconstellation consisting of several smallsemiconductor firms in the reducedinstruction-set computing industry. Morerecent research suggests the need forSMEs to collaborate with competitors tocreate economies of scale, mitigate risk,and leverage resources (Morris, Kocak,and Özer 2007). Eikebrokk and Olsen(2005) demonstrate empirically thatco-opetition in e-business helps SMEsto enhance the novelty of their busi-ness and to combine complementarystrengths in products and technologies.With a focus on the development of insti-tutional standards, Mione (2008) arguesthat small firms work together to createcommon norms and technologies andcompete against each other to promotetheir own technologies and products.Finally, Levy, Loebbecke, and Powell(2003) suggest that SMEs’ tendency toengage in co-opetition is likely to posi-tively relate to financial performance.

Taken together, these studies suggestthat SMEs need to be very strategic intheir approach to collaboration andsuggest the importance of collaboratingwith competitors as a key strategyfor technological innovation and forbottom-line performance of SMEs.Strictly speaking, co-opetition means to


simultaneously collaborate and competewith the same partners at the same time(Gnyawali, He, and Madhavan 2008; Luo2007). More broadly, however, thenotion of co-opetition includes collabo-ration at one time and competition at adifferent time with the same competitoror collaboration with some competitorsto develop strengths to compete againstother competitors. For example, Lechner,Dowling, and Welpe (2006) insist that afirm can use competitors as subcontrac-tors (collaborate with them) when it hastemporarily reached full capacity. Firmscan form alliances with competitors inorder to handle large projects. Using lon-gitudinal data of bidding contracts in theTaiwan simulator industry, Chien andPeng (2005) demonstrate that companiescompete against each other whilebidding, and after they win the bid theycooperate and work together to com-plete the projects. While co-opetition inthe SMEs context thus far seems to be inrather basic forms such as constellationsor networks (Gomes-Casseres 1997),subcontracts of large projects, and cross-licensing of technologies, SMEs in thefuture are likely to be involved incollaborating and competing simulta-neously with the same partners, eitherwith other SME competitors or withbigger competitors. Also, because ofchanging dynamics in high-technologysectors, collaborative relationships andnetworks may become more co-opetitive,which means that the networks willinclude direct competitors or that someexisting collaborators may become com-petitors over time. While co-opetitionis a rather complex strategy, SMEs mightbe able to pursue this strategy moreeasily than can bigger companiesbecause unlike large firms, SMEs canexperiment with new business modelsbecause they are less constrained byexisting structure and formal proceduresand policies. Also, if SMEs use thestrategy wisely, co-opetition may be auseful risk management tool when

uncertainties of markets and technolo-gies are high.

Co-opetition forTechnological Innovation

Jorde and Teece (1990) discussed theimportance of collaborating with com-petitors for technological development.They suggested that the simultaneousinnovation model (as opposed to the tra-ditional serial model) “recognizes theexistence of tight linkages and feedbackmechanisms which must operate quicklyand efficiently, including links betweenfirms . . .” (p. 77). The simultaneousinnovation model provides a foundationfor understanding why competitors needto bring together each other’s resourcesto pursue innovations. With a focus onthe informal exchange of technologyamong competing firms, Von Hippel(1987) suggested that collaboration forknowledge sharing among competitorsoccurs when technological progress maybe faster with collective efforts ratherthan through individual efforts, whencombined knowledge offers betteradvantages than does solo knowledge,and when solo knowledge does notprovide any major competitive advan-tage. As a result, co-opetition is likelywhen technological standards are beingdeveloped and when combining multiplebodies of knowledge provides moreadvantages than solo knowledge does.

More recently, Quintana-García andBenavides-Velasco (2004) empiricallyshowed that collaboration with directcompetitors is important not only inacquiring new technological knowledgeand skills from the partner but also increating and accessing other capabilitiesbased on an intensive exploitation ofexisting ones. Powell, Koput, and Smith-Doerr (1996) argue that a network ofexternal linkages serves as a locus ofinnovation because it provides timelyaccess to knowledge and resources thatare otherwise unavailable. Senior execu-tives seem to be paying greater


attention to co-opetition. For example,Morgenstern (2006) reports that in thesemiconductor industry, with the com-plexity of technologies, rising costs, andshrinking product life span, co-opetitionmight be a viable strategy for loweringcost and boosting production speed.

The previous review suggests thatSMEs face numerous challenges and thatSMEs may benefit by collaborating withcompetitors in order to develop theirability to compete in their industries.Moreover, the challenges seem to beeven greater when SMEs try to pursueinnovation and new technology develop-ment, hence the need to pursueco-opetition to develop their ability toinnovate. Three critical issues suggestthe importance of SMEs’ cooperationwith competitors as opposed to any kindof cooperation: first, competitors arelikely to have relevant resources andcapabilities because they operate insimilar markets. Second, because SMEsface resource constraints and a strongthreat from large competitors, it makessense for them to collaborate with eachother to overcome the resource con-straint and develop a collective ability tocompete. Finally, SMEs with similarproducts and technologies (i.e., competi-tors) can work together to createcommon technologies and a uniformvoice in the marketplace.

Theoretical FrameworksRelated to Co-opetition

The following three theoreticalstreams provide the conceptual basis todiscuss co-opetition: RBV including theknowledge-based view, game theory,and network theory. Based on the RBVframework, Lado, Boyd, and Hanlon(1997) propose a syncretic model,arguing that “success in today’s businessworld often requires that firms adoptboth competitive and cooperative strate-gies simultaneously.” The best partnerfor a firm in a strategic alliance is some-times one of its strong competitors. The

dynamic capability-based perspective,focusing on how asset stocks are accu-mulated, mobilized, and deployed togenerate a sustainable competitiveadvantage (Lado, Boyd, and Wright 1992;Nelson 1990), provides a basis uponwhich to examine the accumulation ofresource stocks, such as technologicalresources and capabilities, through bothcompetition and collaboration (Lado,Boyd, and Hanlon 1997).

Game theory provides another con-ceptual lens with a dynamic picture ofthe interactive process of cooperationand competition (Gnyawali, He, andMadhavan 2008; Clarke-Hill, Li, andDavies 2003). Diverging from the purecompetitive perspective of game theory,Brandenburger and Nalebuff (1996) illus-trated how a firm can use game theory toachieve positive-sum gains by changingthe players, the rules of the game, andthe scope of the game. Cairo (2006)says that the co-opetition approach inbusiness relies on the premise thatcompanies’ activities involve two centralelements—creating value and capturingvalue. The former refers to the establish-ment of new or the enlargement of exist-ing value, whereas the latter refers to the“dividing up of the pie.” Brandenburgerand Nalebuff (1996) emphasize that therecognition of these two different pro-cesses requires companies to adapt anew mindset. A win–win approach is themost effective way to create a large pieand, in turn, obtain a bigger slice (Cairo2006). Firms should seek out opportuni-ties to create new values together,achieve synergy effects, and make a posi-tive sum game (Zineldin 2004).

Network theory also provides veryuseful explanations. Cooperative tieswith competitors provide a firm withopportunities to learn about its partners(as well as indirectly about the partners’partners) and afford access to resourcesof the partners and their partners(Powell, Koput, and Smith-Doerr 1996).Scholars have noted that external


resources are critical in shaping a firm’scompetitive behavior and suggest thatthe following three types of resourceflows take place between partners: infor-mation flows, asset flows, and statusflows (Gnyawali and Madhavan 2001).Moreover, firms differ in their ability toaccess and use external resources.Though rivals are expected to be cau-tious in entering into cooperative tiesand sharing resources, which could pos-sibly dampen asset flow, partnershipswill mean some access to eachother’s resources, which enables better-positioned firms to more swiftly accessnetwork-based resources and use themto aggressively pursue competitiveopportunities (Gnyawali and Madhavan2001). As collaborative relationshipsbecome more popular, scholars suggestthat firms need to orchestrate theirnetwork of relationships and leveragenetwork resources so that they cancreate and extract value from thenetwork (Dhanaraj and Parkhe 2006).Gnyawali, He, and Madhavan (2006)examined co-opetition and its effectsusing the network perspective andempirically found that differentialnetwork configurations and structuralpositions among firms in a co-opetitivenetwork reflect resource asymmetriesamong them and that such asymmetrieslead to differences in firm competitivebehavior.

Conceptual Frameworkand Propositions

In the following discussion, we drawupon the literature reviewed previouslyto develop our conceptual argumentsand propositions. As noted earlier, thenotion of co-opetition is rather broad, sowe focus on why and how SMEs that arecurrently competing against each otherare likely to collaborate for technologicalinnovation. It is important to emphasizethat the context of this conceptual devel-opment is technological innovation.The conceptual model and propositions

relate mainly to the industry context andSMEs that are experiencing rapid techno-logical changes and the need to developcapability to innovate and successfullybring new technologies to the market.

Figure 1 depicts the multilevel con-ceptual model developed in this paper. Amultilevel model is particularly useful asit provides a richer and deeper portrait oforganizational phenomena (Klein, Tosi,and Cannella 1999) and allows an inte-grated inquiry on the topic (Kostova1999). Such a model also allows us tomore deeply investigate the complex,multifaceted, and paradoxical nature ofco-opetition (Chen 2008). As indicated inFigure 1, we argue that increasing R&Dcosts, shrinking product life cycles, andconvergence of technologies are themain drivers of co-opetition in a givenindustry. By building on the notions ofresource complementarity and resourcepooling, we suggest that the interface ofindustry factors and dyadic factors deter-mines the likelihood of a given pair offirms to engage in co-opetition. At thefirm level, we suggest that SMEs that arevery proactive in building technologicalstrengths or feel challenged by largeplayers are likely to engage inco-opetition. We argue that co-opetitionbrings several benefits—mainly speed ofproduct development, economies ofscale, and reduction of uncertainty andrisk in technology development. At thesame time, co-opetition is costly as itcreates the risk of technology leakage,brings unique management challenges,and can lead to the loss of control. Inthe following sections, we develop ourconceptual arguments and offerpropositions.

Industry Forces Shaping theLikelihood of Co-opetition

The term “likelihood of co-opetition”refers to the probability that SMEs thathave traditionally competed against eachother will collaborate for technologicalpurposes. Based on two major criteria,


we identify three key relevant industry-level factors that tend to increase thelikelihood of co-opetition among SMEs.First, because we are focused on thehigh-technology context, the constructsshould represent key technologicalchanges. Second, for modeling themultilevel phenomenon, the interplay ofindustry factors and pair-level or dyadicfactors is an important consideration.Based on prior research (Sampson 2007;Palmberg and Martikainen 2006;Quintana-García and Benavides-Velasco2004; Chen and Li 1999), we identifythree major forces that are likely toshape co-opetition in high-technologyindustries: short product life cycle, con-vergence of technologies, and increasedcosts of R&D. We selected two dyadicfactors based on Emden, Calantone, andDroge (2006): partner technologicalalignment and partner goal alignment.We first discuss the role of industryfactors and then discuss the interplay ofindustry and dyadic factors.

Short Product Life Cycles. Researchshows that product life cycles are dra-matically shrinking (Chen and Li 1999),mainly because of rapidly changing cus-tomer preferences as well as the speedand magnitude of technological changes.Speed-to-market is becoming more andmore essential to new product success(Lynn and Akgün 1998). Oxley andSampson (2004) suggest that profitabilitydepends critically on firms’ abilities tocreate and commercialize new technolo-gies quickly and efficiently. Shortproduct life cycles require companies toreduce time-to-market in order to launchtheir products at the right time to getreasonable profits during the useful life-time of a product. As a result, the likeli-hood of cooperation with competitorshaving excellent exploration capabilitiesincreases. Gnyawali, He, and Madhavan(2006) suggest that co-opetitive networksmight provide benefits of reducing time-to-market through earlier access to tech-nology and information.

Figure 1Co-opetition for Technological Innovation in SMEs:

A Conceptual Framework

Short ProductLife Cycles

High R&DCosts

Dyadic Factors

TechnologicalConvergence

Firm-level Factors • Prospecting Strategy • Perceived Vulnerability

Consequences of Co-Opetition Benefits

• Economies of Scale

• Reduction of Uncertainty & Risk

• Speed in Product Development

Costs

• Technological Risks

• Management Challenge

• Loss of Control

Likelihood of Co-Opetition

by SMEs

P1

P8-P9

Strategic Alignment • Goal Congruence

Technological Alignment• Technological Capability • Resource

Complementarity • Resource Similarity

P2-P4

P6-P7

P5

Likelihood of Co-Opetition

within an Industry

SME, Small and Medium-Sized Enterprise.


Technological Convergence. Techno-logical convergence refers to the pres-ence of a vast array of different types oftechnologies to perform similar tasksand the trend of technologies to mergeinto new technologies that bringtogether a myriad of media. Gametheory (Brandenburger and Nalebuff1996) provides a useful basis for under-stand how technological convergenceleads to changes in the players, therules of the game, and the scope of thegame. First, convergence may demandmore complex, broad, and sophisticatedtechnical developmental tasks (thescope of the game). Due to high uncer-tainty in terms of both market and tech-nology, companies tend to increasediversity; therefore, reducing failure rateis a key factor in the formation of alli-ances. SMEs will therefore need to lookfor partners that have complementaryresources and expertise. Second, tech-nological convergence offers companiesopportunities to set industry standards(the rules of the game). Research sug-gests that competitors (especially firstmovers) can cooperate with each otherto win in a battle for industry standards(Gomes-Casseres 1994) and createindustry-wide norms (Mione 2008). Butan SME, due to its weak position in theindustry compared to a large firm, hasdifficulty in pushing its technology toachieve the industry standard alone.Working with other firms within theindustry therefore seems to be a usefulway for SMEs to develop, push, and aimto raise the quality of the technology tomake it more competitive for the indus-try standard. Third, when technologiesare converging, SMEs may cooperatewith previous competitors that haverelevant technologies to deal with thethreat of large firms entering theirindustry (the change of players). Newopportunities created by convergencemay also cause previous collaborators tobecome competitors, thereby increasingthe chance of co-opetition.

High R&D Costs. Average R&D intensity(R&D expenditures as percent sales) isvery high in high-technology sectorssuch as pharmaceuticals and biotechnol-ogy, software and computer services,and technology hardware (DIUS 2008).Massive R&D costs provide a strongincentive for companies to cooperatewith competitors with a large resourcebase. Creating a co-opetitive relationshipis an effective way to combine R&Dexpenses and expertise (Zineldin 2004).Small firms on their own cannot spend alarge amount of money and resources onR&D, especially when the outcomes areuncertain. Working together with othercompetitors with similar resources is aneffective way to pursue large-scale R&Dprojects and share risks associated withthe technologies.

Overall, most SMEs, given their con-straints in financial and technologicalresources and lack of market strength,cannot address the previously mentionedchallenges by just using their ownlimited resources and capabilities. There-fore, SMEs have to reach out to theircompetitors who have the requisiteresources and capabilities and are willingto collaborate to address the challenges.Resources and capabilities of competi-tors are likely to be directly relevant toeach other, and the common challengesthey are facing could be minimizedby working together. Therefore, wepropose that

P1: SMEs operating in industries charac-terized by short product life cycle,technological convergence, and highR&D cost are more likely to engage inco-opetition than SMEs operating inother industries.

A logical question, then, is whatfactors make two existing competitors inan industry collaborate with each other?We suggest that the answer lies at theinterplay of industry forces discussedearlier and partner-specific factors such


as the technological capabilities and goalalignment of potential partners. Thepropositions focus on the most relevantcombinations of the industry forces anddyadic factors.

Partners’ Technological andStrategic Alignment asDyadic Forces

As noted earlier, it is very costly todevelop new products or technologies,both of which seem to mature and “die”rather quickly. As a result, competingfirms are forced to bring together theirmutual resources and competencies andcombine them to speed up the productdevelopment task and to develop uniqueproducts or technologies. However,co-opetitive relations are not easy andinvolve high costs and risks. Firms there-fore need to consider critical factorswhen selecting their competitor-partners.By building on Emden, Calantone, andDroge (2006), we suggest that a firm’sdecision to collaborate with a particularcompetitor will depend on the techno-logical alignment in terms of technologi-cal capability, resource complementarity,and resource similarity and the interplayof the technological factors with theindustry factors discussed earlier.

Technological Capability. Emden,Calantone, and Droge (2006) suggestthat the potential partner’s unique com-petencies, such as innovative technologyand expertise in a certain field, are veryimportant factors in partner selection.This is consistent with the RBV, whichclaims that firms search for partners whohave unique technological resources(Barney 1991) that they can leverage(Hitt et al. 2000). In the RBV, a desire ofparticipants to acquire capabilities froman external source is the primary motivefor the formation of alliances (Dasand Teng 1998; Mowery, Oxley, andSilverman 1998) and for the selection ofspecific alliance partners (Hitt et al.

2000). Resources and capabilities, espe-cially when they are tacit and complex,cannot be easily traded through marketchannels; therefore, alliances and otherinterfirm collaborative mechanisms aredevices that enable firms to gain accessto these capabilities (Mowery, Oxley,and Silverman 1998; Barney 1991; Kogut1988).

Partnering with competitors havingstrong technological capabilities seemsto be especially critical when thewindow of time-to-market is rather short,making it difficult for a single firm todevelop the technology on its own in atimely manner. A company might bemotivated to collaborate with a competi-tor when it faces gaps in critical capabili-ties that are too expensive or will taketoo long to develop internally but thepotential partner has the requisite capa-bilities. Because close competitors have ahigh degree of market commonality andresource similarity (Chen 1996), they arelikely to have resources and capabilitiesthat are highly relevant to each other.Research shows that upstream allianceshave become quite popular in the semi-conductor industry as they help todevelop a firm’s technological capabilityand ability to quickly bring products tomarket (Roberts 2005).

Partners’ technological capabilitiesseem to be critical for SMEs as well. Inthe biotech industry, for example, smallfirms seeking strategic alliances weremore likely to be motivated by R&Dtime-span reduction than larger firms(McCutchen and Swamidass 2004). Whenfirms have limited time available for pur-suing R&D, they will be more motivatedto combine each other’s expertise andresources and work together for thecommon goal. It is important to note thatlarger firms are also competitors if theyare in the same industry and that thetrend of co-opetition may cause largefirms to change their partners from SMEsto other large firms. Therefore, SMEs willget fewer opportunities to cooperate


with larger firms; that may mean thateither they should partner with otherSMEs or develop technologies internally.Collaboration with competitor-SMEs withcapabilities will provide them betteropportunities for competing (or catchingup) with larger firms and for attractingbetter potential partners in the future.Therefore, we propose that

P2: In industries characterized by shortproduct life cycle, SMEs are likely tocollaborate with competitors havingstrong technological capabilities.

Resource Complementarity. Researchindicates that resource complementarityis crucial for collaborative success(Bleeke and Ernst 1991; Harrigan 1985)mainly because of synergy and econo-mies of scope. Partners with complemen-tary resources can combine theirstrengths and create synergy, and engagein codevelopment of new products andtechnologies. Hagedoorn (1993) pro-poses that R&D alliances can be mostbeneficial in unrelated diversificationtoward complementary, noncore fields.Research on new product developmentsuggests that significant innovations arelikely to emerge from a combination ofcomplementary skills (Glaister 1996).Emden, Calantone, and Droge (2006)insist that the potential partners shouldhave technical resources that are distinctyet complimentary to one another for theopportunity foreseen, which wouldallow the partners to exploit or to createopportunities by integrating theircomplementary skills and resources.Based on their analysis of joint ventureswith convergent (the parent firms’ intan-gible skills become alike) and divergent(the parent firms’ intangible skillsbecome dissimilar yet complementary)developments, Nakamura, Shaver, andYeung (1996) demonstrate that partnercompetitive capabilities become dissimi-lar but complementary in long-lastingjoint ventures.

Resource complementarity is impor-tant for several reasons. First, due toreciprocal commitment, partners withcomplementary resources are less likelyto be opportunistic with each other andlearn more from the relationship (Sarkaret al. 2001). Second, though rapidconvergence of technologies adds riskand uncertainty to firms, collaborationwith competitors having complementaryresources is likely to help firms mutuallyreduce the risks and uncertainties byworking together. Research shows thatbecause the information and communi-cation technologies are converging, firmsin these industries tend to seek R&Dalliances with firms having comple-mentary resources (Palmberg andMartikainen 2006). Quintana-García andBenavides-Velasco (2004) suggest thatcollaboration with direct competitorscontributes to technological diversity andadoption of a complementary approachto product development. Third, inemerging industries, companies (espe-cially first movers) will search for oppor-tunities to set the standards, and they aremore likely to cooperate with competi-tors having complementary resourcesto win battles with other competitorgroups.

In the context of SMEs, the combina-tion of complementary resources andexpertise and cocreation of new tech-nologies are likely to help SMEs createsynergy and face the stronger andlarger rivals. Similarly, SMEs canreduce uncertainty by increasing thebusiness scope through partners’complementary resources. Unlike largefirms, SMEs tend to be specializedrather than diversified in their techno-logical competencies and product range(Tidd, Bessant, and Pavitt 2005) andtherefore have a greater need to lookfor partners with different but comple-mentary capabilities, especially whenthe technologies are converging. Basedon the previous reasoning, we proposethat


P3: In industries characterized by tech-nological convergence, SMEs arelikely to collaborate with competitorsthat have complementary resourcesand technologies.

Resource Similarity. Resource similar-ity, or the extent to which resources ofpotential competitors overlap in variousdimensions, is an important determinantfor co-opetition for several reasons. First,resource similarity helps to increase theeconomies of scale in technologicaldevelopment. As technologies becomemore complex and sophisticated, firmsneed more resources, including financialresources and human resources, todevelop technologies. As noted earlier,due to high market commonality andresource similarity between competitors,resources and capabilities of competitorsare directly relevant to each other. There-fore, competitor firms can pool theirresources and capabilities to pursuecommon projects. Also, competitors typi-cally have common interests in develop-ing certain technologies and thereforemay be ready to invest a substantialamount of money in the projects.

Lechner, Dowling, and Welpe (2006)argue that relationships with competitorscan give access to temporarily neededresources or enable them to poolresources. After developing the tech-nologies through cooperation, the par-ticipating firms might compete tocommercialize the technologies in thefinal market. R&D cost, one of the maindeterminants of co-opetition as discussedearlier, can be shared if each partner canjointly invest and benefit from the econo-mies of scale in R&D. Research by Miottiand Sachwald (2003) shows that highcost is a main determinant of R&D coop-eration among rivals. In high-tech con-texts, the costs of product developmentand manufacturing are prohibitive forsmall firms. “With the cost of a new fabheading above $3 billion, manufacturersneeded to find ways to quickly recoup

the investment in the plant. And asolution to the challenge of this quickproduction cycle: ‘co-opetition,’ ” saidDuBois, vice president of StrategicProjects at STMicroelectronics Group(Morgenstern 2006).

Second, resource similarity is impor-tant in sharing risks in technologicaldevelopment. In many industries, stan-dardization limits the possible paths forfuture technologies, and so firms concen-trate their R&D activities on the samefields (Kultti, Takalo, and Toikka 2006).Though multiple firms might be pursuinga particular technology for patenting, apatent for the same development isgranted to only one firm, and therefore,other firms’ efforts to develop the sametechnology will not lead to fruition.Working together on key technologicaldevelopments can help to share costsand risks in the process of technologicaldevelopment.

Third, resource similarity is essentialfor partner search and subsequent orga-nizational learning and knowledge trans-fer. Similarity of resources provides thenecessary common ground to realize thetechnology’s potential and to communi-cate with each other (Emden, Calantone,and Droge 2006). Mowery, Oxley, andSilverman (1998) argue that alliances thatfocus on joint R&D or product develop-ment should involve firms with ex antetechnology-based capabilities that aresimilar in scale and scope and thattechnology-based alliances are likelyto favor the choice of partners withsimilar technological portfolios. Further,the notion of relative absorptivecapacity suggests that some similaritybetween partner firms’ knowledge andknowledge-processing systems is criticalfor partners to learn from each other andtake advantage of the collaboration(Lane and Lubatkin 1998; Mowery,Oxley, and Silverman 1996).

It is important to note that resourcesimilarity can increase the threat of apartner’s opportunistic behavior, but


research suggests that this threat can bemitigated by reducing the alliance scopeand by having joint ventures as opposedto nonequity alliances (Oxley andSampson 2004). Based on the previousreasoning, we propose that

P4: In industries characterized by highR&D costs, SMEs are likely to collabo-rate with competitors having similaror overlapping resources.

The earlier discussion focused on keyaspects of technological alignment as akey driver for SMEs’ collaboration withcompetitors. In addition, we suggest thatstrategic alignment is a critical factor indetermining the likelihood of collabora-tion among two competitor SMEs. Wefocus on goal congruence as a key stra-tegic factor.

Goal Congruence. Goal congruencerefers to the extent to which firms in aco-opetitive relationship believe thatthey can gain a competitive advantagefrom the relationship. Such an advan-tage can stem from pursuing commonbenefits (or enlarge the size of the pie,enabling all involved parties to reapbenefits), or some unique benefits tothe individual partners, which may ormay not be applicable to the otherparty. An example of the former is thecreation of a new technological stan-dard by working together, and anexample of the latter is the partners’beliefs about how much they can indi-vidually benefit from the newly createdstandard. Though technological align-ment is very important in increasing theprobability of having a co-opetitive rela-tionship for technological purposes,strategic alignment is necessary toensure that the technological goals arecompatible with strategic goals. Becausealliances with competitors are likely tohave a very high threat of opportunisticbehavior, which is often a cause of theirinherent instability (Das 2004), rivals

are unlikely to collaborate withoutbeing sure that the collaboration willhelp their strategic priorities.

As noted earlier, co-opetition isbased on the premise that companies’activities involve two central elements:creating value and capturing value.Brandenburger and Nalebuff (1996)emphasize that a win–win approach isthe most effective way to create a largepie and, in turn, obtain a bigger slice.Creating value is an inherently coopera-tive process, whereas capturing value isinherently competitive (Luo 2005). Thisissue of creating and dividing up the piemakes the process of co-opetition quiteuncertain and dynamic. Hamel, Doz, andPrahalad (1989) argue that “the partner’sstrategic goals converge while their com-petitive goals diverge,” which is one ofthe conditions under which mutual gainis possible. Further, Morris, Kocak, andÖzer (2007) also argue the importance ofmutual gain, especially when collabora-tion involves resources the firms willacquire or the market position they willassume.

The issue of strategic alignment orbalance of value creation and appropria-tion is especially critical when SMEspartner with larger firms because asresearch shows, SMEs are often indanger of being appropriated by largerfirms (Alvarez and Barney 2001) and oflosing control (Gomes-Casseres 1997;Forrest 1990). The dangers will be evengreater when SMEs collaborate withcompetitive large firms; therefore, SMEspursuing co-opetition strategies will haveto seriously consider potential value cre-ation and appropriation.

A different way of looking at goalcongruence or strategic alignment isthe situation where net benefits ofco-opetition outweigh costs. This can beexamined in several ways, such as morevalue creation and more value appropria-tion, same value creation but more valueappropriation, or more value appropria-tion by a focal firm than that by the


partners. It is important to note thatmore value appropriation by the focalfirm does not necessarily mean loss to itspartner. Firm A’s value appropriationdoes not have to be at the expense offirm B’s value appropriation. If firm Ahas more relevant internal resources andcapabilities and can more effectivelyblend and bundle external and internalresources, then it will more likely benefitgreatly from the partnership. In themeantime, firm B will be better offthrough the co-opetition but not as muchas firm A will. In this scenario, both firmsA and B are likely to have congruence ofgoals for the partnership, albeit theextent of benefits will be different.

Based on the previous reasoning, webelieve that SMEs may form co-opetitiverelationships when they predict a posi-tive gain from the relationship after con-sidering both value creation and valueappropriation. We therefore propose that

P5: The likelihood of co-opetition by SMEswill be high when the degree of goalcongruence or mutual value creationis high or when partners believe thatthey can appropriate more value fromthe relationship.

Firm-Level Factors as Driversof Co-opetition

We focus our discussion of firm-leveldrivers on two key aspects, one proac-tive and one reactive: prospecting strat-egy and perceived vulnerability. As weexplain in the following discussions, theproactive reason is to advance the focalfirm’s own competitive position and gaingreater bargaining power in the relation-ship, whereas the reactive reason is toreduce its strategic vulnerability in itsmarket.

Prospecting Strategy. Firms with pros-pecting strategies, that is, those thatstrive to be the first mover or closefollower in their industry, are likely toconstantly look for opportunities for

co-opetition so that they can combinetheir resources and capabilities withthose of others to create and maintaintheir competitive advantage in the indus-try. Firms with prospecting strategy willbe motivated to form ties with competi-tors for three reasons: a strong desire tolearn, to increase and solidify bargainingpower, and to increase overall competi-tive capability. Firms will be greatly moti-vated to learn from their competitorsbecause competitors possess valuableknowledge. The mainstream organiza-tional literature (Gnyawali and Stewart2003; Grant 1996; Nonaka 1994) suggeststhat learning and generating knowledgeare important to the creation of competi-tive advantage. Because knowledge is acritical determinant of firm bargainingpower (Mudambi and Navarra 2004),firms will be motivated to collaboratewith some competitors to increase theirbargaining power against others. An SMEcan increase its bargaining power vis-à-vis other firms when its stock ofknowledge and its knowledge creationcapabilities are higher compared to itspartners. Combined with the idea thatboth inducements and opportunitiesinfluence a firm’s alliance formation(Ahuja 2000), co-opetition may providethe focal firm with better potential part-ners and enhanced bargaining power tothe potential partners in the subsequentalliance opportunities. If a small firm caneffectively learn through co-opetitiveties, it can become a better partner andavail itself of more attractive opportuni-ties in the long run. A prospecting firmoften looks for opportunities to enhanceits knowledge, bargaining power, andoverall capabilities so that it can becomemore successful in competing againstlarger rivals.

Overall, a firm with prospectingstrategy is likely to be proactive andengage in innovative projects, which willcall for more knowledge-seeking andknowledge-building initiatives. Becauseprospectors continuously develop their


market and knowledge domains(Miles and Snow 1978), SMEs pursuingprospecting strategy usually engage inprocesses of exploration and attempt tobuild links with a range of externalknowledge providers (Zhang, MacPher-son, and Jones 2006). As we discussedearlier, knowledge and capabilities ofcompetitors are likely to be directly rel-evant due to high market commonalitybetween them. Therefore, all else beingequal, a firm with prospecting strategywill attempt to collaborate with competi-tors to learn from them and enhanceits competitive strengths. Therefore, wepropose that

P6: A firm pursuing a prospecting strat-egy is more likely to engage inco-opetition than other firms.

Perceived Vulnerability. Vulnerabilityas a driver for the formation ofco-opetitive ties can originate from acompany being challenged with a reduc-tion in its competitive advantage, which,in turn, may endanger its profitabilityand reputation in the short run and/orits sustained survival in the long run.Vulnerability can stem from both exter-nal and internal sources. External vul-nerability can arise if new competitorsare entering the market or if the firmitself is trying pioneering technologies(Eisenhardt and Schoonhoven 1996).Internal vulnerability can occur due topoor performance relative to targets setby the firm (March and Simon 1958) ordue to lack of resources. In addition,vulnerability can be in both absoluteand relative terms. A firm may not beable to achieve its intended or specifiedperformance outcomes (absolute vulner-ability) or the performance may beworse than its peers or worse than itsown prior performance (relative vulner-ability). Because each firm operates inunique environments, the dynamics ofits competitors, suppliers, customers, orother industry factors create pressures

that play a key role in affecting the focalfirm’s vulnerability.

Then the natural question will be“Who will cooperate with highly vulner-able firms?” This is especially criticalwhen a firm’s attractiveness to potentialpartners depends on the value that it canadd to the partnership (Ahuja 2000). Asdiscussed earlier, firms in partnershipsshould be able to provide technologicalcapabilities, complement each other’stechnological needs, or share costs fortechnological development. Vulnerabilitydoes not necessarily mean the firm hasno resources or capabilities, but insteadsuggests that the firm feels challengedand needs to do something in responseto the challenge and therefore looksfor opportunities. Also, firms may feelvulnerable in a certain area whilehaving competencies in other areas. Forexample, the firm feeling vulnerable,say firm A, can be an attractive partneras long as firm B benefits from what Ahas to offer or A and B collectively createnew technologies. To confront largedominant firms, vulnerable SMEs mayjoin hands with each other and try todevelop collective capability by poolingtheir resources and expertise. BecauseSMEs are more vulnerable comparedwith large firms as discussed earlier, thisperceived vulnerability is a very criticalfactor driving co-opetition in SMEs.

Another question will be “Who maytake advantage of the vulnerability?” Theanswer will be related to value appro-priation. A firm with a higher level ofvulnerability will have weak bargainingpower and will be at risk of beingunequally appropriated by the partners.However, the perceived level of vulner-ability will be different across the firms.Though firm A feels vulnerable due tounique challenges it is facing, that doesnot mean that firm B knows A’s vulner-ability or feels the same way about A.SMEs partnering with larger firms tocommercialize new technologies can beable to keep bargaining power if they


have capabilities to offer additional tech-nologies or if they have inventive capa-bilities (Alvarez and Barney 2001).

In a nutshell, both external and inter-nal vulnerabilities will likely push SMEsto form ties with competitors so that theycan combine their resources and capa-bilities and, in turn, deal with the exter-nal threats, especially those posed bylarge firms. We therefore propose that

P7: The greater the perceived vulnerabil-ity felt by SMEs, the greater the likeli-hood that the SMEs will collaboratewith competitors to increase theirability to compete against the strongerplayers.

Consequences of Co-opetitionIn this section, we examine how

co-opetition impacts the focal firm inboth positive and negative ways. Thoughour context is technological innovation,the consequences of co-opetition gobeyond technologies and encompassmanagement challenges as well. Ourattempt here is to identify some keyimplications—both positive and negative—rather than be exhaustive. Moreover,because our discussion earlier high-lighted several benefits and costs, wewill be brief here in developing ourarguments.

Benefits of Co-opetition. As notedearlier, collaboration with competitorsenables the firm to develop or use tech-nologies it otherwise could not developon its own (Morris, Kocak, and Özer2007). Because most of the competitorsin an industry face similar issues andcompete in similar markets, theirresources and capabilities are directlyrelevant or applicable to each other (orrequire limited modification before theyare used); therefore, firms can getbetter or direct benefits by leveragingthe resources and capabilities ofthe competitor-partner. Furthermore, ascompetitors might have had the common

goal (or more focused), the firms caninvest more resources in certain projectstogether. As a result, SMEs that pool eachother’s resources and pursue commoninnovation projects are likely to gaineconomies of scale in R&D and innova-tion and be able to compete against largepayers.

Another benefit comes from reduceduncertainty and risks. When firms col-laborate with one another, they canreduce the risks in the process of inno-vation by distributing costs and possiblyincreasing the likelihood of success. In arelated manner, when firms combinetheir complementary technologies, theyhave a broader set of technologicalcapabilities to “fight” against competingtechnologies and products. Moreover,because SMEs are small and fragmented,they do not have a strong voice in theindustry; co-opetition is likely to enableSMEs to develop a strong common voiceand institute relevant norms. Finally,firms involved in co-opetition can reducethe time span of R&D. By workingtogether with partners who have over-lapping knowledge, firms can effectivelypursue simultaneous innovations (Jordeand Teece 1990). They can also learn toenhance their knowledge and competen-cies and to improve their absorptivecapacity. Overall, by leveraging intelli-gence, experiences, human resources,networks, and other capabilities of theircompetitor-partners, SMEs can reducerisk, lessen costs, and be more efficientin their innovation efforts. We thereforepropose that

P8: SMEs that engage in co-opetition arelikely to achieve economies of scale,reduce uncertainty and risks, andspeed up the product developmentprocess.

Costs of Co-opetition. Though co-opetition may provide lots of benefits,firms should recognize the costs ofco-opetition as well. The first downside


of co-opetition is technological risks. If afirm is not quite careful or happens to getan opportunistic partner, it could lose itssecret and proprietary knowledge to thecompetitor-partner. When partneringwith larger firms, SMEs might be appro-priated unequally by the partners(Alvarez and Barney 2001). If the partnerhappens to be an opportunistic one, theSME might also confront legal issues. Adilemma SMEs face is that though it isbetter to select a capable partner forresource-based reasons, the selection ofa trusting partner (who may not be themost capable partner) is necessary toavoid technological leakage and oppor-tunistic behavior by the partner.

Loss of control of the partnership andits operation is another downside ofco-opetition. SMEs are likely to face thischallenge when they partner with alarger firm. Rothaermel and Deeds(2004) argue that due to their initiallyweak bargaining position, new technol-ogy ventures tend to cede a dispropor-tional amount of control rights to thefinancier of the R&D alliance. The largerpartners have more power and controland can force smaller ones to take onmore of the risk (Sulej, Stewart, andKeogh 2001). Also, increased depen-dency on a dominant partner (overde-pendency) will limit the flexibility.

Finally, management of co-opetition isa very challenging task. Co-opetitionrequires managers to redefine the com-petition with a more complex and mul-tifaceted manner and walk the fine linebetween collaborating in good faith andcompeting to enhance own strategic out-comes (Gnyawali, He, and Madhavan2006). Due to competing expectationsfrom both cooperative and competitiverelationships, managers engaged inco-opetition, especially in boundarypositions, may feel role conflicts(Bengtsson and Kock 2008). Further-more, over time, the incentive to investmore in cooperating or competing with agiven firm will change (Morris, Kocak,

and Özer 2007; BarNir and Smith 2002).SMEs may be less adept at decipheringthese changes, estimating the evolvingcosts and benefits, and making the nec-essary adjustment to the co-opetition-based relationship (Morris, Kocak, andÖzer 2007). Therefore, we propose that

P9: SMEs that engage in co-opetition arelikely to face technological risks, man-agement challenges, and loss ofcontrol.

SMEs might be able to mitigate thepreviously mentioned costs by havingmultilateral relationships rather thanbilateral ones. Lavie (2007) argues thatbilateral competition between the firmand its partners exacerbates some of thenegative effects, whereas multilateralcompetition among partners in the alli-ance portfolio attenuates them. Multilat-eral ties may be an effective way forSMEs to enhance their collective strengthand reduce the risks of being controlledby large firms.

Discussion andImplications

We have argued that firms, especiallySMEs, in high-technology industries needto explicitly consider co-opetition as apart of their strategy tool set. Just asstrategists think about how to outcom-pete a rival in their industry (competitivestrategy) and about how to pursueand manage collaborations (cooperativestrategy), they need to pursue ways inwhich they can simultaneously engage incollaboration and competition with otherfirms in the industry. Collaboration withcompetitors, as opposed to other firms, isunique and important in several ways:because competitors have high degreesof market commonality and resourcesimilarity, they will find that competitors’resources are most useful to each other.Also, competitors’ resources are likely tobe directly useful (with little furtherdevelopment and adaptation), whereas


resources of noncompetitors are less rel-evant. Moreover, because competitorsface similar external pressures (such aschanging technologies and massive R&Dcosts) and have built resources to dealwith such pressures, they can more effec-tively deal with the pressures if theywork together by combining their ownresources. Because of resource con-straints and ongoing challenges fromlarge competitors, SMEs are most likelyto benefit if they engage in co-opetition.

A key implication of the criticality ofco-opetition is that executives need todevelop a co-opetition mindset. Firmsled by executives with a co-opetitionmindset are more likely to perceive co-opetition opportunities and help othermanagers develop a co-opetition mind-set and therefore more effectivelymanage the dynamics of co-opetition.Elements of a co-opetition mental modelmight include recognizing the impor-tance of co-opetition, scanning the envi-ronment for co-opetition opportunities,and developing ways to effectivelyengage in actual collaborative relation-ships with competitors.

We contribute to the literature inseveral important ways. First, this is thefirst paper that systematically discussesco-opetition in SMEs, identifies keydrivers at multiple levels and discussesmajor consequences of co-opetition. Theconceptual model helps to understandforces that may be driving co-opetition ina particular industry and among a set offirms. As we argued, the key motivationfor co-opetition is to create common ben-efits and to overcome industry pressuressuch as increasing R&D costs, shrinkingproduct life cycles, and convergence oftechnologies. Second, by building on thenotions of resource complementarity andresource pooling, we suggested thatthe interface of industry factors andfirm-level resource factors determinethe likelihood of a given pair of firmsbeing engaged in co-opetition. Thus, weprovide a concrete basis in which schol-

ars could look at dyadic factors whileevaluating the likelihood of co-opetitionbetween a given pair of firms. Third, weprovide practical guidelines to managersof SMEs in their efforts to understandco-opetition and devise their co-opetitionstrategy. We suggested that SMEmanagers must monitor and analyzeenvironmental changes to assess theneed to engage in co-opetition, andif co-opetition is intensifying in theindustry, they should explicitly considercompetitors when pursuing technology-intensive alliances. More broadly, weurged SME researchers to systematicallyexamine the emerging phenomenon ofco-opetition and provided a frameworkto do so. In addition, we not only urgedmanagers to make co-opetition a majorstrategic agenda but also provided con-crete ideas to analyze the industry andkey competitors in better understandingthe forces of co-opetition and theireffects. Overall, we believe that thispaper will stimulate more systematicresearch on co-opetition in SMEs andwill help SME managers in their effortsto evaluate co-opetition in their indu-stries and develop their strategy forco-opetition.

Implications for Future ResearchThough our conceptual framework is

a rather preliminary one, we believe thatit provides useful guidelines for futureresearch. First, as noted earlier, co-opetition is an emerging pheno-menon, and limited research has beenconducted to systematically examine theco-opetition, including its antecedentsand consequences. Given the novelty ofthe construct/phenomenon, appropriateand well-developed measures do notexist to perform large sample studiesand conduct statistical analyses ofco-opetition. Therefore, we suggestthat researchers conduct in-depthcase studies to more systematically anddeeply examine factors that are drivingco-opetition at both the industry and firm


levels. We believe that our model pro-vides a way to implement in-depth casestudies to better understand the phenom-enon and develop measures for largesample studies. When conducting casestudies, researchers need to focus onhigh-tech industries where technologiesare rapidly changing and converging.Second, further attempts are needed tomore deeply examine the paradoxicalnature of co-opetition (Chen 2008).Within an industry or a pair of compa-nies, the intensity of co-opetition mayvary depending on contextual and firm-level factors. It appears that co-opetitionwould be most intense between twofirms of approximately equal size andhigh market overlap. Similarly, it isimportant to understand the causes andconsequences of mergers and acquisi-tions versus co-opetitive relationships.Finally, by building on the core ideasdeveloped in this paper, future researchshould develop more complex modelswith the interplay of multiple factors.For example, how would the nature ofco-opetition be if we examine combinedeffects of the multiple industry drivers,dyadic drivers, and firm-specific factors?How would a focal firm’s factors such asits absorptive capacity and internalresources and capabilities interface withcompetitor-partners’ absorptive capacityand internal capabilities in dyadicco-opetition (between a pair of competi-tors) versus multiparty co-opetition?

Managerial ImplicationsFrom this study, managers may better

understand how companies use aco-opetition strategy to deal with rapidlychanging technology development, andit is expected that companies shouldanalyze more systematically the newphenomena and establish appropriatestrategies. In this sense, managers needto look at a confluence of factors (indus-try, dyadic, and industry-dyad interface)at the same time as determining theco-opetition strategy. The first step for

pursuing co-opetition strategy is thatmanagers need to look at technologicalcharacteristics in their industries, and ifthe industries show the characteristics ofshort product life cycle, technologicalconvergence, or high R&D costs, manag-ers should prepare to cooperate withsuitable competitors. Second, it is impor-tant to develop a co-opetitive mind-setfor the effective management of theparadoxical nature of co-opetition (Chen2008). Lado, Boyd, and Hanlon (1997)clearly suggest that a top managementteam’s poster in promoting or discourag-ing employees’ co-opetitive behaviorsaffect the firm’s ability to engage inco-opetitive behavior. Because manag-ers’ mental models influence behaviors(Hambrick and Mason 1984), it is impor-tant to develop systematic efforts indeveloping co-opetition mental models.SME executives with a co-opetition mind-set can be more proactive in identifyingopportunities to improve their com-petitiveness by evaluating forces ofco-opetition and by pursuing the strategyof co-opetition. Third, from a practicalstandpoint, it is important that managerssystematically analyze benefits and costsbefore entering into a co-opetitive rela-tionship. Key benefits of co-opetition, asnoted earlier, include a combination ofexpertise and resources to create synergyand economies of scale, reduction ofuncertainty and risk, and reduction oflead time in developing technologies andproducts. Meanwhile, the most criticalchallenge that co-opetition gives manag-ers is the paradox of knowledge sharingand knowledge control. Co-opetitionentails the sharing of knowledge thatmay be a key source of competitiveadvantage. However, there is the para-dox that the very knowledge shared forcooperation could also be used in com-petition. Because SMEs tend to be weakin leveraging synergy (Levy, Loebbecke,and Powell 2003), SMEs particularlyneed to develop their ability toacquire the knowledge created through


co-opetition and effectively use it forinternal technological developments.

Public Policy ImplicationsThe growing popularity of co-

opetition brings challenges to anti-trust regulators. It is possible thatco-opetition in the end market or thedownstream aspect of the value chainis problematic, but co-opetition inupstream aspects, including R&D andtechnological innovation, may not beproblematic from the standpoint of anti-trust regulators. Also, when players aresmall and fragmented, such as SMEs,co-opetition is unlikely to be problematicbecause firms cannot easily build collec-tive strengths to dictate price and com-petition in the industry. Jorde and Teece(1990) suggest that cooperation amongcompetitors in technological innova-tion may not be anticompetitive. Thiscould be true for several reasons.First, co-opetition is likely to help bringunique products and create new marketsfor them. It may also develop more inte-grative technologies so that consumerscan buy fewer but better-functioningproducts (convergence of technologies),which would mean that more multifea-ture products would be in use. Second,co-opetition is a different kind ofcompetition. Instead of firm-to-firmcompetition, cooperation among firms(collaboration between a pair or smallgroup of competitors) may lead togroup versus group competition (Gomes-Casseres 1994), which may be an evenmore intensified form of competition. Asa result, it is possible that U.S. antitrustregulators may need to use newerapproaches/lenses to look at antitrustissues. In fact, this seems to be happen-ing. Levin and McDonald (2006) suggestthat though the U.S. Supreme Court haslong relied on the perfect competitionmodel of the Chicago School of Econom-ics, the Supreme Court has recentlyrejected some of these assumptions andphilosophies of the Chicago School. As

Levin and McDonald (2006) argue,co-opetition could be beneficial to con-sumers by lowering costs and improvingthe value of market offerings. In thecontext of SMEs, it may in fact be betterto encourage collaboration among thembecause this could be a way to help smallfirms develop their innovation capabili-ties and be able to compete against thelarge players in the industry. Thus, itappears that policymakers need to take amore nuanced approach to antitrustissues. The notion of creating value andappropriating value discussed earliermay be relevant here. It is possible thatco-opetition to create value (or bringmajor new technologies and products)among small players is not that problem-atic, but cooperation among a set of largecompetitors to take customers directlyaway from another set of large competi-tors may be problematic.

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