Collaborating To Compete: The Rise of "Coopetition" and Strategic Alliances
In a world of high uncertainty and greater interdependence,
companies often cooperate to compete. Rivals may go head-to-head in
certain areas, and declare a truce in others. With the rising importance
of collaboration, designing and managing these relationships has become
more important.
"One reason cooperation has become more significant is that we are focusing on ecosystems of firms," says Harbir Singh, academic co-director of Wharton’s Strategic Thinking and Management for Competitive Advantage and academic director of Wharton’s Strategic Alliances: Creating Growth Opportunities. "For example, Microsoft has an ecosystem of software writers and infomediaries creating content. Wal-Mart has an ecosystem of suppliers. Cooperation is more and more relevant today, particularly in technology-based industries."
This focus on competing through cooperation, or "coopetition," requires a shift in thinking. "It changes the way people think about strategy," Singh says. "We are moving from the old definition of wholly owned resources to a new view of shared resources. If you look at Microsoft’s ecosystem, a shared resource is the platform on which the software is written. In oil exploration, companies may come together to share the costs and benefits of exploration, which is very expensive, and then compete after the discovery is made."
The trick in managing these relationships is for managers to determine which resources to keep within the firm and which ones to share with partners. "In our alliance program, we discuss what this new mindset is and how to protect proprietary assets while working with partners," Singh says.
Strategic Thinking and Management for Competitive Advantage, which Singh leads with Professor Ian MacMillan, is designed to address such questions. It helps managers broaden their strategic thinking, analyze competition, make their organizations more competitive, and understand a variety of options for growth, including alliances, acquisitions, and internal corporate ventures.
Rising Importance of Alliances
Several forces are driving the increasing importance of alliances and other forms of cooperation. First, a blurring of industry boundaries, with the convergence of once separate industries, means that companies need new capabilities and face new rivals. For example, when Apple created the iPod and iPhone, it needed access to music, wireless networks, and other capabilities beyond its typical expertise in computing equipment and software. Alliances can provide access to these capabilities.
Second, as the global economy has developed, companies are entering new markets, particularly emerging markets. Sometimes governments require local partners. Other times a local firm can offer the knowledge and logistics to successfully enter the market. At the same time, companies from China, India, and other parts of the world are competing in global markets, and alliances can provide them with the scale or capabilities they need to face global competitors. Finally, growing pressure for innovation and growth has forced companies to look outside their own borders for new ideas.
Acquisition or Alliance?
When a company needs access to new capabilities, one of the critical questions is whether to buy or ally. Singh and colleague Prashant Kale, associate professor of strategy at Rice University who also teaches in the Wharton program, have created a framework for making decisions about acquiring or buying.
"Alliances and acquisitions are alternatives for achieving the same goal of gaining access to capabilities," Kale says. "What we have discovered in our research is that while companies think about alliances and acquisitions as alternatives, they lack a systematic framework for identifying which one is better in one set of circumstance rather than another."
In their research, Singh and Kale found three factors were most important to consider in deciding whether to acquire or ally. Managers need to analyze market-related factors, resource-related factors, and capability factors. For example, one consideration is whether the capabilities of the alliance partner could be used by rivals. If this is the case, managers might decide on an acquisition to prevent competitors from gaining access to the same capabilities.
Tighter financing and resources in today’s financial markets may make alliances more attractive than acquisitions in the future. "There was a huge boom in M&A activity over the past few years, but alliances have continued steadily through this time as well," Kale says.
Successful Alliances
As an indication of how hard it is to design and manage alliances well, about half of all alliances fail. Companies that are most successful in making their alliances work have developed a dedicated alliance function within the organization.
In their research with hundreds of companies, Singh and Kale have identified four primary factors that lead to alliance success:
- Accessing complementary capabilities: The
capabilities of the two partners should complement one another. "Sometimes
the best partner is not the strongest partner but the most complementary," Singh
says.
- Customizing capabilities: The partners
need to customize their capabilities to the relationship and build
capabilities for developing and managing alliances.
- Knowledge sharing: The partners need
to develop systematic ways of sharing knowledge between them and across
their organizations.
- Effective governance: The alliance partners need to create a clear and effective system for developing trust, including good legal contracts.
While most managers would recognize that building trust is vital to alliance success, it is very hard to do. During the Wharton program, participants engage in a case where they negotiate an alliance between partners. They experience firsthand how quickly trust can be built or eroded in just a few hours. "It is a surprise to them," says Kale. "They know it is an exercise, but we have even had people who refuse to talk to each other for the rest of the program. It is very hard to build trust."
Kale says that in their research and consulting, they have found that companies have improved in the design and formation of alliances. The biggest problem area now for most companies is management of the alliance. "Companies are working on building trust, sharing knowledge, and adapting over time."
Research-Based Knowledge
Wharton’s alliance program is distinctive because it is based on current research. The insights in the program are drawn from decades of research by Singh, Kale, and others on what makes alliances work — or fail. The program also brings in real-world cases and executives to offer on-the-ground insights on alliances.
"We have been immersed in this, both through in-depth field work
and broader studies," Kale says. "We bring a lot of research
into the classroom and it gives a lot more credibility to the discussions."
