Environmental change and partnerships (or alliances) – two business topics we have studied in the past three weeks – are inevitably bound in the world of business. In the article, “Strategic repositioning by means of alliance networks: The case of IBM,” Dittrich, Duysters, and de Man (2007) use the IBM case study to contend that these partnerships can be utilized as a vehicle for significant internal changes. In a period spanning about 20 years, IBM used over 60 alliances to change the strategic direction of its firm from a computer manufacturing company to a dominant service provider. The transformation of IBM was so severe that by the beginning of the 21st century "most activities that characterized IBM in the late eighties and early 1990's have been farmed out to multiple layers of specialized suppliers (Dittrich, Duysters & de Man, 2007, p. 1501)."
When comparing the cases of IBM and Wal-Mart it is apparent that larger organizations play by a different set of rules when considering the use of partnerships. A larger company’s prominence (i.e. revenue, experience, infrastructure, etc.) can provide the unique opportunity to participate in an aggressive exploration strategy, one defined by “experimentation with new alternatives and the exploration of a new (technological) field (Dittrich, Duysters & de Man, 2007, p. 1497).” When I think of “exploration,” the word “access” comes to mind. IBM pursued alliances to gain access to capabilities that were outside its current realm – such as the micro processing industry of Intel – and Wal-Mart pursued the Bharti partnership to gain access to an untapped international market (Dittrich, Duysters & de Man, 2007; Bose, 2012).
Smaller firms are unable to pursue such ambitious partnerships with regularity because they operate on an entirely different cost-benefit tradeoff paradigm. Size and revenue determine (to a large extent) the amount of risk, or transaction costs, that a firm can acquire from its pursuit of partnerships (Barney & Hansen, 1994). According to the authors of the week 4 readings, agreements such as equity alliances and weak-form trust partnerships can require relatively low risk (Gomes-Casseras, 1993; Barney & Hansen, 1994). In the late eighties, IBM, realizing that its strategy was ill-suited to adapt to the rapidly changing computer industry, decided to pursue a series of low-risk partnerships that would eventually change the internal direction of the company. Due to this high volume, IBM had the ability to wait and see which partnerships would be profitable for the firm. This strategy allowed IBM to keep its eggs in several baskets, so to speak – which in turn gave IBM the flexibility to react to different changes in the market
One might argue that the size of small firms can lead to added agility in a changing business environment, minimizing the need to pursue ambitious partnership strategies. This might be true in some cases. Nevertheless, these smaller firms must employ more conservative partnership strategies in order to survive. When considering a company’s exploratory strategy of partnerships, larger firms have the access and ability to pursue more opportunities.
References
Barney & Hansen, (1994). "Trustworthiness as a Source of Competitive Advantage." Strategic Management
Journal, Vol. 15, pp. 175-190.
Bose, I. (2012). "Wal-Mart and Bharti: Transforming Retail in India." Asia Case Research Centre. pp. 1-18. (Full
Article)
Dittrich, K., Duysters, G., de Man, A. (2007). Strategic repositioning by means of alliance networks: The case of
IBM. Research Policy, 36 (10), 1496-1511. Retrieved February 19th, 2012 from SciVerse.
Gomes-Casseres, (1993). "Managing International Alliances: A Conceptual Framework." Harvard Business School.
pp. 1-20. (Full Article)
Hi Casey,
ReplyDeleteThis is a really interesting comparison. I agree with you regarding the advantages that big companies have over smaller companies. Their "reputation" along with all the resources they bring along tend to also make big companies more attractive to potential partners (Gulati, 1998, p.301).
Adriana
Nice post, Casey. Thinking about it the other way, what do small firms gain by partnering with IBM? Why is IBM an attractive partner? Does its reputation play a role in this? Does the social network in which IBM is embedded influence the decision making of potential partners?
ReplyDeleteYou also say that small firms are agile and therefore do not have to rely on alliances. The Gomes-Casseres (1993) reading brings up an interesting counterpoint to this statement with the example of Mips Computer Systems (p. 9). What happened to this small company after it built an extensive network of alliances (p. 14)?
Courtney,
DeleteIn the second paragraph of my post I argued that large firms could seek exploratory alliances for access to untapped markets. Looking at it from the opposite perspective, I believe small firms seek partnerships with larger firms like IBM for access to the network of the larger firm, which includes exposure to a larger customer base and network of other companies. Dittrich, Duysters, & de Man (2007) speak about the changes in “network embeddedness” (p. 1501) as IBM assumed a more aggressive exploratory strategy. This “network embeddeddness” can be synonymous (in some cases) with the “relationship embeddedness” Gulati (1998, p. 296) refers to in his article. Furthermore, Gulati (1998) refers to the term “embeddedness” throughout his article to refer to the already formed social relationships formed through business interactions. Much like other larger firms, IBM gives smaller firms access to this already formed network which could result in exposure to endless possibilities.
I did not mean to say that small firms do not have to rely on alliances. That would have been a blanket statement that would set me up for countless counterarguments. My last paragraph was to answer those critiques who might argue that my theory – larger firms have more opportunity to form alliances – was insignificant since smaller firms can find other ways to adapt to a changing environment.
The Mips Computer Systems example further proves my theory. Mips was the perfect example of a smaller firm that was far too ambitious in its exploratory alliance strategy. Sure, this strategy produced short term gains for a period of time, but eventually Mips went out of business because of the “appropriability constraint” incurred due to the significant dependence on corporate partners (Gomes-Casseres, 1993, p. 14). Mips took on far too much risk relative to the size of their company. With risk comes dependence, and with dependence comes a loss of strategic control over a company’s strategic direction.
Hey Casey,
ReplyDeleteI did not realize that over the last "20 years, IBM used 60 alliances" to change its company brand and image. that was fascinating having grown up in Chicago and watched IBM restructure so many times. I also witnessed this first hand when Pr firm Shandwick International merged with a smaller boutique firm, The Weber Group in 2001. Since that time Weber-Shandwick has created alliances with more than 30 smaller firms to become the latest PR conglomerate. But, I wonder if "Bigger is Better" what is the collaborative advantage for companies of equal size, depth and breadth coming together? Just a random question of wonder :-).
Enjoyed your post a lot. Thanks!
~LaVenia