How many alliances does your company have? Probably more than it used to. Whether the question has to do with the supply chain, with research and development challenges, with emerging industry standards or with marketing channels, the answer, more and more, is neither a market relationship nor vertical integration, but something in between: an alliance. Among the leading users of alliances are IBM Corp., which announced 191 partnerships in the four-year period ending in 2004; Hewlett-Packard Co., which formed 127 in the same period: and Microsoft Corp., which announced 146 in those four years. So many alliances have been formed that in many industries all companies have become connected to each other, whether directly or indirectly. It's not hard to make the case that networks of alliances have, in fact, become the dominant organizational form in the modern economy.
Yet not all companies really understand their positions in these networks. True, many have enjoyed some success in structuring and managing individual relationships, and some may even have taken the lead in creating a web of partnerships. But few companies have thought strategically about the different roles available to them when they're involved in multiple relationships. Once formed, these networks turn out to be a complex and dynamic mix of collaboration and competition. But the partnerships tend to proliferate in response to immediate needs, with little overall planning.
This is unfortunate, because there are distinct positions that companies can choose to occupy in the alliance networks in their industries - especially those companies willing and able to take a leadership role. Based on a study of the wealth of corporate partnering experience accrued in recent years, we can say that a company that wants to lead in a network has two basic choices: it can aspire to be an orchestrator, or it can try to become a bridge. Each of these positions has fairly clear-cut costs and benefits; depending on the circumstances, either may be a good choice. Each is worth considering in more detail.
A company occupying an orchestrator position is best thought of as the spider in a web of alliances. It has more alliances than other companies and is a hub of alliance activity in its industry. Microsoft occupies such a position in the information technology industry. Toyota Motor Corp. is the core player of an extensive network of alliances in its supply chain. And Nike Inc. orchestrates a network of suppliers, researchers and marketers that all collaborate to advance the interests of the Nike network.
An orchestrator may reap a number of benefits from its dominant position in an alliance network. The high number of alliances gives an orchestrator a position of great influence in an industry, or helps it perpetuate such a position. Via partners, the company can direct the development of a technology or influence the market. It is therefore able to shape the business environment to its particular needs.
The second advantage an orchestrator enjoys is that its central position makes it the partner of choice in its industry. The companies with the best ideas will try to partner with the orchestrator first, rather than with one of the lesser players. After all, an orchestrator will be able to make a greater contribution to their business, by introducing them to other business partners or clients or by providing a sales channel. This effect strengthens the position of orchestrators: they get the first pick among all the new business ideas available in the market. A final advantage of an orchestrator position is that an orchestrator has access to information from a wide variety of partners. It is best informed about the latest trends in technology, demand and production processes. Information, of course, is one of the cornerstones of competitive advantage.
The orchestrator position is no free lunch, however. It comes with certain responsibilities and requires certain investments. The costs of managing a network with numerous partners are high. Alliances require considerable management attention, and some orchestrators employ dozens of alliance managers to oversee and support their alliance network. IBM (to name just one example) devotes substantial resources to its alliance management function. The duties of alliance managers include recruiting new partners to the network; supporting partners in executing their tasks; defining standard ways of doing business in a network; and setting up the IT infrastructure that enables partners to communicate with each other.
Another downside to being an orchestrator is the way orchestrators tend to be held accountable for the performance of partners. When a partner makes a mistake, consumers may blame the orchestrator rather than the partner. This is what happened to Nike when it was discovered that labor practices in some of its suppliers were not up to standard. Nike suffered more from the bad publicity than its partner did. Similarly, software vendors may be hurt by the inadequate performance of an implementation partner.
For all these reasons, only strong companies are able to execute the orchestrator role. Without a solid power base, a core technology and deep pockets, it is difficult to build up an orchestrator position.
A bridge position may be within the reach of more companies. A company in a bridge position has alliances with two or more companies that are themselves not allied. For example, Motorola Inc. has an alliance with Microsoft to license an operating system for mobile applications. Microsoft's No. 1 competitor in this market is Symbian Inc., the mobile software joint venture owned by leading mobile hardware makers including Nokia Inc., Ericsson Inc. - and, of course, Motorola, which thus has an alliance with Symbian as well. Similarly, in 2003 Sony Corp. collaborated with two competing music exchanges on the Internet, Pressplay and MusicNet Inc., before recently setting up its own online music store called Connect. A final example is IBM, which collaborates with Microsoft and with Redhat Inc., an open-source company and rival to Microsoft.
Such positions enable companies to make use of different sources of information without having to engage in massive numbers of alliances. Even though Pressplay and MusicNet may not have boosted Sony's online music business, they did teach Sony valuable lessons that it used to set up its own store. A further advantage is that a bridge can spread its risks. When there are numerous competing technologies present in the market, betting on just one of them is usually dangerous. By setting up alliances with backers of competing technologies, the risk that a company may miss out on the eventual winner is diminished. Hence, IBM bets on both Microsoft and open-source software.
Another advantage of being a bridge is the way the role can position a company against an orchestrator. Because orchestrators tend to be established companies in their industry, they also tend to be conservative. They will usually not warm to ideas that are too far removed from their existing practices. Especially when ideas threaten to cannibalize an existing business, an orchestrator will want to oppose their adoption within the network it leads. This opens up an opportunity for another company to set up a bridge position. As long as Microsoft does not embrace open-source software, IBM has the potential to profit from a bridge position by partnering with Microsoft and Redhat.
A final advantage of bridging is that companies in a bridge position may be able to engage in divide-and-rule strategies. This is what Motorola tries to achieve by backing both Symbian and Microsoft software. By aligning with both, it hopes to ensure that neither one of them becomes too dominant and runs away with most of the profits in the mobile market. Sometimes it is better to have competing companies vying for your attention, rather than be tied to only one supplier.
The drawbacks of a bridge position are similarly clear. If alliance partners don't know right away that a company is pursuing a bridge strategy, they are sure to learn, and the perceived opportunism will not amuse them. As a consequence, the alliance relationship may become characterized by low trust. In that case a partner may not be willing to share some relevant information or give unfettered access to its best minds.
Next, a bridge needs to manage competing partners. Partners may pressure a bridge to opt for an exclusive relationship, or they may ask a bridge to ensure that no information spills over to their rival. Numerous bridge companies have had to set up "Chinese walls" between the alliance teams working with the competing partners. This increases the cost of alliance management and limits the extent to which companies profit from a bridge position. Finally, bridges are vulnerable to high partner attrition rates. Typically, the alliances of a bridge company tend to be less intense, making it easier for a partner to dissolve an alliance. The bridge may be left behind - and alone.
The decision to opt for a bridge or orchestrator position rests on the strategic position a company has in an industry and the dynamics in the industry. In industries with fast-changing technologies, a bridge position may be preferable to an orchestrator position, because it is easier to adapt the alliance network to changing technologies. In more stable industries like airlines or retail, orchestrator positions present opportunities for optimization and reaping economies of scale. This is particularly relevant in these mature industries. Bridging strategies may be less effective under such circumstances.
Companies are seldom an orchestrator or a bridge in all their businesses. Instead they may mix the strategies. They may be orchestrators in the core of their business, but they may take a bridge position in related, newly emerging technology fields. Or they may be orchestrators in their supply chain, but opt for a bridge position in their network of R&D alliances. The point, of course, is to make an informed choice.
Having more partners is not necessarily better, as the drawbacks of the orchestrator position show. Instead of entering into alliance after alliance without a clear plan, companies need to think through what they want their alliance portfolio to achieve. This is not a one-time issue. The evolving world of alliances requires companies to monitor their alliance portfolio continuously.
Companies also need to be aware of the strategies of their partners. Is the partner an orchestrator, a bridge, or neither? And what is the implication of this? It may be difficult to maintain your own identity when partnering with an orchestrator. When partnering with a bridge, you may indirectly be connected to a competitor. Studying the alliances of partners and competitors may reveal valuable clues about the competitive positions in an industry. Knowing who works with whom helps companies avoid choosing the wrong partner.
In short: partners beware. Your partner's strategy may affect your future more than you think. The network economy may be relatively new, but the challenges of mixing self- and mutual interest have long been acknowledged.
Almost 2,500 years ago, the Chinese warlord Sun Tzu wrote: "One must not enter into an alliance with another state sovereign before being fully acquainted with his designs."
That lesson applies to modern companies as well. - Ard-Pieter de Man
Ard-Pieter de Man is professor of organization science at the Eindhoven University of Technology. He is the author of "The Network Economy: Strategy, Structure and Management" (Edward Elgar, 2004) and chairman of the Association of Strategic Alliance Professionals in Europe.
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