Collaboration Among Competitors Global Economy

Collaboration AMONG COMPETITORS

Global economy no longer allows firms to operate separately as individual entities. Working in isolation is definitely not an option and more and more firms have realized that dependence on other firms has become important. It is however still true that despite the need for collaboration, most firms view it with suspicion and try it with reluctance. Firms prefer to capture market independently and argue that inter-firm collaboration leads to dependence, which is definitely not desirable for competition [Contractor & Lorange 1988]. Organizations see themselves as independent units that fight for market share while competing with rivals in a freely competitive environment. Inter-firm collaboration was a term relatively unheard of and competition with rivals had always formed the focal point of strategic management in organizations. [Astley 1984].

Global market conditions have however changed dramatically resulting in creation of an environment where survival on one's own has become difficult and nearly impossible. Apart from this, the belief that 'resource owners increase productivity through cooperative specialization' (Alchian and Demsetz, 1972: 777) has also driven many firms to collaborate with competitors. This has led to an unprecedented increase in inter-firm collaboration, which can also be seen as collaboration among competitors. But the results of these collaborations have been less than satisfactory making firms even more suspicious of entering such unions. (Parkhe, 1993) Collaboration among competitors takes place when firms recognize the assets each member has and the benefits that could be derived from mutual use of those assets. If competitors seem to be in a position where each can offer some benefits to the other and thus attain greater market share then collaboration is considered indispensable if not desirable. In many cases, collaboration takes place for minimization of costs:

One of the objectives of transactors seeking joint maximization of profits should be to create conditions, which allow them to achieve the joint maximization result of the zero transaction cost model (North, 1990: 107)

According to Herzfeld, there are four reasons which may drive a firm to seek collaboration and these are: "limitation of investment, limitation of risk, overcoming nationalistic prejudice, and merging skills and strengths." (Herzfeld: 26-27) Some other studies have sought to focus on only the "defensive" and "positive" reasons for cooperation and collaboration among competitors. Roulac's offers four motivations, which can help in explaining the reasons for collaboration, and they are all connected with financial support and investment and they are (1) Make available diverse resources and minimize risk, (2) increase options, (3) circumvent capital crisis, and (4) permit project-specific financing. In their rather dated articles in 1978 Berg and Friedman discussed the subject of joint ventures that also help to explain the real purpose of inter-firm collaboration. According to them such collaborations "serve as an external substitute for internal knowledge acquisition." (Berg & Friedman: 39) Berg, Friedman and Duncan offered three reasons to seek collaboration and they were "risk avoidance, knowledge acquisition, and market-power creation."

Yankelovich, Skelly, and White conducted a research for Coopers & Lybrand and found that due to acceptance of inter-firm collaboration, the "concept of the corporation as a self-sufficient entity" had come "under question." This research concluded that corporations "are abandoning their ideological stances of the 1970s" due to increased market pressures that have driven many to seek alliance and collaborate. This is now considered a more pragmatic approach. The four main incentives according to various interviews in the study were "complementary strengths," a reason cited by 80% of interviewees, "shared resources" by 48%, joining hands with a more powerful firm, by 43% and risk sharing by 39%.

Some studies have indicated increased productivity and higher performance levels for firms that collaborated although there are exceptions. (Hagedoorn and Schakenraad, 1994) Several other studies argue in favor of collaboration stating that firms are more likely to survive if they collaborate than if they don't (Mitchell and Singh, 1996). Resource access and sharing has been cited as the most common reason for enhanced performance. Some studies suggest that with greater collaborative use of technology, manufacturing facilities, finances, and other resources lead to better performance since the same resources would have not been available to lone players. (Baum et al., 2000; Oliver, 1990)

But collaboration despite indications of higher performance has led to higher dissatisfaction as well. It can create numerous problems for firms entering into the union and some of the common risks are increased dependence, confusion, sharing of trade secrets and other information and adaptation issues (Williamson, 1991) Thus it is not entirely easy to determine where benefits lie and where risks exist. The right balance could be achieved if benefits outweighed the risks but this is easier said than done. Managers normally use sales and growth levels as indicators of success of a collaborative union. Sales levels must increase consistently to indicate success because higher sales translate into greater profitability. Consistent growth in sales indicates that a firm is successful and is considered a worthy competitor.

Strategic repertoire today calls for increased cooperation. Collaboration means cooperative action in some ventures and this cooperation has become a major strategic tool for firms in this highly competitive global economy. But how do firms compete with their rivals when they are cooperating with the same? A closer look reveals that firms do remain competitive even when they share a strategic alliance with their rivals. This competition however may not always be their first priority as one of the three approaches are used: a) firms can cooperate first and compete later, b) firms can cooperate while competing or c) firms can cooperate with alliance partners and compete together with the outsiders.

The first approach of cooperate first and compete later is adopted when firms need to build their strategic and competitive strengths before launching a competitive war with the rivals. In this case, firms cooperate with partners for expansion of market so each partner has greater share and presence in the market. Transformation of economic structure is not an easy problem to overcome and thus creation of value becomes critical. This is when 'cooperation first' approach is adopted and is expected to work. In other words, when a firm needs more technological know-how and higher resource capability to launch a new product or service, it is then not easy to transform the economic infrastructure of the firm and then seeking a partner is advisable. R&D collaboration is very common in such cases as firms pool their resources especially their knowledge tools to successfully introduce a new product.

The second approach, which is cooperation while competing, is one of the more common and successful ones. Many firms are currently using this approach including General Motors and Toyota who despite their NUMMI joint program are successfully competing with each other globally. Similarly Ford and Mazda also compete with each other while they share many resources and capitalize on technological know-how and other kinds of tacit knowledge. This model is popular even outside the automobile industry. One of the best examples of this in the semiconductor world is collaboration between six giant firms, which took place due to rising costs of product development. In the face of such cost demands, six firms including Intel Corporation and Micron Technology of the United States, NEC of Japan, Samsung Electronics and Hyundai Electronics of South Korea, and Infenion Technologies AG, entered a strategic alliance. With the exception of Intel, the group makes microprocessors chips and enjoy 70% share of the global market for memory chips.

The companies thought this unusually broad alliance should be more cost effective than going alone. The accord refers to a goal of developing high-performance, advanced DRAM technology for the marketplace in 2003. This accord would provide information to facilitate the development of related PC components such as a chipset, which acts as an intermediary between DRAM and the central processing unit (CPU). Consumer interest in high-performance PCs that provide advanced multimedia and graphics is pushing companies to develop higher-speed CPUs that require more powerful yet affordable DRAM chips. While firms cooperate in certain field or venture, they basically compete with each other in all other areas. This allows greater efficiency and accounts for lower cost demands. Similarly many airline firms also cooperate while competing. However this is done to develop or strengthen certain facilities, which once achieved means the firms, can go their separate ways and compete like they ought to.

The third kind of cooperation occurs when firms unite to form a strong competitive alliance against other rivals. In Japanese, these kinds of inter-firm collaboration are common and are known as Keiretsu. Firms would collaborate to achieve synergy and build a powerful front against rivals. But these are different from inter-firm collaboration found in the U.S. And Europe: "Unlike U.S. And European conglomerates, the hundreds of companies in each keitretsu are highly decentralized. While being separate and independent, they are part of an incredible communication network that allows them to cooperate with each other when there is a mutual advantage to do so." (Starr: 145)

Mitsubishi and Sumitomo are good examples of Japanese collaborative unions. The firms seek to benefit from whatever a partner has to offer. This is different because size of the firms does not matter as long as each is willing to support the other in mutually beneficial manner. Unlike U.S. collaboration units where financial assistance plays a critical role, in Japan, it is the infrastructure that matters.

Unlike the U.S. conglomerates, which accent financial management, Keiretsu are oriented to cooperate in accord with whatever contribution a family member can make to help the other family member. Business units may be cooperating as suppliers of parts, lenders of capital, contributors of production know-how, or providers of access to markets. All these happen quietly. It takes a lot of digging to find out who is supplying what to whom. Even then, many of the arrangements cannot be uncovered. Most of the agreements will never be known. Keiretsu behavior epitomizes cooperation based on mutual advantage. Keiretsus actively seek out joint ventures with a broad range of partners, all over the world. (Starr: 146)