TranscriptQuestion: How does collaboration between companies work in today's competitive landscape?
Ranjay Gulati: Collaboration between businesses has been an old, old idea. You can go back to the East India Company, go back to the old shipping ventures that were done where a ship will go to the east to get silk and spices and have a bunch of business people who would basically pool resources and say, "Okay, I’m investing in this shipping venture, and I’ll get a piece of the action, a percentage of the profits."
But I think collaboration today has taken on a totally new meaning. As you see complexity on the demand side and supply side, you see what I call, shrinking the core, expanding the periphery. So, let’s look at the supply side. On the supply side, you have companies saying, I can’t produce all the inputs that go into my part anymore. So I want to shrink what I used to all core. Core was a lot of things that I produced myself. I’m going to do much less of that myself. And you know, so they start to do a whole variety of things. Take a look at this device, you know, you all know this device, an iPhone. By some accounts, 90% of the inputs that go into this device are not made by Apple. A vast majority of them being made by a whole range of suppliers, who work very closely with Apple to design, develop, configure, make sure all of these things are interconnected. Now, that's shrinking the core.
At the same... that has to be with the supply side of complexity all of the things they had to get together to make it work. Apple—this is the company that used to produce almost everything itself. Printer cables. So, they finally saw the light, they had to operate in a much more interconnected world.
Now you also have demand-side complexity. Customers who are much more demanding, wanting different things. And so you see what I call expanding of the periphery. Organizations saying, my customers need to receive bundles. They need to see solutions. They need to be able to customize what they have. I’ll go back to the iPhone again. A hundred thousand applications in the applications store. None of which are made by Apple, but allow thousands of us to customize this device for our special needs. And all Apple gets is 30% off the top. Great business model. So you start to see organizations shrinking their core, expanding their periphery, operating in a much more interconnected way.
And they are not alone. Another example of a company that I looked at is the largest mobile operator in India, Bharti AirTel. Bharti AirTel outsourced first the maintenance of a cell tower network. So they were not managing or maintaining its cell towers anymore. They outsourced the entire IT infrastructure to IBM. Subsequently, they decided to spin off the ownership of their cell towers. So, here’s an organization that does not own its cell towers, does not maintain its cellular network, and does not maintain its IT systems, or own them. And you say, "What do you do?" And it’s growing 35% a year, the largest in India which is the fastest growing market in the world.
Now, I also would add that this is not for the faint-hearted. You can look at the recent example of Boeing and the delays in its 787, some which is attributed to its inability to coordinate effectively with its suppliers. And by some accounts, depending on how you define this, half or more of alliances may fail. So, you have to figure out how to manage alliances because if you’re going to make this a centerpiece of your growth, you have to know how to make alliances work. And there’s some basic fundamental principles to effective collaboration that unfortunately many organizations miss and in those cases this completely backfires on them.
Question: What are some examples of companies that have collaborated effectively?
Ranjay Gulati: So I think collaboration is not rocket science. It’s human nature, how do you work together with another entity and make it work. And I think there are some basic principles that are important. The first of them is strategic alignment. Do we share similar goals, or compatible goals? You don’t have to have the same goals; you’ve got to have compatible goals. And furthermore, these are things that develop over time, you have to continually reaffirm with each other that do we continue to share compatible goals? We may have had compatible goals back then, do we have them today? So, how does goal alignment work and evolve over time is key.
Then you have structure issues. When you form these collaborations, you have two aspects of structure, there’s an economic structure and then there’s a government structure. The economic structure is about incentives, carrots and sticks. Who does what and what are the penalties associated with that. That gets done pretty well by the lawyers and business development people who are involved in the alliance, the structuring of the incentives in the collaboration. But the second part, which has to do with the government structure, which is the decision-making, information sharing, how things will get done, doesn’t happen. And it doesn’t happen because the guys who are going to manage the deal are not involved in creating the deal. And so the guys that are doing the dealmaking are not so interested, involved in that part of it.
The third piece of the equation is the process of behavioral issues. This one really kills them. And these have to do with the dynamics of interaction between the entities. Are we culturally aligned? Are we behaviorally aligned? Are we emotionally aligned? And you might say; how can two organizations be emotionally aligned? You can look at organizations that have long histories of collaboration. Fuji-Xerox, been around for 50 years. CFM, which is aligned with GE and a French company, to make jet engines; been around for decades. So you have alliances that do persist and endure over time and they do so because they have a structure that is aligned, the goals are aligned, you have governance in place and you have the behavioral sides in place. And it’s the coming together of all of these that allow you to really be an effective collaborator. Common sense; doesn’t happen.