Compete or cooperate?

Trying to outmaneuver an incumbent is not always the best way to succeed as a new company. A study by Scott Stern at the Kellogg School of Management and David Hsu at Wharton revealed that the return on investment tended to be higher for a cooperation strategy than a competition strategy when one or more of three conditions existed for the start-up company:

1) The firm has strong patents
2) The firm is backed by venture capitalists
3) There is a high sunk cost requirement for the firm to compete in its industry

If patent rights are valuable in your industry, strong patents increase the validity of a competitive threat against the incumbent if negotiations break down and cooperation fails.

Start-ups that enjoy venture backing increase their credibility in a negotiation by evaluating and certifying the company’s innovation.

In an industry such as biotechnology, distribution channels, brand recognition, regulatory knowledge, and production expertise make it expensive for start-ups to enter alone. This situation makes leveraging the assets and resources of an established firm a more viable option.

Cooperation may be achieved through several mechanisms, such as licensing the innovation, forming a strategic alliance, or selling the technology outright to a competitor.