A New Way of Working Together

Question: How does collaboration between companies work in \r\ntoday's competitive landscape? 

Ranjay Gulati: \r\nCollaboration between businesses has been an old, old idea. You can go \r\nback to the East India Company, go back to the old shipping ventures \r\nthat were done where a ship will go to the east to get silk and spices \r\nand have a bunch of business people who would basically pool resources \r\nand say, "Okay, I’m investing in this shipping venture, and I’ll get a \r\npiece of the action, a percentage of the profits."

But I think \r\ncollaboration today has taken on a totally new meaning. As you see \r\ncomplexity on the demand side and supply side, you see what I call, \r\nshrinking the core, expanding the periphery. So, let’s look at the \r\nsupply side. On the supply side, you have companies saying, I can’t \r\nproduce all the inputs that go into my part anymore. So I want to shrink\r\n what I used to all core. Core was a lot of things that I produced \r\nmyself. I’m going to do much less of that myself. And you know, so they \r\nstart to do a whole variety of things. Take a look at this device, you \r\nknow, you all know this device, an iPhone. By some accounts, 90% of the \r\ninputs that go into this device are not made by Apple. A vast majority \r\nof them being made by a whole range of suppliers, who work very closely \r\nwith Apple to design, develop, configure, make sure all of these things \r\nare interconnected. Now, that's shrinking the core. 

At the \r\nsame... that has to be with the supply side of complexity all of the \r\nthings they had to get together to make it work. Apple—this is the \r\ncompany that used to produce almost everything itself. Printer cables. \r\nSo, they finally saw the light, they had to operate in a much more \r\ninterconnected world. 

Now you also have demand-side complexity. \r\nCustomers who are much more demanding, wanting different things. And so \r\nyou see what I call expanding of the periphery. Organizations saying, my\r\n customers need to receive bundles. They need to see solutions. They \r\nneed to be able to customize what they have. I’ll go back to the iPhone \r\nagain. A hundred thousand applications in the applications store. None \r\nof which are made by Apple, but allow thousands of us to customize this \r\ndevice for our special needs. And all Apple gets is 30% off the top. \r\nGreat business model. So you start to see organizations shrinking their \r\ncore, expanding their periphery, operating in a much more interconnected\r\n way. 

And they are not alone. Another example of a company that I\r\n looked at is the largest mobile operator in India, Bharti AirTel. \r\nBharti AirTel outsourced first the maintenance of a cell tower network. \r\nSo they were not managing or maintaining its cell towers anymore. They \r\noutsourced the entire IT infrastructure to IBM. Subsequently, they \r\ndecided to spin off the ownership of their cell towers. So, here’s an \r\norganization that does not own its cell towers, does not maintain its \r\ncellular network, and does not maintain its IT systems, or own them. And\r\n you say, "What do you do?" And it’s growing 35% a year, the largest in \r\nIndia which is the fastest growing market in the world. 

Now, I \r\nalso would add that this is not for the faint-hearted. You can look at \r\nthe recent example of Boeing and the delays in its 787, some which is \r\nattributed to its inability to coordinate effectively with its \r\nsuppliers. And by some accounts, depending on how you define this, half \r\nor more of alliances may fail. So, you have to figure out how to manage \r\nalliances because if you’re going to make this a centerpiece of your \r\ngrowth, you have to know how to make alliances work. And there’s some \r\nbasic fundamental principles to effective collaboration that \r\nunfortunately many organizations miss and in those cases this completely\r\n backfires on them. 

Question: What are some examples \r\nof companies that have collaborated effectively? 

Ranjay \r\nGulati: So I think collaboration is not rocket science. It’s human \r\nnature, how do you work together with another entity and make it work. \r\nAnd I think there are some basic principles that are important. The \r\nfirst of them is strategic alignment. Do we share similar goals, or \r\ncompatible goals? You don’t have to have the same goals; you’ve got to \r\nhave compatible goals. And furthermore, these are things that develop \r\nover time, you have to continually reaffirm with each other that do we \r\ncontinue to share compatible goals? We may have had compatible goals \r\nback then, do we have them today? So, how does goal alignment work and \r\nevolve over time is key. 

Then you have structure issues. When \r\nyou form these collaborations, you have two aspects of structure, \r\nthere’s an economic structure and then there’s a government structure. \r\nThe economic structure is about incentives, carrots and sticks. Who does\r\n what and what are the penalties associated with that. That gets done \r\npretty well by the lawyers and business development people who are \r\ninvolved in the alliance, the structuring of the incentives in the \r\ncollaboration. But the second part, which has to do with the government \r\nstructure, which is the decision-making, information sharing, how things\r\n will get done, doesn’t happen. And it doesn’t happen because the guys \r\nwho are going to manage the deal are not involved in creating the deal. \r\nAnd so the guys that are doing the dealmaking are not so interested, \r\ninvolved in that part of it. 

The third piece of the equation is \r\nthe process of behavioral issues. This one really kills them. And these \r\nhave to do with the dynamics of interaction between the entities. Are we\r\n culturally aligned? Are we behaviorally aligned? Are we emotionally \r\naligned? And you might say; how can two organizations be emotionally \r\naligned? You can look at organizations that have long histories of \r\ncollaboration. Fuji-Xerox, been around for 50 years. CFM, which is \r\naligned with GE and a French company, to make jet engines; been around \r\nfor decades. So you have alliances that do persist and endure over time \r\nand they do so because they have a structure that is aligned, the goals \r\nare aligned, you have governance in place and you have the behavioral \r\nsides in place. And it’s the coming together of all of these that allow \r\nyou to really be an effective collaborator. Common sense; doesn’t \r\nhappen. 

Recorded on April 20, 2010

Collaboration between businesses isn’t rocket science. So why are so many companies missing the boat on creating alliances?

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