The human race, as Charles Darwin hypothesized, is governed by the survival of the fittest dictum. Corporations, the new icons of the progress of civilization, reflect this dictum to an even greater degree. It is not surprising, therefore, that the works by Michael Porter on Competitive Strategy which seek to advise corporations on strategies to gain competitive advantage have been runaway hits. Though over thirty years have passed since they appeared on the strategy scene, Porter’s theories continue to dictate management thought in the strategy domain. There are, however, two major inadequacies in the theoretical prescriptions that need to be addressed. Firstly, the generic strategies that are propounded by Porter are by now well understood by, and remain applicable to, all corporations. Probably, focused execution rather than strategizing per se determines relative success amongst the corporations. Secondly, in a resource constrained economic situation, emphasis on fiery competition which consumes continuous investments by all the players probably becomes self-defeating over time.
Porter’s Five Forces Theory identifies the following five forces as the determinants of the level of competition in an industry. These are: the threat of new competition, the threat of substitute products or services, the bargaining power of customers (buyers), the bargaining power of suppliers, and the intensity of competitive rivalry, all of these analyzed within the framework of an industry. Porter’s framework brims with the spirit of competition wherein each stakeholder is constantly jockeying to get the better of a relationship, strategic or tactical. In a sense, Porter’s Five Forces Theory is like Theory-X of organizational behavior, bringing out the negative nuances of corporate growth and economic development. The industry environment and technological attributes have changed so dramatically over the last ten years that the traditional, including Porter’s, view of firms and industries not talking to each other is no longer valid. There is a clear need to redefine the Porter Model to meet the new environmental needs in terms of collaboration, rather than competition.
Networked industries and firms
Today, industries and firms are more networked than ever. Firms communicating through social networking sites such as Facebook , You Tube, and Twitter on one hand and the willingness of such social networking sites (such as Facebook) developing applications for hardware (such as Apple iPad) are visible examples of networked firms collaborating to develop business jointly. A few operating systems supporting a wide variety and range of cellular phones no longer smack of monopoly domination; on the other hand, they seek to enhance business potential by enabling others’ business through their core competencies. Search engines and navigation systems as well as electronics manufacturers support a mechanical equipment industry such as automobile as never before. Use of electronics in the automobiles has improved the safety and convenience of the users. Usage of electronics also increases the luxury and comfort to the riders. The cars manufactured presently contain more than 1000 electronic components, it is said!
Along with specialization came the need for firms to diversify their market base, for example a forging manufacturer making parts for giant ships as well as small scooters. Similarly, end product manufacturers began to concentrate on only certain core competencies and leverage others’ core competencies to finish up the products. At the same time, customer needs are multiplied in terms of convergence (many needs fulfilled by one device), specialization (one device for one predominant need) and diversity (many needs and many products). These trends are making firms to develop their own networking strategies to share resources and avoid redundant strategies in the context of continuously changing customer dynamics. Whichever way the current industrial environment is viewed, competition is tempered with collaboration. A strategic theory which redefines the forces governing the industry in terms of collaboration needs to be explored.
Five forces of collaboration, a different model
In the new paradigm, the five forces of collaboration can be stated as: the opportunity of market expansion with competition, the synergy of substitute products or services, the collaborative power of customers (buyers), the collaborative power of suppliers, and the balance of collaborative and competitive rivalry, all of these analyzed within the framework of a networked industry definition. The author would like to call this model Five Forces Theory of Collaboration. The important differences of the collaborative model with the competitive model are as follows. It sees competition not as evil but as a driver of market expansion. It views new products as a bundling opportunity and as a transition to enhanced customer experience. It also views customers and suppliers as being collaborative, rather than combative, with the firm. Finally, it proposes that collaboration and competition coexist in a firm, with the balance between the two forces determining the growth energy of the industry.
In the collaborative model, industry is not narrowly defined as in the Porter’s competitive model. For example, the Porter model encourages us to define the automobile industry as narrowly as car, truck, bus and motor cycle industries on the basis that each product is not a substitute for the other. The collaborative model, on the other hand, considers all passenger serving industries as one, not only whether these are car, bus and motor cycle but also inclusive of supportive industries such as navigation, electronics, telecommunication and entertainment. Does this lead to complexity of analysis based on boundless on collaboration, moving away from the competitive model of simplicity based on focused narrowness? Probably yes, but the reality of today’s world is complexity of integrating multiple technologies to provide the needed customer satisfaction.
Five forces illustrated
The five collaborative forces are grounded in reality of contemporary and emerging competition as illustrated below.
Competition-led market expansion
New competition, in an industry scenario of well balanced players only serves to expand market. In India, entry of new automobile players helped the market exponentially grow from 500,000 cars per year in the peak Maruti-Suzuki days (late 1990s) to around 3 million cars in 2011. By the same token, entry of luxury car makers such as Benz, Audi and BMW made the Indian luxury car market to grow to 30,000 from next to nothing, in a matter of just five years. The global smartphone sales galloped to 500 million units in just a matter of ten years, again from next to nothing, based essentially on entry of several smartphone makers in a market amazingly opened up by Apple. Entry of new competitors is an unmitigated gift of market expansion to the consumers as also to the incumbent players. Even an innovator firm cannot fulfill the total market demand despite a monopoly position. In an innovative product market segment such as tablets, for example, the pioneer-leader Apple iPad would have only one-third of the 760 million tablets in 2016, according to expert forecasts.
Synergy of substitute products or services
Porter considers substitute products or services as threats to existing businesses. In matter of fact, except for a few predominantly mechanical apparatus such as telex and dot matrix printer, it is not usual to see certain basic product concepts getting completely threatened. Once the only dominant computing system, the mainframe computer got progressively supplemented by personal computer, laptop, netbook, tablet and ultrabook. Yet, all the computing devices exist in one form or the other even today, each gaining from the competencies of the other. Despite the scorching pace of growth of around 50 percent per annum, tablets in installation base could be I billion compared to 2 billion personal computers in use, even by 2016. In fact, substitute products help incumbents who are either innovators or smart followers to diversify their product-market segments. Ultrabook is an example of how computers could reinvent themselves taking design cues from the later generation tablets.
Collaborative power of customers (buyers)
When firms and industries exist for customers it is ironic that customers are considered a competitive force by Porter. In a sense of demand leading to competitive entry by other firms or consumers switching between products, brands and firms, customers do have a competitive impact. However, the predominant bond between firms and consumers ought to be one of collaboration. Consumers simply love a great product and collaborate with the firm through patronizing of successive generations of products. Firms which view consumers as an extended family through a variety of feedback and feed-forward communication mechanisms have seen the consumers provide a major collaborative force for business and technological development of firms. The release of beta versions of new software for consumers is an example of how firms now appreciate the need for consumer involvement to achieve better products for full scale commercial launch.
Collaborative power of suppliers
The notion that the end-product manufacturers are at the mercy of their suppliers is also not relevant in the contemporary scenario. Specialization in materials and component technologies has enabled the component makers lead the development of new products. Smartphone makers are increasingly setting up pre-release collaborations with application developers to develop the right ecosystem. Collaborative planning emphasizes an approach by which suppliers and firms work together to avoid over or under bidding of positions and instead seek to maximize end-product opportunities in the marketplace with right products, right pricing and right volumes.
Balance of collaborative and competitive rivalry
Porter’s model considers that the competitive rivalry in an industry increases as the fifth force with the number of firms in the industry and the intensity of the four competitive forces. On the other hand, it is also possible that a few, if not all, of the firms in an industry could collaborate even while competing in the marketplace. Sharing of production sites, sharing of marketing channels, co-branding, co-marketing, exchange of components and cross-licensing of intellectual property help firms pool resources while keeping the individual identities discrete. Such collaboration helps companies bring down costs. An equitable balance between collaboration and competition in an industry occurs as the industry evolves rapidly.
From competition to collaboration
The discussion in the blog post is not to suggest that firms should or can cease to compete, and that business development would happen only through inter-firm collaboration. On the other hand, the blog post suggests that all of corporate strategy need not be, and should not be, only comprised of a strategy of competition. Competition must exist but should be more in the nature of product, process and delivery innovation. This strategy alone delights customers and expands markets. The strategy, however, requires significant investments. The model of collaborative strategy can help firms optimize their investments by sharing resources while retaining distinct identity. Firms can derive synergy by looking for areas of collaboration with their stakeholders, be they the customers or suppliers, and their competitors, whether they are followers in an existing product line or innovators of new substitute products and services.
While the model of five collaborative forces as enunciated herein has significant validity, it is open to further study if it can be followed up with generic collaborative strategies, on the lines of generic competitive strategies. In the collaborative model, cost leadership and product differentiation or niche remain as the ultimate competitive goals and there need to be generic strategies of collaboration to reach the competitive goals. For example, product collaboration, process collaboration and marketing collaboration could be the three principal collaborative strategies which could be resorted to by competing firms to great advantage. The differentiators for each firm, despite the collaborative sharing, will be design uniqueness, operational excellence and delivery efficiency.
Posted by Dr CB Rao on May 31, 2012
Showing posts with label Collaboration Management. Show all posts
Showing posts with label Collaboration Management. Show all posts
Thursday, May 31, 2012
Sunday, November 1, 2009
The Fine Art of Business Collaborations: From Hidden Agendas to Shared Missions
It is a dream for any company in an industry to be so integrated and so diversified that it is able to exercise complete control over its value chain and provide the complete spectrum of its products to all its customers, globally. Such a perfect monopoly, however, is neither economically feasible nor socially desirable. It is no wonder that corporations around the world, within industries and across industries, are recognizing the need to collaborate and maximize value for themselves and all their stakeholders. That said, there is still far lower emphasis in corporations on collaborations, compared to competition as a means of value maximization. This deficiency is even more palpable in India. This arises from an inadequate appreciation of the power of collaboration and an insufficient availability of talent to manage collaborations as they ought to be.
Collaborations: value drivers
In today’s world technology is becoming both specialized and expansive at such a fast pace that it is unproductive for any firm to attempt to do everything by itself. By collaborating with segmental players, companies can focus their energies on developing new products on a continuous basis. This collaborative model has indeed been demonstrated most effectively in the automotive and electronics industries, although there is considerable ground to be covered in these industries as well. On the other hand, most other industries including such intellectually driven industries such as pharmaceuticals are paranoid about self-reliance and circumspect, if not suspicious, about collaborations.
As a result, while the automotive and electronics industries continuously offer new products and services at an amazing pace offering better choice for the consumer, introverted industries such as pharmaceuticals are facing new product drought which could threaten the very existence of such industries in future. The concepts of integration and differentiation which are fundamentally investment- intensive and hence cost-accretive can be made market-friendly and value building initiatives if collaborative strategic relationships between specialist companies can be fostered.
Technologies: collaboration drivers
A strong collaborative position emerges from core competencies in science and technology. Manufacturers of computers, mobile phones and cameras, for example, are immensely benefitted by the core competencies of chip makers such as Intel and AMD in developing high performance processors for a variety of applications. Automobile manufacturers are significantly benefitted by the core competencies of their component makers in upgrading component and overall system performance. As a result, firms within and across industries that are engaged in collaborative product development and manufacture are able to continuously expand the boundaries of performance.
In this collaborative model, maximization of corporate performance emerges as a logical corollary of maximization of customer satisfaction with better product choice. The collaborative model focuses on creating product attributes that are not limited by current input functionalities and instead focuses on motivating the participants of the collaborative model to invent new functionalities. In contrast, firms and industries which seek performance maximization through monopoly control over the value chain tend to face economic extinction in the long term.
Markets: value determinants
Very often, strategists and CEOs make the mistake of judging value propensity of their firms only by way of internal value chain optimization and by deployment of internal performance metrics. The questions that they often ask themselves relate to the internal efficiencies in each of the primary functions of product development, manufacturing and marketing, and the several ancillary functions that support them. Very rarely, they focus on how well those functions are collaborating to determine a benchmark value for their firm, let alone explore if the value chain can be optimized for maximal value by bringing other players from within the industry as well as from outside the industry into the collaborative loop.
Companies which have listened to the signals from diverse markets to fulfill their differentiated needs, and collaborated for new technologies and new inputs to create new products that fulfill such needs have clearly outperformed others. Tata Motors outperformed its peers in India consistently as it has excelled in developing products that meet segmented customer needs. The roadblocks to a more universal implementation of this collaborative principle of business reconstruction stem largely from introverted corporate and professional mindsets that are unwilling to invest in business innovation and instead seek to maximize short run performance.
Extroverted mindsets: value visionaries
Corporate and CEO mindsets need to look beyond the current business models and delivery platforms on a continuous basis to extract the maximum value from the happenings around the world. Except in monopoly and patent protected domains, the competitive sustainability of a product is limited to one or two years and that of its manufacturing platform to four to six years. Strategists and CEOs, rather than periodically reinvent the value chain, fall into the trap of trying to extend product and manufacturing life spans until the last dollars are squeezed out of them. In the process, they make their companies highly vulnerable to more extroverted and more proactive competition.
A computer maker who is concerned about the current stocks and who holds back from either the development or the launch of a full range of upgraded models simultaneous with the launch of the latest operating system (Windows 7, for example) makes itself vulnerable to a competitor who has been more proactively collaborative with the developer of the new operating system. Steel plants which recognized the strategic importance of mines, petroleum companies which recognized the source vitality of oil fields and foundries which recognized the criticality of die, pattern and gating system making as a core competence present examples of companies looking beyond straightjacket business models to explore sustainable models of collaboration across industries and geographies. Value visionaries are those CEOs and strategists who constantly search for newer and more collaborative ways of doing business.
Talent: primer for collaboration
A corporation’s ability to look beyond the zones of comfort stems from the availability of talent that can identify new market needs, explore new delivery platforms and create new business models. The global delivery model pioneered by the Indian IT firms to meet the IT needs of global customers is a classic example of breaking the mould. The efforts by GE to develop new low-cost diagnostic devices for the emerging markets and taking them back to their developed markets is a more recent example of reverse globalization. Typically, talent pools from different functions, different industries and different geographies are harnessed together to make such game changing events possible.
For talent driven business optimization to happen, CEOs and strategists must have an appreciation of the constantly changing drivers of value in a business model. These could relate to a fundamental redefinition of customer needs which a firm seeks to meet, the configurations of products that best fulfill the changing needs, the material inputs, manufacturing processes and conversion technologies, facility standards, quality levels and delivery mechanisms. Companies must nurture talent that looks beyond current comforts and constraints to seek new ways of doing things. Strategists and CEOs in particular need to understand the essentiality of cross-corporate and cross-industry collaboration, and need to be suitably talented by themselves to lead by example.
Negotiation: foundation of a collaboration
Any collaborative relationship requires negotiation to make it happen. Negotiation is the complex and often tiresome process of two companies attempting to develop common ground to meet future strategic objectives. Hidden agendas destroy negotiations and collaborations while shared missions strengthen them. A good negotiation posture can only emerge from strategic clarity on the drivers of industry evolution and the determinants of firm’s competitiveness, with and without the proposed collaborative framework with the potential partners. A fruitful negotiation can occur only when the partner for negotiation is chosen based on detailed desk research and on-site due diligence. A smooth negotiation process can only happen with deployment of negotiators who understand the essential ingredients of viable business and the subtle nuances of a win-win collaboration.
The above three essential steps of negotiation are sequential in nature. Any attempt to invert or mix up the sequence or priorities would invariably result in a botched up negotiation. Negotiation of a business collaboration can neither be top-down nor bottoms-up. It is one process that is typically driven by a mid-tier organization that establishes a cooperative framework based on business fundamentals. For the negotiation to succeed in terms of a sustainable collaboration, the top leadership should be irrevocably committed to the three essentials of negotiation identified above and the operating level should have adequate strategic appreciation.
Hidden agendas: value destroyers
The purpose of any collaboration is to create synergy for enhanced performance of the partners. The process of negotiation seeks to create a charter for achieving such synergy. The biggest roadblock for any negotiation is the opaqueness which each partner faces in its attempt to understand the other partner’s motives. The fundamental prerequisite for any successful collaboration is therefore mutual trust. Trust is required because collaboration involves exchange of information, based on confidentiality agreements, on market plans, product plans, technologies and costs and a host of confidential data. Hold-back of information on these fronts leads to sub-optimal and at times counterproductive collaboration.
The typical negotiator, either as a company or as a professional representing the company, has therefore the challenging task of establishing trust as the fundamental lever for a successful collaboration. Trust emanates from strategic clarity, leadership commitment and negotiator skill. Trust emanates from each party having faith in its own competencies and a belief that the collaboration would not short-change on its strengths. Collaborations that are unevenly poised on mutual strengths or weaknesses and mutual risks or rewards are more likely to fail. Even if a collaborative framework is cobbled together initially it will eventually flounder on mutual non-performance.
Strategic clarity: shared missions
Any collaboration must fit into the long term strategy of the company. Collaborations must be leveraged to supplement technologies, markets or people. They should play a clear role in the integration and diversification value chains of the company. This means that a company seeking a collaboration must have a strategic roadmap with a role clearly assigned to each strategic partner. The company should be able to visualize a performance scenario with and without the collaboration and be prepared to share with the partner. It is heartening that progressive companies develop strategic clusters of related companies with whom they are able to share their long term technology perspectives and agree on shared missions.
Strategic clarity on collaboration roadmaps and enabling shared missions is generally missing in the Indian scenario. The more knowledge driven and the more competitive a company considers itself the more introverted and the more closed the company behaves. The Indian pharmaceutical industry which has an aggressive global agenda and weak local resources is a telling illustration of how resources can be diffused in highly duplicative activities that run counter to the structural requirements of a global aspiration model. The industry is all set to replicate its chaotic and fragmented Indian market model in the global markets, eroding its own value in the bargain. A Japanese MITI kind of initiative is called for to infuse appropriate strategic and collaborative thinking among the firms in various industries in India.
Structured diligence: mutual alignment
Correct selection of the partner is an essential element of the negotiation process. Opportunistic selection of partners often leads to conflicts in negotiation processes as well as in collaboration management. There are four important phases of a diligence exercise for successful negotiation and collaboration. The first is a broad business level meeting to determine compatibility of business models, organizational culture and functional capabilities. The second is a technical evaluation of the required products and services, or their surrogates. The third is a detailed evaluation of the quality and compliance capabilities. The fourth is an evaluation of the opportunity of collaboration and the competitiveness of the firms to generate value from the collaboration model.
There are several examples in the global business scenario which demonstrate the critical importance of diligence. Roche-Genentech and Daiichi-Ranbaxy represent two distinct polarities in the pre-collaboration diligence spectrum and post-collaboration value build or value erosion as the case may be. Jet-Sahara merger in the airlines industry, Tata-Corus acquisition in the steel industry, Kingfisher-Shaw Wallace spat in the liquor industry, and HM-Isuzu collaboration in the automobile industry are but a few examples of how the level of due diligence could influence outcomes.
The negotiator: catalyst or inhibitor?
The personality of the negotiator plays a key role influencing the speed with which a negotiation can proceed and the strength which a collaboration can take shape. The demands on a negotiator are plenty. The negotiator needs to be highly competent with a complete understanding of the industry and the firm. He needs to be exceptionally communicative with an ability to listen as much as talk. And above all, he needs to be a collaborator with an outstanding ability to reinforce mutual strengths and overcome mutual weaknesses. He needs to be committed not only to the company he represents, understandably for business expansion, but also to the very process of collaboration, to inspire confidence and trust in the other party.
The negotiator when he is competent, communicative and collaborative as discussed above can be a true catalyst for the negotiation process. If he lacks any or all of the three critical factors could well be a major roadblock for the partnership. Rail track type of parallel negotiations, neither converging nor diverging or circular type of negotiations, with neither a beginning nor an end, are familiar examples of a faulty negotiating personality. An understanding of multiple cultural requirements is an additional requirement for a global negotiator. Negotiation requires openness with appropriate transparency as much as softness with adequate firmness to develop a mutually respected win-win position.
Model pitfalls: rat traps and pies in the sky
There are two clever, if not cunning, negotiation models that are employed by negotiators in negotiating with apparently weaker partners, trying to seek one-sided success; not surprisingly neither will be a sustainable success in the long term. The first is the rat trap negotiation model. In this model, the weaker partner, often requiring urgent cash consideration, is enticed into a ‘rat trap’ of excusive and perpetual collaboration which completely limits future flexibility and cash flows for the weaker partner. The characteristic feature of the rat trap model is that given the dire need for cash, just as a rat in need of food enters a rat trap, the needy partner enters a one way street of permanent collaboration. Technology sellouts without royalties, contract manufacturing sans profit shares, perpetual royalty-free licenses, circular first rights of refusals, corporate selloffs without tagalong rights, low private equity valuations in times of downturn, and technology imports without access to improvements are some examples of typical rat trap negotiations.
The second model is the pie in the sky model. This model appeals to partners who have a comfortable present but are driven by ambitions of a highly prosperous future. Aggressive and adventurous partners who are unaware of future industry evolution, and pitfalls thereof, fall for this model. Typically, in this model one partner offers for the other a highly attractive future cash flow stream in return for a nominal upfront payment. Collaborations which swap current businesses for apparently more attractive future collaborations, payment models which are not linked to success milestones, exotic valuations based on bloated business plans, royalties linked to declining businesses, payments linked to uncertain product developments and approvals, and non-competes without current business alternatives fall under the pie in the sky negotiation model. Needless to say, neither the rat trap negotiation model nor the pie in the sky negotiation model would lay the basis for a strategic collaboration; some of these could end up in tortuous litigation as well.
Collaborating to win
Strategic collaborations are equitably negotiated to bring mutual competencies into constructive play. They represent a balance of rigidity and flexibility. For example, mutual exclusivity is balanced by performance triggers for non-exclusivity. They balance risk with reward appropriately. For example, both partners need to bring in balanced resource commitments to the collaboration to be able to reap the rewards proportionately. Strategic collaborations require milestones and deliverables that are mutually agreed a priori to measure performance and undertake course corrections. And they require a governance structure, with equal senior level representation and voting rights as well as arbitration procedures to move with the times.
Strategic collaborations essentially require a three dimensional fit: strategic, cultural and operational. Well structured collaborations transform the value chains of companies, helping them to address new products and markets with optimized resources. They enhance technological depth and enhance market reach. They consolidate industry structure while preserving firm level competitiveness. The society benefits with technologically updated products with cost economics. The firms, industry and economy benefit with efficient deployment of scarce resources for consistent growth of national product. A truly collaborative mindset, with no hidden agendas and with shared missions, represents a unique managerial alchemy that can usher in multiple benefits to all the stakeholders.
Posted by Dr CB Rao on November 1, 2009
Collaborations: value drivers
In today’s world technology is becoming both specialized and expansive at such a fast pace that it is unproductive for any firm to attempt to do everything by itself. By collaborating with segmental players, companies can focus their energies on developing new products on a continuous basis. This collaborative model has indeed been demonstrated most effectively in the automotive and electronics industries, although there is considerable ground to be covered in these industries as well. On the other hand, most other industries including such intellectually driven industries such as pharmaceuticals are paranoid about self-reliance and circumspect, if not suspicious, about collaborations.
As a result, while the automotive and electronics industries continuously offer new products and services at an amazing pace offering better choice for the consumer, introverted industries such as pharmaceuticals are facing new product drought which could threaten the very existence of such industries in future. The concepts of integration and differentiation which are fundamentally investment- intensive and hence cost-accretive can be made market-friendly and value building initiatives if collaborative strategic relationships between specialist companies can be fostered.
Technologies: collaboration drivers
A strong collaborative position emerges from core competencies in science and technology. Manufacturers of computers, mobile phones and cameras, for example, are immensely benefitted by the core competencies of chip makers such as Intel and AMD in developing high performance processors for a variety of applications. Automobile manufacturers are significantly benefitted by the core competencies of their component makers in upgrading component and overall system performance. As a result, firms within and across industries that are engaged in collaborative product development and manufacture are able to continuously expand the boundaries of performance.
In this collaborative model, maximization of corporate performance emerges as a logical corollary of maximization of customer satisfaction with better product choice. The collaborative model focuses on creating product attributes that are not limited by current input functionalities and instead focuses on motivating the participants of the collaborative model to invent new functionalities. In contrast, firms and industries which seek performance maximization through monopoly control over the value chain tend to face economic extinction in the long term.
Markets: value determinants
Very often, strategists and CEOs make the mistake of judging value propensity of their firms only by way of internal value chain optimization and by deployment of internal performance metrics. The questions that they often ask themselves relate to the internal efficiencies in each of the primary functions of product development, manufacturing and marketing, and the several ancillary functions that support them. Very rarely, they focus on how well those functions are collaborating to determine a benchmark value for their firm, let alone explore if the value chain can be optimized for maximal value by bringing other players from within the industry as well as from outside the industry into the collaborative loop.
Companies which have listened to the signals from diverse markets to fulfill their differentiated needs, and collaborated for new technologies and new inputs to create new products that fulfill such needs have clearly outperformed others. Tata Motors outperformed its peers in India consistently as it has excelled in developing products that meet segmented customer needs. The roadblocks to a more universal implementation of this collaborative principle of business reconstruction stem largely from introverted corporate and professional mindsets that are unwilling to invest in business innovation and instead seek to maximize short run performance.
Extroverted mindsets: value visionaries
Corporate and CEO mindsets need to look beyond the current business models and delivery platforms on a continuous basis to extract the maximum value from the happenings around the world. Except in monopoly and patent protected domains, the competitive sustainability of a product is limited to one or two years and that of its manufacturing platform to four to six years. Strategists and CEOs, rather than periodically reinvent the value chain, fall into the trap of trying to extend product and manufacturing life spans until the last dollars are squeezed out of them. In the process, they make their companies highly vulnerable to more extroverted and more proactive competition.
A computer maker who is concerned about the current stocks and who holds back from either the development or the launch of a full range of upgraded models simultaneous with the launch of the latest operating system (Windows 7, for example) makes itself vulnerable to a competitor who has been more proactively collaborative with the developer of the new operating system. Steel plants which recognized the strategic importance of mines, petroleum companies which recognized the source vitality of oil fields and foundries which recognized the criticality of die, pattern and gating system making as a core competence present examples of companies looking beyond straightjacket business models to explore sustainable models of collaboration across industries and geographies. Value visionaries are those CEOs and strategists who constantly search for newer and more collaborative ways of doing business.
Talent: primer for collaboration
A corporation’s ability to look beyond the zones of comfort stems from the availability of talent that can identify new market needs, explore new delivery platforms and create new business models. The global delivery model pioneered by the Indian IT firms to meet the IT needs of global customers is a classic example of breaking the mould. The efforts by GE to develop new low-cost diagnostic devices for the emerging markets and taking them back to their developed markets is a more recent example of reverse globalization. Typically, talent pools from different functions, different industries and different geographies are harnessed together to make such game changing events possible.
For talent driven business optimization to happen, CEOs and strategists must have an appreciation of the constantly changing drivers of value in a business model. These could relate to a fundamental redefinition of customer needs which a firm seeks to meet, the configurations of products that best fulfill the changing needs, the material inputs, manufacturing processes and conversion technologies, facility standards, quality levels and delivery mechanisms. Companies must nurture talent that looks beyond current comforts and constraints to seek new ways of doing things. Strategists and CEOs in particular need to understand the essentiality of cross-corporate and cross-industry collaboration, and need to be suitably talented by themselves to lead by example.
Negotiation: foundation of a collaboration
Any collaborative relationship requires negotiation to make it happen. Negotiation is the complex and often tiresome process of two companies attempting to develop common ground to meet future strategic objectives. Hidden agendas destroy negotiations and collaborations while shared missions strengthen them. A good negotiation posture can only emerge from strategic clarity on the drivers of industry evolution and the determinants of firm’s competitiveness, with and without the proposed collaborative framework with the potential partners. A fruitful negotiation can occur only when the partner for negotiation is chosen based on detailed desk research and on-site due diligence. A smooth negotiation process can only happen with deployment of negotiators who understand the essential ingredients of viable business and the subtle nuances of a win-win collaboration.
The above three essential steps of negotiation are sequential in nature. Any attempt to invert or mix up the sequence or priorities would invariably result in a botched up negotiation. Negotiation of a business collaboration can neither be top-down nor bottoms-up. It is one process that is typically driven by a mid-tier organization that establishes a cooperative framework based on business fundamentals. For the negotiation to succeed in terms of a sustainable collaboration, the top leadership should be irrevocably committed to the three essentials of negotiation identified above and the operating level should have adequate strategic appreciation.
Hidden agendas: value destroyers
The purpose of any collaboration is to create synergy for enhanced performance of the partners. The process of negotiation seeks to create a charter for achieving such synergy. The biggest roadblock for any negotiation is the opaqueness which each partner faces in its attempt to understand the other partner’s motives. The fundamental prerequisite for any successful collaboration is therefore mutual trust. Trust is required because collaboration involves exchange of information, based on confidentiality agreements, on market plans, product plans, technologies and costs and a host of confidential data. Hold-back of information on these fronts leads to sub-optimal and at times counterproductive collaboration.
The typical negotiator, either as a company or as a professional representing the company, has therefore the challenging task of establishing trust as the fundamental lever for a successful collaboration. Trust emanates from strategic clarity, leadership commitment and negotiator skill. Trust emanates from each party having faith in its own competencies and a belief that the collaboration would not short-change on its strengths. Collaborations that are unevenly poised on mutual strengths or weaknesses and mutual risks or rewards are more likely to fail. Even if a collaborative framework is cobbled together initially it will eventually flounder on mutual non-performance.
Strategic clarity: shared missions
Any collaboration must fit into the long term strategy of the company. Collaborations must be leveraged to supplement technologies, markets or people. They should play a clear role in the integration and diversification value chains of the company. This means that a company seeking a collaboration must have a strategic roadmap with a role clearly assigned to each strategic partner. The company should be able to visualize a performance scenario with and without the collaboration and be prepared to share with the partner. It is heartening that progressive companies develop strategic clusters of related companies with whom they are able to share their long term technology perspectives and agree on shared missions.
Strategic clarity on collaboration roadmaps and enabling shared missions is generally missing in the Indian scenario. The more knowledge driven and the more competitive a company considers itself the more introverted and the more closed the company behaves. The Indian pharmaceutical industry which has an aggressive global agenda and weak local resources is a telling illustration of how resources can be diffused in highly duplicative activities that run counter to the structural requirements of a global aspiration model. The industry is all set to replicate its chaotic and fragmented Indian market model in the global markets, eroding its own value in the bargain. A Japanese MITI kind of initiative is called for to infuse appropriate strategic and collaborative thinking among the firms in various industries in India.
Structured diligence: mutual alignment
Correct selection of the partner is an essential element of the negotiation process. Opportunistic selection of partners often leads to conflicts in negotiation processes as well as in collaboration management. There are four important phases of a diligence exercise for successful negotiation and collaboration. The first is a broad business level meeting to determine compatibility of business models, organizational culture and functional capabilities. The second is a technical evaluation of the required products and services, or their surrogates. The third is a detailed evaluation of the quality and compliance capabilities. The fourth is an evaluation of the opportunity of collaboration and the competitiveness of the firms to generate value from the collaboration model.
There are several examples in the global business scenario which demonstrate the critical importance of diligence. Roche-Genentech and Daiichi-Ranbaxy represent two distinct polarities in the pre-collaboration diligence spectrum and post-collaboration value build or value erosion as the case may be. Jet-Sahara merger in the airlines industry, Tata-Corus acquisition in the steel industry, Kingfisher-Shaw Wallace spat in the liquor industry, and HM-Isuzu collaboration in the automobile industry are but a few examples of how the level of due diligence could influence outcomes.
The negotiator: catalyst or inhibitor?
The personality of the negotiator plays a key role influencing the speed with which a negotiation can proceed and the strength which a collaboration can take shape. The demands on a negotiator are plenty. The negotiator needs to be highly competent with a complete understanding of the industry and the firm. He needs to be exceptionally communicative with an ability to listen as much as talk. And above all, he needs to be a collaborator with an outstanding ability to reinforce mutual strengths and overcome mutual weaknesses. He needs to be committed not only to the company he represents, understandably for business expansion, but also to the very process of collaboration, to inspire confidence and trust in the other party.
The negotiator when he is competent, communicative and collaborative as discussed above can be a true catalyst for the negotiation process. If he lacks any or all of the three critical factors could well be a major roadblock for the partnership. Rail track type of parallel negotiations, neither converging nor diverging or circular type of negotiations, with neither a beginning nor an end, are familiar examples of a faulty negotiating personality. An understanding of multiple cultural requirements is an additional requirement for a global negotiator. Negotiation requires openness with appropriate transparency as much as softness with adequate firmness to develop a mutually respected win-win position.
Model pitfalls: rat traps and pies in the sky
There are two clever, if not cunning, negotiation models that are employed by negotiators in negotiating with apparently weaker partners, trying to seek one-sided success; not surprisingly neither will be a sustainable success in the long term. The first is the rat trap negotiation model. In this model, the weaker partner, often requiring urgent cash consideration, is enticed into a ‘rat trap’ of excusive and perpetual collaboration which completely limits future flexibility and cash flows for the weaker partner. The characteristic feature of the rat trap model is that given the dire need for cash, just as a rat in need of food enters a rat trap, the needy partner enters a one way street of permanent collaboration. Technology sellouts without royalties, contract manufacturing sans profit shares, perpetual royalty-free licenses, circular first rights of refusals, corporate selloffs without tagalong rights, low private equity valuations in times of downturn, and technology imports without access to improvements are some examples of typical rat trap negotiations.
The second model is the pie in the sky model. This model appeals to partners who have a comfortable present but are driven by ambitions of a highly prosperous future. Aggressive and adventurous partners who are unaware of future industry evolution, and pitfalls thereof, fall for this model. Typically, in this model one partner offers for the other a highly attractive future cash flow stream in return for a nominal upfront payment. Collaborations which swap current businesses for apparently more attractive future collaborations, payment models which are not linked to success milestones, exotic valuations based on bloated business plans, royalties linked to declining businesses, payments linked to uncertain product developments and approvals, and non-competes without current business alternatives fall under the pie in the sky negotiation model. Needless to say, neither the rat trap negotiation model nor the pie in the sky negotiation model would lay the basis for a strategic collaboration; some of these could end up in tortuous litigation as well.
Collaborating to win
Strategic collaborations are equitably negotiated to bring mutual competencies into constructive play. They represent a balance of rigidity and flexibility. For example, mutual exclusivity is balanced by performance triggers for non-exclusivity. They balance risk with reward appropriately. For example, both partners need to bring in balanced resource commitments to the collaboration to be able to reap the rewards proportionately. Strategic collaborations require milestones and deliverables that are mutually agreed a priori to measure performance and undertake course corrections. And they require a governance structure, with equal senior level representation and voting rights as well as arbitration procedures to move with the times.
Strategic collaborations essentially require a three dimensional fit: strategic, cultural and operational. Well structured collaborations transform the value chains of companies, helping them to address new products and markets with optimized resources. They enhance technological depth and enhance market reach. They consolidate industry structure while preserving firm level competitiveness. The society benefits with technologically updated products with cost economics. The firms, industry and economy benefit with efficient deployment of scarce resources for consistent growth of national product. A truly collaborative mindset, with no hidden agendas and with shared missions, represents a unique managerial alchemy that can usher in multiple benefits to all the stakeholders.
Posted by Dr CB Rao on November 1, 2009
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