The challenges of rising development costs and shorter product life cycles have made it harder for firms to invest in innovation. Current literature suggests that the answer to this problem is in adopting new innovation models, encompassing the concepts of open and networked innovation. Yet little attention has been paid to how SMEs utilize external partners to achieve innovation leadership and competitive advantage.

Based on in-depth qualitative studies of two case companies, SEKAB and Koenigsegg, and a literature review, we explore the progressing forms of R&D collaboration applied by SMEs to achieve innovation leadership.

The analysis of the cases reveals a number of different collaborations in different forms in where the two case companies have a different approach to collaborations. Yet a number of common key success factors are identified, such as the organization’s ability to attract external partners with complementary knowledge. Efficient acquisition and assimilation of knowledge is found to require a cross-functional organization, mutual trust and co-location. Finally it is concluded that the innovation process is not easily broken down into different phases, as transformation of knowledge has to be considered from a broader view as an ongoing process involving all of creation, transfer, adaptation and integration of knowledge, in which individual managers has a key role and responsibility for the entire process.