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