|| Cultivate sparring
"Remember that a partnership
is a two-way street.
You're depending on the partner
to supply the expertise you lack."
- Cynthia Griffin,
American Business Journalist
ot all that long ago businesses competed in stable national markets. Competitors were familiar. Customers were captive.
Not any more.
If you want to compete today, you need to be flexible. And you need to be global. You need the ability to respond quickly to new, innovative competitors who constantly bust in to woo your customers. To survive, let alone prosper, you have continuously seek new products, new customers and new markets. At the same time, you have to keep costs and prices down.
In a nutshell: you have to move fast; you have to be everywhere.
That's why strategic alliances are important. They're partnerships between two or more strong companies that have something worthwhile to exchange. The alliances are often global and can involve anything from research and development (R&D) and manufacturing to distribution.
One of South Africa's largest industrial conglomerates, Anglo American Industrial Corporation (AMIC), which saw turnover top R20-billion and total net earnings top R1-billion in 1995, got into bed with the Korean electronics giant Daewoo. They set up a joint venture operation in Gauteng. The initial intention: to manufacture colour tubes for TV sets.
Heavily involved in commodities, AMIC went into the alliance to diminish its exposure to the vagaries of the volatile market.
Although chairman Leslie Boyd said that the alliance was not an indication that AMIC wanted to get out of commodities, its investment in joint ventures, like the one with Daewoo, would ensure that the
group's bottom line wasn't critically affected by commodity price swings.
Build business together
He told the Financial Mail's Special Survey of Top Companies in 1996: "We are specially keen on joint venture projects with major players who can bring process operations, new techniques and technologies to S A so that we can build business together
- some of which may have export potential.
"It's another of our strategies for going forward."
Although the original intention of making TV colour tubes stalled, the joint venture got off the ground in May 1995, when AMIC/Daewoo took control of the quoted electronics company Supalek, a small consumer electronics firm that supplied Kenwood hi-fi and low-end audio brands. With 60,4% of the equity, the joint venture reconstituted Supalek as Daewoo Electronics South Africa. Within eight months its turnover rocketed by more than 110% to R142-million.
The addition of Daewoo TVs, VCRs, domestic appliances and the Pace satellite TV franchise led to the meteoric growth in turnover.
"Mike Bosworth, managing director of Daewoo Electronics, describes the joint venture as
"a powerful strategic alliance" with both parties willing "to bring more and more to the joint
At the heart of each companies alliance agreement are the strategic goals of each participant or member.
Let's look at another example.
In the late 1980s, Japanese computer giant Toshiba entered into two alliances that involved developing and sharing microchip technology. Although, on the surface, both partnerships appeared to have the same technical objectives, they had different strategic implications.
The first alliance called on Toshiba, IBM and Siemens to collaborate on chip-design research. Researchers from each company were to work independently in their respective laboratories and then compare notes. On completion of the research project, each company would go its own way.
Since chip design is clearly a strategic activity, this was a strategic but limited alliance. A contract agreement was sufficient to cover all the issues.
The second alliance - between Toshiba and Motorola - was also aimed at developing chip technology. However, the strategic implications were much greater than those in the first alliance. It called for the partners to exchange their core expertise. In effect, Motorola gained access to
Toshiba's "family heirloom" - its process technology
skills. In return, Motorola granted Toshiba access to its "crown jewels" - the
company's product development skills.
Yet, despite the alliance, both companies continued to compete head-on in several geographic areas.
The success of the alliance depended on tight control of the information exchanged between the partners. Toshiba and Motorola opted for a joint venture governed by a detailed contract that stipulated what technologies and information could be exchanged.
That was an alliance.
In 1986, the two giant companies expanded their co-operation. They agreed to:
- exchange technology;
- buy each other's products, and
- develop and make products in a jointly owned plant in Japan.
Their pact of co-operation didn't end there. Toshiba also agreed to actively support
Motorola's efforts to access the Japanese market.
That was a strategic alliance. And, like in many strategic alliances, the two partners were also competitors.
How can you build partnerships with competitors? To find the answer, I investigated ...
The Nike story
When Nike founder Phil Knight first ventured into the market for athletic footwear, the only competitor was a German company, Adidas. Knight decided to attack Adidas with low-priced, high-quality Japanese imports. After all, he reckoned, if it worked for cameras, why
couldn't it work for shoes?
So the Nike boss entered into a sourcing agreement with the Japanese shoe manufacturer, Onitsuka. Nike provided the designs. Onitsuka manufactured the footwear.
Knight configured the business so that he retained the key value activity
- design - in-house. The agreement also leveraged the partner's resources: its manufacturing infrastructure and know-how.
But Knight had overlooked a key factor. He had done nothing to protect the future.
Onitsuka saw the success of Nike shoes and decided that it wanted the market for itself. Knight turned down an offer from Onitsuka to buy him out. Onitsuka retaliated by withdrawing its manufacturing facilities.
A valuable lesson
Knight had no fall-back position. But he learnt a valuable lesson.
He now insists on contracting multiple manufacturing sources.
So what real benefits can you derive by entering into strategic alliances? The 1996 issue of Trendsetter Barometer, produced by Coopers & Lybrand, surveyed 437 companies that were identified as the fastest growing businesses in the United States between 1990 and 1995. It found that companies that collaborated with outside partners launched 23% more new products that those that relied entirely on inside resources.
So-called external teaming, used by 51% of the high growth companies, usually took the form of strategic alliances with suppliers or sub-contractors (41%), marketing or selling partners (24%) and joint venture operations (3%).
According to George Auxier, of Cooper & Lybrand's Entrepreneurial Advisory Services, these companies reduced their risks by engineering new products to external rather than internal standards. They also derived benefit from the collective resources, expertise and experience of their partners.
However, before you rush into wedlock with what appears to be a suitable partner:
- Rethink your business.
- Reconfigure your business.
- Leverage resources.
Rethink your business
Evaluate each of your company's activities from design and manufacturing to distribution a sales. Look carefully at where you add value. Look equally carefully at where you
don't add value.
Your investment in R&D, for example, has led to innovating improvements in your products. Clearly, R&D is one of your
company's value activities.
On the other hand, when you manufacture a product, you're not adding any value
- say through innovative logistic systems. You could manufacture more cheaply through an outsourcing agreement without any loss of value.
Reconfigure your business
When you've evaluated all your company's activities, decide which you should keep in-house and which you can give to partners. Partnerships can be internal (subsidiaries) or external (alliances).
After taking stock of your situation, you may find that it will pay you, in terms of cost and quality, to outsource the manufacture of your products to an external alliance. You can the plough back the resources your save into a new distribution network or into the development of new technology or products.
According to recent research, about 85% of the companies in the United Kingdom farm out some part of their operations to independent contractors. The concept,
first publicly punted by failed American Presidential contender Ross Perot in 1962 when he set up Electronic Data Systems (EDS), really took up in the United States as the 1980s drew to a close. It was a concept that companies in America and across the Atlantic, in Europe, desperately grasped in a bid to contain fast-rising costs.
After closely analysing the situation, in which bottom line figures began to display an increasingly unhealthy pallor, company bosses decided to concentrate on core competencies and outsource everything else. This led to improvements in the quality of
products because outside specialists were responsible for producing different components. In addition, service improved and reduced stock levels freed capital previously tied up unproductively.
James Fitzgerald, chief executive of EDS in South Africa, is bullish about the future of outsourcing in this country, particularly in the area of information technology (IT). He reckons that outsourcing will account for a good share of the future world-wide spend on IT, which he expects to grow by 13% a year until 2002.
South Africa's return to the international business community has given impetus to the spread of calling in outside contractors. As an example of the growing trend, Fitzgerald cites the Standard Bank.
Phone Standard to authorise a MasterCard and you speak to an EDS employee. This is part of the service included in a R1-billion contract that the bank signed with EDS to restructure and manage its card division.
Big Blue has also entered the local IT outsourcing arena. In 1993, a year before it bought back its former South African business, IBM established International Outsourcing Services. Also muscling in on the act: Momentum Life, which recently gave birth MC2 Solutions.
It's structured to electronically collect and disburse money and provide admin services.
Fiery American management consultant Tom Peters passionately believes in the benefits of outsourcing.
"Contract out everything except your soul," he urges with a regulatory bordering on tedium. But South African business only subscribes to the concept only with reluctance. Carl Roberts, of IBM Global Network, diplomatically says that locals are still in need of education. However, long cocooned from the real world by an over-protective government, South African business is wet behind the ears when it comes to realising the benefits of outsourcing and implementing it.
But there are exceptions. Converts include the South African Breweries (SAB), Gengold, Ingwe Coal and Premier, which have contracted out some IT work to IBM. Standard Bank, as mentioned, outsources much of its
MasterCard operation to EDS,
which has also scooped a R500-million outsource contract from JCI and a R200-million deal with Automakers.
So, if you want to weather the invasion by foreign companies or become internationally competitive, identify your core competencies and hive off the rest.
It's the way to go.
Reconfiguring your business may not be the total answer. In some cases, reconfiguration fails to bring sufficient resources to add meaningful value. Alliances that allow you leverage resources from your partners may offer the solution.
If R&D is an important value activity in your company, for example, you can combine the resources of your
partner's company with your own through co-development. As one manager explains:
"It's just like leveraging your company through borrowing. Except here you leverage through other
But be warned: outsourcing doesn't come without pain because it's inevitably accompanied by re-engineering or restructuring. And that means heavy duty job losses. Consider the case of Johannesburg-based Anglo American Property Services (Ampros). At the time of writing it was in the throes of a major restructuring process. Job losses were expected to be heavy-duty. About 900 of the
company's 2 000-strong workforce faced the axe.
The reason, according to a management source: Ampros wanted to concentrate on its core business
- property asset management. It, therefore, intended outsourcing "periphery
operations" such as cleaning and security services.
The company's operations chief, Piero Farina, claimed that Ampros had embarked on the re-engineering programme to keep it abreast of developments in rival property management companies which outsourced non-core services.
He also noted that the restructuring would have a positive impact on the shape of
Ampros' bottom line. That, after all, it what it's ultimately all about.
What happens the businesses that don't form alliances or refuse to outsource peripheral activities. In view of the demand for excellent customer service and murderous competition in the market place, they either battle just to survive or go down the tubes.
Apple Computer, once a front-runner in global IT field, has felt the painful sting of refusing to change. It stuck rigidly to its
"exclusive proprietary" strategy in the face of plummeting earnings. It consistently refused to allow other suppliers to sell its hard and software. It was a policy introduced by co-founder Steve Job and enthusiastically propagated by his successor John Sculley, who quit his job as president of Pepsi-Cola in 1984 to join Apple.
Marketing-orientated Sculley grew the upstart computer company from a $800-million a year fledgling to an $8-billion a year giant. Then Apple saw earnings drop by 80% in 1993 and Sculley quickly bowed out.
It's problem: the company arrogantly discouraged "cross-platform
With the exception of Apple, giants in the IT industry co-operate as much as they compete. Setting standards for consumers to interchange compatible hard and software has meant massive profits for such players as IBM, Intel and Microsoft. While they and others reaped the benefits of co-operation, Apple saw it its 10% market share in 1991
sag to about 7% in 1996.
Just how to leverage resources effectively is a key consideration in any alliance strategy. Nike did it. A graduate graphic design student created its internationally famous
"swoosh" logo for a mere $35.
To sum up, reconfiguring your business - redistributing your company's activities between the parent business, subsidiaries and alliances
- will help you concentrate your resources in areas where you can add value.