Where does one company stop and another start? How alliances shape businesses.

The question of whether modern businesses have time for classical business strategies is becoming increasingly apposite. Whether or not you subscribe to the view that the future is coming faster than ever before, the world of business is certainly very different from that which existed just a few years ago. The effects can be felt in factories, shops and offices around the world. But they are also to be seen in the halls of academe.

Rita Gunther McGrath

Rita Gunther McGrath

Business school professors are starting to realise that a lot of their assumptions about what governs the success of companies no longer hold true. Not long ago, for instance, Rita Gunther McGrath of the Columbia Business School published The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business (Harvard Business Review Press). Interpreted by many as a challenge to the ideas of strategy doyen Michael Porter, the book essentially describes what many in the field have suspected for a while: that in the fast-moving environment that is modern business the idea of developing a long-term sustainable business strategy is, if not untenable, then at least highly problematic. McGrath’s point is that these days businesses need to be more agile – spotting opportunities quickly, exploiting them and then moving on to the next thing before the market is exhausted and before the competition catches up.

In Network Advantage: How To Unlock Value From Your Alliances and Partnerships (Jossey-Bass), Henrich Greve, Tim Rowley and Andrew Shipilov go further. Rowley, a professor at Toronto University’s Rotman School of Management, told a recent audience in London “the old thinking isn’t working”. Concepts like “the five forces analysis” – the factors Porter used to decide whether a market was attractive or not – were difficult to use as the basis for analysing an industry when the models did not work the way they used to. There was, he said, a “blurring” of boundaries that necessitated a new way of thinking.

The approach he and his colleagues, professors at INSEAD, have come up with is based on the notion that many successful businesses are co-operating with rivals at the same time as competing with them. Indeed, the authors say that data from Thomson Reuters suggests that companies around the world forged nearly 42,000 alliances of various kinds between 2002 and 2011.

But just forming the alliances is not enough. Alliances, like other facets of business, come in various shapes and sizes. For the book’s purposes, they include partnerships and joint ventures, for example. More important, not all are successful, and these failures – said to account for a half of all alliances – can be detrimental to companies’ competitive advantage.

Rowley and his colleagues point out that it is important to realise that alliances do not work in isolation. Such is the complexity of modern business, a company may have several different alliances. “The benefits reaped from an individual alliance depend on the other alliances surrounding the firm – its alliances with other partners, its partners’ alliances with other partners, and the overall network of alliances,” they write. Understanding how each alliance fits into a wider network may increase the chances of success. As they add: “It might not be bad luck or bad timing that takes you down, but a bad alliance portfolio and a bad position in your alliance network.”

Helping companies understand where they should be in the alliance network is at the core of the book. A firm’s prosperity depends on its position in this network – which is a system of alliances interconnecting all firms within its industry and beyond. Indeed, Rowley and co describe the competitive advantage derived from a firm’s ability to obtain three things from the alliance network – information, co-operation and power – as “network advantage”.

There are three “perspectives” to this advantage. The first-degree advantage concerns individual relationships. Two key factors contribute to this – the partners’ compatibility and their ability to complement each other’s skills and knowledge. The second-degree advantage stems from looking at all the partners in the alliance portfolio and at their connections. It is “the unique ability” to obtain timely access to information, secure co-operation, and gain power by using the connectionsbetween the firm’s various alliance partners.

According to Rowley and his colleagues, there are three basic alliance portfolio configurations – hub-and-spoke, integrated and hybrid. Hub-and-spoke is a portfolio with one business at the centre (the hub), with separate connections (the spokes) to each of the other partners, which are mostly not connected to each other. Integrated portfolios are those where the business is connected to partners that are also mostly connected to each other. The hybrid is, of course, a combination of the two, with the business at the centre having some connected partners and some that are unconnected.

One form is not intrinsically better than the others; it depends on what the business is seeking from the alliances. Hub-and-spoke arrangements are considered very helpful for creating breakthrough innovations, while integrated arrangements are more useful where the aim is to establish norms around extensive exchange of information and so are useful in managing complex projects and encouraging incremental innovation. Steve Jobs was seen as a master of the hub-and-spoke network through his ability to learn aspects of one industry and combine that with what he had picked up from an entirely separate connection with another business, as when he developed the iPhone.

The third-degree perspective concerns how a business’s partners share connections to other businesses. Having connections with other well-connected partners will increase a business’s status and hence is attraction to other future partners. One way that a business can increase its allure is by building its brand – through such means as thought leadership campaigns and increased visibility in its industry. But such activities will count for nothing if it has not also gained a reputation as a good collaborator. In other words, business leaders need to make sure they extra benefit from their alliances but they should be wary of being seen as exploitative – something that today’s technology companies might want to bear in mind as they become involved in all sorts of sectors beyond those in which they started out.

John Owrid and Roger Trapp now write for Forbes on a weekly basis. To keep in touch with their work please click on the links to follow them.

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