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Allying for the Future

Overcoming the disciplined limitations of core competence to capture new markets used to be difficult. Now, its proponents show how partnerships can enable companies to overcome those restrictions.

He co-invented it. So, it is entirely fitting that strategy guru Gary Hamel--half of Prahalad + Hamel--should be the one to co-transcend core competence. Implicit to his new thesis--presented in Alliance Advantage, co-authored with insead professor Yves L. Doz--is the acknowledgement that core competence often prevent companies from achieving 3 crucial objectives: building critical mass; reaching new markets; and plugging skill gaps, for all of which the company must go beyond its present capabilities. Of course, none of them is an end in itself; they're only necessary for capitalising on new opportunities, most of them in offering previously-undelivered products and services.

Is diversification the only option before the core-centric corporation in such situations? Must, for instance, a telephone services company that wants a piece of the satellite telecommunications business expand sideways into running its own satellite infrastructure? Of course not, answer Hamel and Doz. The portal to new businesses is the alliance: a loosely structured, open-ended task-centric collaboration between 2 or, usually, more companies who may well be competitors in many businesses.

But if core competence was all about competing for the future, why must companies go beyond them? Simple: tomorrow's opportunities lie not just in providing single products or services, but in offering entire systems and packages to the customer. That's because the constant narrowing of the need that a single product can meet is leading to such a proliferation of options that the customer is getting bewildered. Increasingly, she is displaying her preference for integrated solutions, which combine the individual need-fulfilling abilities of different products and services. And a core competent company cannot do that on its own.

Hence the need for the alliance. Drawing on John von Neumann's Game Theory, translated by Adam Brandenburger and Barry Nalebuf into the tenets of co-opetition, Hamel and Doz identify 3 specific benefits that lead to the 3 objectives of alliances:

LINKAGE. A competitor isn't always a thorn in one's side; the markets and customers at his disposal can be co-opted through an alliance. As a result, instead of targeting one another's shares of the market, 2 allies can combine their resources to target other rivals' markets instead. Crucially, the alliance effectively increases the scale of operation of each to a point where the customer might derive greater benefit from patronising them. For example, when 2 airlines form an alliance to offer a global service, fliers might prefer the alliance, which can offer for seamless travelling, to stand-alone airlines.

LEVERAGE. Termed co-specialisation in the new alliance theory, the advantage flows from the pooling of the assets, relationships, brands, and overall competitive positions of the alliance partners. Each set of capabilities becomes more valuable when used in conjunction with the other--just as the ability to manufacture cheap cds, for instance, becomes more valuable when combined with the ability to create popular music--rather than separately. And, in the process, the alliances creates a value-offering that can appeal to markets which would have remained closed to the partners operating individually.

LEARNING. All alliances create value, but what matters is the ability of the allies to capture that value. In other words, when Company A forges an alliance with Company B because the latter brings a bundle of skills and abilities that the former doesn't possess, Company A must invest resources and manpower in transferring those competencies to itself. For, the alliance won't be permanent, but the learning can be hardwired into the organisation. Thus, an alliance between 2 auto-makers from diverse environments--say, Japan and the US--can add to the internal skills of both through mutual learning.

In the past, companies viewed alliances as entry-vehicles into peripheral businesses, with the partnership being used to contain risks. That position, warn Hamel and Doz, is passé. Today, alliances must be formed in areas central to a company's interest--both strategically and financially. And as the reward potential of alliances rises, putting 2 and 2 together to make 5 won't be easy.

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