To Compete or Cooperate in Business - Essay Example

To compete or cooperate - that is the question. Till not so long ago, business jargon was largely dominated by war terminology. Phrases like 'capturing the market', 'annihilating the competition', 'trade secrets', 'closing in for the kill' were commonplace in businesses, as were reading recommendations like Carl von Clausewitz' 'On War' and Sun Tzu's 'Art of War.' Today the emphasis is more on cooperation and collaboration. Businesses have woken up to the fact that there is more than enough of the pie to go around, specially with globalization expanding the playing ground to an unimaginable degree. Egged on by technology, the great equalizer, demand for standardized products across the world is at an all-time high. The pie is enormous, with enough and more for everybody. So, in this globally competitive environment, is competition or collaboration the key to success In business, as in war, there are winners as well as losers, but ultimately, both suffer causalities, often with the customer being the beneficiary. Take the case of the price war between US airlines in the early 90s. The industry is commonly known to have lost more money in three years than it had previously made in all the time since the Wright brothers' inaugural flight at Kitty Hawk nearly 100 years ago. (Nalebuff and Brandenburger 3) Today it's a known fact that most businesses succeed only if others also succeed. "The demand for Intel chips increases when Microsoft creates more powerful software. Microsoft software becomes more valuable when Intel produces faster chips. It's mutual success rather than mutual destruction. It's win-win." (Nalebuff and Brandenburger 3). This does not mean that the time for war is over. On the contrary, fierce competition between parity products such as Coke and Pepsi, Nike and Reebok, exists. It is between complementary businesses that strategic alliances happen. For example, between Bank of England and Tesco, whereby the bank's services are available throughout Tesco's not inconsiderable chain of supermarkets, or ebay, an online trading company, and PayPal, an online finance company, where the complementary nature of the business is obvious. In these alliances, the key factor for success is that each organization has their own unique core strengths that taken together result in increased mutual and individual benefits. "Few firms have all the skills and resources to develop technologically complex products themselves. Increasingly, firms choose to concentrate on core technologies and opt to collaborate with others to gain access to complementary skills and resources." (Collaboration.htm). Paradoxically, though "in some companies, collaborating can be seen as a sign of weakness. () collaborative capability is a competitive advantage today." It is a means to the end, to enable a business to maximize commercial success and mitigate risk. It is not about being nice. It is "an inclusive and reciprocal approach to getting what you want." (Shuman and Twombly) There are many other advantages to a strategic alliance, "they involve little immediate financial commitment; they allow companies to put in their toes into new markets before they get soaked; they offer a quiet retreat should a venture not work out as the partners had hoped. () (But) the most popular use for alliances is as a means to put a toe into a foreign market." (Hindle 207) When an organization wants to get into a foreign market, a whole new set of strategies need to be developed. But first, should it enter as a multinational, or as a global entity The vital difference between the two is that in a multinational operation businesses are not linked together, separate strategies are developed for each country where the business exists, with separate investment decisions and autonomous operations, whereas global strategies are evolved and implemented on a global scale, in a global arena. (Aaker 255) One of the best examples of strategic alliances in a global scenario is a company that has teamed up with just about everybody in Japan - IBM. It has Ricoh in distribution of low-end computers, Nippon Steel in systems integration, Fuji Bank in financial systems marketing, OMRON in Computer Integrated Manufacturing, NTT in value-added networks. "As a result IBM is considered a major insider in the Japanese market, and competes across the board in all segments and applications." There's even a book in Japanese entitled IBM's Alliance Strategy in Japan. (Aaker 267) The global market has evolved hugely. Advances in technology and communication, internet access and networking have created a huge demand for standardized products. But the most radical change that has led to the homogenization of consumer demand has been in the consumer itself. He has been transformed "from isolated to connected, from unaware to aware from passive to active." (Prahalad and Ramaswamy 2) The biggest factor in this change is the explosion of available information that enables a consumer to make informed decisions. For companies that used to compartmentalize markets and restrict or edit information about their products on them, this shift is radical. Today's consumer can learn about the products and brands, check out options and competitive sources, surf the Net for optimum pricing, even choose between a new and used product, and get the best deal. An ideal example is active health care consumers. They use the Internet to learn about diseases and treatments; check out the advantages of conventional and alternative medicines; keep a track record of doctors, hospitals and clinics; and the latest clinical drug trials and experimental procedures; form groups to share experiences with others; and generally be aware enough to be able to challenge their physician and participate more fully in their own treatment. (Prahalad and Ramaswamy 2 & 3). The impact of this cosmopolitan consumer is clearly manifest in their increasing demand and adoption of global products. And this awakening is coupled with a world view which makes the owning of a BMW more desirable than simply aspiring for any of the handful of car models available at the local car dealer. To remain competitive in this global market, manufacturers are therefore forced to limit the differences in the price or quality of their products across geographic borders. According to Kenichi Ohmae, "Globalization mandates alliances, makes them absolutely essential to strategy." (qtd. in Aaker 267) So why do strategic alliances play such an important role in global strategies When a business is trying to get a foothold in a new country, ". it is common for a firm to lack a key success factor for a market. It may be distribution, a brand name, a sales organization, technology, or R&D or manufacturing capability. () When the uncertainties of operating in other countries are considered, a strategic alliance is a natural alternative for reducing investment and the accompanying inflexibility and risk." (Aaker 267) It naturally follows that even the strategic goals of the partners are achieved more efficiently when the strengths of two or more organizations are leveraged. Pharmaceutical companies, for instance, are investing huge amounts in drug research and development almost everyday. It is common for them to tie up with other pharmaceutical companies to generate scale economies. Recently, Tamiflu maker Roche had reached agreements with two U.S. generic drugmakers, Teva Pharmaceuticals and Mylan Laboratories, as well as 13 other drug producers to enhance its supply chain and add capacity for certain specialized steps in the manufacturing of Tamiflu. U.S. Senator Charles Schumer says, "Roche has made the right decision. Instead of closely holding their patent rights and production techniques, in the face of a global health risk, they've moved swiftly to partner with multiple companies to dramatically increase production of this potentially life-saving drug," (Reuters). When the Japanese firm JVC, with VCR design and manufacturing capabilities tied up with Thompson, it gained access to strategic markets in a fragmented European sector, while Thompson gained access to a competitive technology. When Nippon Steel entered Indiana, it tied up with Inland Steel in return for local knowledge, and more vitally, to get round import quotas, and overcome trade barriers. When Toyota used an idle GM plant in California, both benefited from the use of excess capacity. (Aaker 268) Automobile manufacturers, notably Ford and Suzuki, frequently enter new markets and form alliances to provide key components in its product line. The Thompson-JVC and the GM-Toyota venture (above) too are examples of compensatory alliances. Such an alliance can is used to access a brand name or a customer relationship; a needed technology or access to low-cost manufacturing capabilities, like GE does while sourcing microwave ovens from Samsung, Korea. (Aaker 268-269) Strategic alliances bring together two independent businesses, along with their paraphernalia of systems, cultures and people, with environment and country influences also playing an important role. Though each partner brings a difference set of core strengths to the table, their core values should be more or less similar, or if it isn't, efforts must be made to develop a shared vision. Collaboration can take many forms. According to the dictionary it means to work together with a partner one is not immediately connected to. This working together can range from a loose informal agreement to a formal joint venture, and can be likened to a relationship between two people which can lie anywhere between living together with no commitments whatsoever, and taking the plunge into marriage. For example, in an informal agreement a manufacturer could tie up with a chain-store owner to sell his products through their sale points. It would be fairly flexible because commitment is not too deep, and therefore not much risk involved. Implementation would be fast and efficient, again for the same reasons. As in any other relationship, the agreement may evolve in time into something more long-term, or dissolve, depending on various external and internal factors. The downside of this is that the shallow nature of the commitment leads to a low exit barrier, making it easy for either of the partners to back off when the going gets tough. A joint venture, on the other hand, with an equity stake and a formal legal arrangement has its own advantages and risks. Being a more permanent arrangement, the commitment here is much higher, with the risks too being correspondingly high. In such a case, to avoid issues of control and profit sharing, a pre-nuptial agreement, a legal document clearly stating the relative contributions and revenues of the collaborators should be drawn up at the outset. Of course it takes more than a document to ensure the success of a collaborative venture. Other factors too go to make a successful alliance. One would do well to learn from the master, IBM. IBM business partners contribute to almost a third of their revenue, because they make sure their partner grows with them. They believe that "even the best doesn't matter if you don't also team with a company whose values reflect your own - innovation that matters; client success; trust and personal responsibility. " (IBM PartnerWorld) A statement amply borne out by one of their most successful and long-term collaborations - Lotus Notes first launched in 1984. Alliance or acquisition Sometimes, a company might prefer to acquire another wholly, instead of collaborating. How to decide One way is by analyzing the uncertainty that surrounds the success of the collaboration. Firstly, assess the internal factors, i.e., whether the technology or product is clearly technically superior to existing and potential rivals. Secondly, the external factors, i.e. the market that affects its success or failure. Would consumers accept it, and if so, how much time would it take The answers or lack thereof, would allow an estimation of "the degree of uncertainty" that clouds the success. If the risk is high, a limited non-equity or equity alliance will limit the firm's exposure since it has to invest less money and time than it would in an acquisition. If the partnership shows promise, the company can invest further, and, if necessary, acquire the firm eventually. If it doesn't yield results, the company can withdraw from the alliance, at comparatively little cost to itself. (Dyer, Kale and Singh) Compatibility is vital issue if a strategic alliance has to be successful. This basically means 'pick someone your own size' - in terms of capital invested, number of employees, competencies, etc. Because, "a major problem with strategic alliances occurs when the relative contribution of the partners becomes unbalanced over time and one partner no longer has any proprietary assets and competencies to contribute." (Aaker 269) This can happen if a partner does not protect its assets and core competencies. Many a partnership between the US and the Japanese has broken down because Japanese firms are not only motivated to learn new skills, they find a lack of technological expertise embarrassing, and they work hard to correct it. So if an American partner brings in technology, which the Japanese master, the reason for the alliance no longer exists. Since the key factor to long-term success is that "each partner contribute assets and competencies over time to obtain strategic advantage" each partner should ensure that his assets and competencies are protected and not made redundant for the other. This problem is mitigated when the core competencies of the partners are complementary, as with Nintendo's bargain hardware and superb games, supplied by a line of competitive software houses. (Nalebuff and Brandenburger 109) Finally, as with any marriage, trust is essential. There should be a degree of transparency and a high level of interaction, ensuring a dynamic relationship that is growing and evolving continuously. One study found that the best predictor of effectiveness is a prior history of a business relationship - if possible, live together before marriage. Success will be directly proportional to the effort put in by the partners. (Gudergan & Gudergan) Works Cited Aaker, A David. Strategic Market Management. Singapore: John Wiley & Sons, 2000. "Collaboration." Dec.11, '05 (access date) http://www.betterproductdesign.net/collaboration.htm Gudergan, P Siegfred and Gerhard P Gudergan. "A Dynamic Theory of Collaboration and Decision-making" Proceedings of the 35th Hawaii International Conference on System Sciences, 2002. IEEE Computer Society. Dec.10, '05 Dyer, H Jeffrey, Prashant Kale, and Harbir Singh. "Alliance or Acquisition" Aug 24, 2004, HBS Working knowledge Home, Dec.11, '05 Hindle, Tim. Guide to Management Ideas. London: Profile Books Ltd, 2003. Nalebuff, J Barry, Adam M Brandenburger. Co-opetition. London: HarperCollins, 1997. Prahalad, C K and Venkat Ramaswamy. The Future of Competition. US: Harvard Business School Publishing, 2004. Shuman, Jeffrey and Janice Twombly. "Collaboration Does Not Equal Nice." http://www.rhythmofbusiness.com/Default.asp "Tamiflu maker Roche agrees on generics." Thu Dec 8, 2005. Reuters. Dec.11, 2005 "Why Join Us." IBM PartnerWorld 2005. ibm.com. 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