“The greatest change in corporate structure – and in the way business is being conducted – may be the accelerating growth of relationships based not on ownership but on partnership… semi-formal alliances of sorts.”
– Peter F. Drucker
There is evidence that relatively effective networks differentiate relatively innovative areas and entrepreneurial localities
– finding of BENNET, R. and McCOSHAN, A., 1993
Leaders and directors of businesses wanting to grow through collaboration should read this paper. It explores why Drucker is right, how innovative and entrepreneurial localities benefit through strategic networking and how to make collaboration work.
According to LORANGE, P. & ROOS, J., 1992 and JARILLO, J.C., 1993 there are a number of pressures on businesses driving them to collaborate. They are:
- Costly technical development and short product lifecycles
- Demand for systems solutions
- The range of competences required to be competitive and defend
- Simultaneous requirements for high quality, low-price, innovation and fast response.
These pressures cause many large and small organisations to consider collaboration. It might give them access to technology that they do not have the resource or culture to develop in-house or access to markets in which their presence is limited, possibly by ownership law. Economies of scale are often achieved by becoming the strategic supplier to a large customer. Organisations may use collaboration as a means to shed non-core activities or offer customers integrated solutions.
Motivations were consolidated into three categories by REUER, J.J., 2004 as
- Reduction of transactional cost
- Organizational knowledge and learning
Who to collaborate with
You are at the centre of your own universe and organisations are no different. When considering who to collaborate with there are four main choices. These are customers, suppliers, competitors and adjacent suppliers. The choice of which should be chosen depends on the motivation for the collaboration. A supplier might be used to offload non-core activity whereas an adjacent supplier might be the source of a complimentary competence that creates an integrated system. Once the motive is clear, the choice is usually pretty obvious.
Forms of collaboration
LORANGE, P. & ROOS, J., 1992 plotted the depth of interdependence of collaboration on a continuous line from market to vertical integration. Here, it is adapted slightly to include outsourcing. At the left end sits the vertically integrated organisation, which owns supply. At the right end is the other extreme where supply is from organisations selected from the market and operated at arms-length.
JARILLO, J.C., 1993 observed how, in the early 1990s, American car manufacturers had high-value added and were vertically integrated as Ford was from the outset. In contrast, their Japanese counterparts had low value-added, assembling sub-systems from a network of suppliers. They had some ownership relationship with many of them. The American car manufacturers were at the far left of the line and the Japanese somewhere near the middle. Now, we all know who has been the victor in this example. The key to understanding why the Japanese succeeded over the Americans in the car industry lies in understanding the two major costs or values that are added in the business. One is doing things. This could be making parts or delivering a service. The other is coordinating these things.
In the vertically integrated example, it is difficult to motivate the different units of the business to be the best at what they do. The director of a Ford owned steel plant would not be as motivated to make the best steel as the owner of steel plant with many competitors. So there can be an advantage in not owning your key suppliers. It is common in restaurant chains for the franchised outlets to outperform the ones owned by the chain. Additionally, the organisation can become slow to respond and inefficient in the many areas of ‘doing things’.
The other extreme not considered in this example is that of sub-contracting to several suppliers from the market at arms length. Although this sounds attractive, it has the disadvantage of increasing transactional costs. To maintain a range of potential suppliers requires continual negotiation and quality control of these suppliers. This is costly for the customer. In the automotive example, the Japanese avoided this increase in cost by using long-term strategic relationships with it suppliers to control supply.
It is arguable that it may have lost track of its customers needs but McDonalds has enjoyed efficiency and consistent quality. It does not own the potato growers but it will select the seed that the potatoes are grown from.
To understand the real problem with sub-contracting at arms length is to understand what is known as a zero-sum game. Consider the case of a software developer using contracted-in engineers. If the software developer can negotiate a £1/hour rate reduction it will gain £1 per man-hour on the bottom line. On the other side of the equation, the provider of the engineer is £1 per hour worse off. The net sum is zero. I gain: you lose and vice versa. We can see that the vertically integrated organisation can have problems with cost and quality; and that the relationship with arms length, market-sourced sub-contractors is naturally an adversarial one.
So what is the answer to getting the benefits of collaboration without the pain…
…strategic networks like those operated by the Japanese car industry allow the manufacturers to control from the top but only carry out core activity – the best of both worlds.
Making it work
Consider the well-known Prisoners’ Dilemma. The police are certain that Peter and Paul have committed burglary. The evidence is flimsy and they need a confession to get a conviction. Peter and Paul are placed in separate interview rooms and offered a deal if they squeal. If one squeals and the other does not, he will go scott free while the convicted criminal gets a 10 year stretch.
If they both squeal, each will get five years. If they both keep stum, each will receive a two-year stretch. The outcomes are summarised in the matrix.
If both follow strategies with only self-interest in mind, they will both inform and receive a five-year sentence. They would have been better off if they had cooperated, both kept quiet and received just two-year sentences. But there is a problem with the latter, cooperative strategy. If one keeps quiet and his trust is betrayed, he will get 10 years. Hence the dilemma! This is not unlike the situation in business collaboration where both have something to gain if they cooperate but there is the risk of being taken advantage of.
AXELROD, R., 1984 was so intrigued by the Prisoners’ Dilemma that he set up a competition where computer programmes were pitted against each other in the Prisoners’ Dilemma. The programme that won the contest (received the least years of sentence) was called Tit-For-Tat. It was extremely simple and started by assuming its counterpart was cooperative. From then on, it copied the opponent’s last move. The experiment has been repeated more than once with more elaborate learning programmes but Tit-For-Tat still won. It was concluded that this approach combined with repetition, encourages cooperation and the win-win outcome.
To make the Axelrod’s findings more relevant to us in business, JARILLO, J.C., 1993 summarised the qualities of Tit-For-Tat as:
- ‘provocable’ and
How can we turn this into how we work with strategic partners?
Rapport, trust and common values
The first thing is to develop a rapport and find common values. This engenders trust. Have you ever noticed the alignment of cultures and trades like Jewish jewellers? A common culture leads to low transactional costs because of shared values, trust and risk of social disgrace if they behave with pure self-interest [JARILLO, J.C., 1993].
Take the long-term view
From the Axelrod’s conclusions about repetition, it is important that both parties take a long-term view [LORANGE, P. & ROOS, J., 1992] and that the long-term benefits are always stressed [JARILLO, J.C., 1993].
Ensure a non-zero game
Both parties must invest something and have something at stake. They must lose something if they pull out or behave in a non-cooperative manner. Kings of collaborating states used to swap offspring to ensure that they could rely on each other.
Equally, each must have something to gain from the relationship. In other words, both must be better off with the relationship than without it. A clear example is that of a manufacturer whose customer is demanding stock to be delivered to the production line ‘just in time’ instead of infrequent deliveries to stores. To gain specialist expertise in logistics they set up a long-term teaming with a logistics company. The logistics company benefits from economies of scale, which are shared. Everybody is better off, including the customer.
Be ‘nice’, ‘provocable’ and ‘forgiving’
For the benefits of the collaboration to be realised, both sides need to follow the cooperative strategy. For this to happen, you have to be cooperative. Once trust and rapport have been established one has to enter the collaboration with the assumption that both parties will behave in a cooperative way. Otherwise the benefits will not be realised and there is no point.
Should the other party behave in a non-cooperative way, it must be shown that this does not pay by being provoked into a similar non-cooperative strategy. In the Prisoners’ Dilemma, both lose.
If the partner reverts to cooperative behaviour, reward it with your cooperative behaviour. Both sides receive the rewards of cooperation again and it becomes obvious that this is the best long-term strategy.
There are growing pressures for collaboration between organisations, including some that would consider each other competitors.
- The deal must offer benefit for both parties and there must be something at stake.
- Develop a rapport and trust.
- It is important to stress the long-term benefits and take the long-term view.
- Like the programme Tit-For-Tat, partners should be ‘nice’, ‘provocable’ and ‘forgiving’.
AXELROD, R., 1984, “The Evolution of Cooperation”, Basic Books, NY
BENNET, R. and McCoshan, A, 1993, “Enterprise and Human Resource Development Local Capacity Building”, Paul Chapman, London, UK
ERNST, D. & HALEVY, T., 2004, “Not by M&A alone”, The McKinsey Quarterly, 20 th August 2004, McKinsey & Company, Inc.
HUGGINS, R. 2000, “The Business of Networks”, Ashgate Publishing Limited, Aldershot, UK
JARILLO, J.C., 1993, “Strategic Networks. Creating the Borderless Organization “, Butterworth-Heinemann Ltd, Oxford, UK.
LORANGE, P. & ROOS, J., 1992, “Strategic Alliances”, Blackwell Publishers, Cambridge, MA
REUER, J.J., 2004, “Strategic Alliances. Theory and Evidence”, Oxford University Press, Oxford, UK