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Ranjay Gulati is a professor at Harvard Business School. He is an expert on leadership, strategy, and organizational issues in firms. His recent work explores leadership and strategic challenges for[…]

Collaboration between businesses isn’t rocket science. So why are so many companies missing the boat on creating alliances?

Question: How does collaboration between companies work in rntoday's competitive landscape? 

Ranjay Gulati: rnCollaboration between businesses has been an old, old idea. You can go rnback to the East India Company, go back to the old shipping ventures rnthat were done where a ship will go to the east to get silk and spices rnand have a bunch of business people who would basically pool resources rnand say, "Okay, I’m investing in this shipping venture, and I’ll get a rnpiece of the action, a percentage of the profits."

But I think rncollaboration today has taken on a totally new meaning. As you see rncomplexity on the demand side and supply side, you see what I call, rnshrinking the core, expanding the periphery. So, let’s look at the rnsupply side. On the supply side, you have companies saying, I can’t rnproduce all the inputs that go into my part anymore. So I want to shrinkrn what I used to all core. Core was a lot of things that I produced rnmyself. I’m going to do much less of that myself. And you know, so they rnstart to do a whole variety of things. Take a look at this device, you rnknow, you all know this device, an iPhone. By some accounts, 90% of the rninputs that go into this device are not made by Apple. A vast majority rnof them being made by a whole range of suppliers, who work very closely rnwith Apple to design, develop, configure, make sure all of these things rnare interconnected. Now, that's shrinking the core. 

At the rnsame... that has to be with the supply side of complexity all of the rnthings they had to get together to make it work. Apple—this is the rncompany that used to produce almost everything itself. Printer cables. rnSo, they finally saw the light, they had to operate in a much more rninterconnected world. 

Now you also have demand-side complexity. rnCustomers who are much more demanding, wanting different things. And so rnyou see what I call expanding of the periphery. Organizations saying, myrn customers need to receive bundles. They need to see solutions. They rnneed to be able to customize what they have. I’ll go back to the iPhone rnagain. A hundred thousand applications in the applications store. None rnof which are made by Apple, but allow thousands of us to customize this rndevice for our special needs. And all Apple gets is 30% off the top. rnGreat business model. So you start to see organizations shrinking their rncore, expanding their periphery, operating in a much more interconnectedrn way. 

And they are not alone. Another example of a company that Irn looked at is the largest mobile operator in India, Bharti AirTel. rnBharti AirTel outsourced first the maintenance of a cell tower network. rnSo they were not managing or maintaining its cell towers anymore. They rnoutsourced the entire IT infrastructure to IBM. Subsequently, they rndecided to spin off the ownership of their cell towers. So, here’s an rnorganization that does not own its cell towers, does not maintain its rncellular network, and does not maintain its IT systems, or own them. Andrn you say, "What do you do?" And it’s growing 35% a year, the largest in rnIndia which is the fastest growing market in the world. 

Now, I rnalso would add that this is not for the faint-hearted. You can look at rnthe recent example of Boeing and the delays in its 787, some which is rnattributed to its inability to coordinate effectively with its rnsuppliers. And by some accounts, depending on how you define this, half rnor more of alliances may fail. So, you have to figure out how to manage rnalliances because if you’re going to make this a centerpiece of your rngrowth, you have to know how to make alliances work. And there’s some rnbasic fundamental principles to effective collaboration that rnunfortunately many organizations miss and in those cases this completelyrn backfires on them. 

Question: What are some examples rnof companies that have collaborated effectively? 

Ranjay rnGulati: So I think collaboration is not rocket science. It’s human rnnature, how do you work together with another entity and make it work. rnAnd I think there are some basic principles that are important. The rnfirst of them is strategic alignment. Do we share similar goals, or rncompatible goals? You don’t have to have the same goals; you’ve got to rnhave compatible goals. And furthermore, these are things that develop rnover time, you have to continually reaffirm with each other that do we rncontinue to share compatible goals? We may have had compatible goals rnback then, do we have them today? So, how does goal alignment work and rnevolve over time is key. 

Then you have structure issues. When rnyou form these collaborations, you have two aspects of structure, rnthere’s an economic structure and then there’s a government structure. rnThe economic structure is about incentives, carrots and sticks. Who doesrn what and what are the penalties associated with that. That gets done rnpretty well by the lawyers and business development people who are rninvolved in the alliance, the structuring of the incentives in the rncollaboration. But the second part, which has to do with the government rnstructure, which is the decision-making, information sharing, how thingsrn will get done, doesn’t happen. And it doesn’t happen because the guys rnwho are going to manage the deal are not involved in creating the deal. rnAnd so the guys that are doing the dealmaking are not so interested, rninvolved in that part of it. 

The third piece of the equation is rnthe process of behavioral issues. This one really kills them. And these rnhave to do with the dynamics of interaction between the entities. Are wern culturally aligned? Are we behaviorally aligned? Are we emotionally rnaligned? And you might say; how can two organizations be emotionally rnaligned? You can look at organizations that have long histories of rncollaboration. Fuji-Xerox, been around for 50 years. CFM, which is rnaligned with GE and a French company, to make jet engines; been around rnfor decades. So you have alliances that do persist and endure over time rnand they do so because they have a structure that is aligned, the goals rnare aligned, you have governance in place and you have the behavioral rnsides in place. And it’s the coming together of all of these that allow rnyou to really be an effective collaborator. Common sense; doesn’t rnhappen. 
Recorded on April 20, 2010