Apple Computer’s John Sculley and other CEOs pursue strategic alliances to tap new technologies and share development costs. Apple successfully collaborated with Sony to develop the PowerBook notebook computer: The Japanese company’s miniaturization expertise enabled Apple to reduce PowerBook’s size and shorten its development time. In 1991, Apple paired with IBM and longtime supplier Motorola to develop RISC-based Macintosh products and a new open-systems platform.
For executives facing mounting competition in global markets, strategic technology alliances offer a promise of dramatic improvements in competitive position. STAs take many forms, ranging from licensing and cross-marketing agreements to more complex cooperative development or manufacturing arrangements to joint ventures.
To be sure, such alliances are fraught with risk. Apple and other successful companies sit at the center of a partnership network like a spider in its web-in full control of its environment-while other companies find themselves tangled in a maze of conflicting, overlapping relationships. Lack of leadership, turf wars with internal R&D, or a failure to stipulate criteria for success can sabotage STAs. But alliances that are part of a broader, companywide technology strategy can cut costs, boost the bottom line, forge synergies, and secure a competitive advantage.
THE KEY TO SUCCESS
Arthur D. Little estimates that
Alliances are almost always the fastest and most cost-effective way to gain technological competence. They enable a company to move quickly to enter new markets. Toward that end, Houghton Mifflin’s software division relies exclusively on a licensing strategy. This allows it to “stick to its knitting,” that is, to design reference, writing, and proofreading software products. Products such as International CorrectSpell and the American Heritage Electronic Dictionary are incorporated as enhancements in a variety of electronic environments-from typewriters to mainframe computers-as spell-checkers and thesauruses. Houghton Mifflin generally forms partnerships with companies on new applications, such as the Wizard by Sharp, equipped as an add-on integrated circuit. Houghton Mifflin looks to its partners for market access and distribution and for the expertise to adapt its products to specific hardware platforms.
In each market, the company moves quickly to identify top-tier alliance partners with the strength, stability, and experience to succeed in emerging markets. Houghton Mifflin rarely signs exclusive agreements. It maintains the leverage to pursue this strategy through a constant stream of enhanced features and functions, made possible by a sustained investment in R&D.
RACING FOR PROFITS
Speed to market is particularly important: The greatest share of profits usually comes at the beginning of a product’s life cycle. In some highly competitive sectors, such as the computer industry, being late to market can spell death for a product. If a company is sufficiently quick to market, it can pre-empt competition and lock up market share. Since development and perfection of technology is one of the most time-consuming parts of product development, outsourcing key technology can dramatically cut lead time.
Computer companies often turn to suppliers or vendors for important components. Most laptop computer makers source liquid crystal display technology from Sharp or Matsushita, companies that have made the massive investment needed to commercialize LCDs. Hewlett-Packard is a leader in laser printers, though it sources laser technology from Canon.
Similarly, Philips N.V., the Dutch consumer electronics giant, recently teamed with other firms to develop a digital tape recorder that uses a digital compact cassette Philips believes will soon become the industry standard.
Philips worked with Seagate Technology to reduce development costs and speed the product to market. The Dutch company paid Seagate for development assistance and then worked out an exclusive supply contract. Philips could have tried to go it alone, but in teaming with Seagate it secured a top-flight supplier. Philips took the additional step of forming an alliance, modeled after its arrangement with Sony, with Matsushita.
BUILDING A PARTNERSHIP
Partners in STAs must manage the venture to achieve rewards while minimizing risks. The fast-moving, highly competitive nature of technology-driven businesses exacerbates the problems inherent in all alliances and introduces some new ones. Typical issues involve control, the shifting balance of power within an alliance, and the fear of losing competitive advantage.
Control issues are rooted in the different objectives and perspectives of the alliance partners. The company acquiring the technology is reluctant to become too dependent on an outside source for an important technology and consequently has a strong desire to control its use. It may demand exclusive rights to a technology or seek to cement the relationship with cross-licensing or cross-marketing agreements. It also may want to cultivate alternative suppliers to maximize bargaining power and maintain a window on technology. On the other side, the technology supplier may also wish to work with several partners and to limit each partner’s access through narrowly defined alliance agreements.
In sum, control problems reflect the balance of power in an alliance. Because the balance can shift periodically, this is an ongoing source of instability.
Another problem involves potential technology leaks, particularly when alliance partners are competitors. In the area of TV components, Japanese companies used STAs to learn valuable marketing and distribution skills prior to entering their partner’s home market.
Fearful that Japanese companies will unfairly exploit a partnership, some Western firms are training scientists to protect information, while others are simply avoiding such collaborations. Yet another response has been to limit cooperation to carefully defined areas. But even this fails to allay fears that contact between allied organizations will result in unintended-perhaps even undetected-sharing of critical information. Members of the Microelectronics and Computer Technology Corporation, a consortium of computer and semiconductor companies founded in 1983, were originally reluctant to assign senior technical people to the consortium because they feared unintended technology leakage. Assignment of less-experienced or middle-level technical personnel resulted in severe quality problems that almost sunk the consortium. Participants had to negotiate stronger commitments from member companies, requiring that senior personnel be assigned to the consortium.
Partners may also fail to reap the full benefit of an alliance because of conflicts with corporate R&D. Technology alliances most often originate at the product or division level. In such cases, the goal may be to get a product to market as quickly as possible. This may clash with long-term corporate goals and lead to turf battles between R&D and divisions. At the very least, coordination problems can arise. When each division goes it alone in pursuit of profits and market objectives, it is difficult to harness the technology for future use. It is equally difficult to leverage acquired technology or to devise an integrated acquisition strategy.
A Siemens executive wryly notes, “Our former CEO often said, ‘If Siemens only knew what Siemens knows.’ “
One way to exploit externally acquired technologies efficiently is to relate them to a firm’s critical technologies. Siemens, for example, maintains a list of such technologies, which it updates on a regular basis. These may include proprietary and externally acquired technologies. By monitoring its activities and requirements, the firm keeps track of important relationships. Philips has created a software platform that records its technology relationships. But the software is carefully monitored and available only to those at a certain level.
At Apple, product groups have broad leeway to cut their own deals when making alliances, and there is much negotiation on both sides at the point of contact. This nurtures the relationships and trust essential to manage alliances. The corporate role at Apple is to monitor the big picture and to ensure that the partnerships make sense.
Power struggles sparked by incompatible personnel can be magnified in technology alliances, partly because STAs tend to be smaller than other alliances, more specialized, and particularly dependent on a few key individuals. When alliances are pursued opportunistically, a lack of leadership can result in lack of direction. Often no one has overall responsibility for the success of the alliance. And people are reluctant to take responsibility for outcomes they do not control.
Another potential problem: Partners may need to adjust their expectations. Apple learned what its Japanese partners do well and not so well, and changed its management style accordingly.
Among the major failings of
Successful technology alliances identify risks and sources of conflict at the outset and work to contain them. It is important to understand the alliance objectives and the agreement between partners on goals, objectives, and outcomes.
Companies also must develop criteria to gauge the success of an alliance. Is the objective increased market share, reduced development time, or lower manufacturing cost? Quantifiable measures of success must be juxtaposed with qualitative measures. Is the goal of the association to gain an understanding of a new technology? Short-term marketing or financial goals should be balanced against longer-term strategic objectives. Only through a rigorous process of identifying what is expected of an alliance can the corporation begin to evaluate its usefulness.
Technology alliances should be pursued where there is a potential for mutual benefit. Such benefit is seldom limited to an exchange of technology based on narrow licensing agreements or long-term supply contracts. Long-term partnerships involve access to a complex set of skills or a bundle of competences that are not easily transferred. In 1987, for example,
Another example: Lacking the expertise to become a leader in robotics, General Motors formed an alliance with
Why is such a combination successful? Partly because it was able to identify joint and complementary objectives. Complementary alliances are intrinsically less threatening, and the issue of internal competition usually disappears.
Corning Inc. has formed some 38 joint ventures over a span of 60 years. The firm has used alliances to gain market access for a product to which its technology holds the key, as in the case of Owens-Corning Fiberglas, founded in 1938; to “leap downstream,” as in the case of Siecor, a joint venture with Siemens to leverage Corning’s optical-fiber capability; to apply internally developed technology; and to gain access to new technologies, as in the case of Genencor, an R&D alliance with biotech leader Genentech. Corning’s technology alliance strategy emphasizes several key principles, including compatibility in strategy and culture, comparable and readily identifiable contributions by each partner, and the ability of the venture to develop new areas of business that do not conflict with existing operations.
DEFENDING COMPETITIVE ADVANTAGE
As Professors Gary Hamel and C.K. Prahalad pointed out in the January/February 1989 edition of the Harvard Business Review, while successful STAs rely on a balance of “gives” and “gets,” it is also necessary to protect proprietary knowledge through measures such as exclusive licensing provisions, right-of-first-refusal provisions, non-competition agreements, and other contractual devices. In an article entitled, “Collaborate With Your Competitors And Win,” Hamel and Prahalad maintain that another solution is to make the transfer of technology contingent on a partner’s fulfillment of its obligations. Motorola agreed to share its advanced microprocessor technology in exchange for use of Toshiba’s distribution capability. It released technology in small doses, as Toshiba delivered on its promise to increase Motorola’s penetration of the Japanese semiconductor market.
Here’s another defensive strategy: When the contributions of the partners occur at different stages of the business process-for example, when one partner contributes a product design and the other manufacturing experience-a serial partnership is possible. Each partner’s contribution is readily identifiable, and the contact can be limited to a simple hand-off of work.
As Hamel and Prahalad wrote, when partners work on the same value-creating activity-for example, joint product development or joint operation of a manufacturing plant-there is generally more contact between employees with similar functional responsibilities. Establishing separate facilities for the alliance or channeling requests for information through a gatekeeper can help to limit information transfer. However, the level of contact inherent in a technology alliance where partners collaborate closely on joint activities almost always generates the transfer of information beyond the scope of what could be covered by these narrowly drawn agreements. Scientific and engineering people tend to share information freely. This reflects their enthusiasm for the scientific discovery aspects of the collaboration, but also can result from a lack of understanding of the alliance’s objectives or the corporation’s long-term strategic objectives.
Companies seeking to ensure a consistent approach to external acquisition must design a companywide technology strategy and integrate technology management at the corporate, division, and product levels.
Although technology acquisitions do not need to be centralized, there should be consistent and uniform criteria and guidelines for technology sourcing and management throughout the company. Maximum benefits are realized when external technology relationships are linked to internal R&D.
Some farsighted organizations, including Apple, have designated a Chief Technology Officer to spearhead the management effort. John Sculley has designated himself as CTO. Whatever the officer’s primary title, he or she must gain the confidence and support of senior management. Armed with such a mandate, a CTO can give alliances a fighting chance and create an aggressive strategy based on the best available technology-whether acquired or developed.
There is no single, best type of technology alliance. In general, the structure of an alliance depends on its objectives, the type of technology being sourced, and the capabilities and corporate culture of the organization. Following some general guidelines, however, can increase an STA’s chances of success.
For basic research, companies can use university and government partnerships or industry consortiums. For example, the Microelectronics and Computer Technology Corporation (MCC) is a consortium of computer and semiconductor companies founded in 1983. It was established to develop generic technology for software, VLSI/CAD, packaging/interconnect, and advanced computer technology. Such relationships can provide valuable insight into developing technologies. Participants in collaborative arrangements must develop mechanisms to transfer technology back to the parent organization. Commercialization of these technologies will require further development.
Licensing agreements can be effective for a simple hand-off of a technology. They work best for one-time transfers of a stand-alone technology, where clear ownership offers some legal protection. Licensing is most practical in the case of intermediate products in the supplier chain where the licensee can leverage off existing technology to create another product. On the other hand, with final products such as pharmaceutical drugs, the logic of licensing is less compelling because little can be added to the existing technology. Drug companies typically charge so much for a license that little room for profit is left. For licensing arrangements to survive, the licenser must offer a steady stream of innovations to maintain a competitive edge and to provide added value to licensees. The licenser must also anticipate dealing with licensees who exploit inevitable ambiguities in agreements to “invent around” the licensed technology.
Joint ventures or collaborative agreements with potential competitors should be limited to areas outside the core competence of the corporation. They also should be evaluated to identify mutually beneficial situations for both partners. Whereas technology lies at the strategic core of the organization, ownership is essential to protect the competitive edge. Alliances in core businesses carry the risk that a mismatch could jeopardize the long-term future of the organization. The ill-fated ATT/Olivetti alliance hurt the foundation businesses of both companies, as neither was successful in marketing the other’s products overseas.
Alliances can be used for foundation businesses that need quick access to emerging technologies, but the long-term goal should be ownership. Merck allied with Immulogic Pharmaceutical to develop drugs for auto-immune diseases such as rheumatoid arthritis. Hewlett-Packard entered the Japanese electronics market through an alliance with Yokogawa Denki. Such alliances should be structured so that they eventually become wholly owned subsidiaries.
For non-core businesses, alliances allow the corporation to make trade-offs among competitive position, improved economics, and reduced risk. Because the corporation’s commitment to a non-vital business is substantially less than to a foundation business, alliances can provide greater flexibility.
John F. Magee is chairman of the board of Arthur D. Little Inc., an international management and consulting firm based in
John F. Magee is chairman of the board of Arthur D. Little Inc., an international management and consulting firm based in