Globalization, alliances and networking: A strategy for competitiveness and productivityBy Joseph Prokopenko (From:Enterprise and Management Development Working Paper - EMD/21/E, International Labour Organization).
6. Alliances and networking as an instrument for globalization
6.1 The partnership concept
Trends towards higher competitiveness through productivity growth and market expansion paradoxically requires firms to form cooperative(!) alliances and networks in order to compete better through cooperation.
Traditional mass production techniques are becoming less and less appropriate for customization. The global economy requires firms who wish to compete internationally to become more flexible in their operations; to use advanced technology to produce high-quality, reasonably-priced goods; to rely on speed-to-market methods of operation; to use multi-site locations; and to adopt just-in-time production and delivery and world-wide components sourcing.
One of the most effective ways of converting a bloated, inefficient bureaucracy into a lean and effective operation is to adopt the business network form. In such a business network, a large firm often forms a series of alliances with other firms by transferring many operations to these network partners but retaining strategic leadership of the network. This form is proving highly effective in developing global competitiveness in a variety of industries.
Networks usually focus on the combination of cost reduction and customer service orientation which is the important prerequisite for improving competitiveness of companies. At the centre of such a network there should be a flagship firm that has some unique contribution to make to the working of the network. This could include competence in managing the network as a whole, fostering and developing core technologies, managing government relations and many others.(22)
In order to cope with the rapidly changing trends in the international economy, companies will have to adopt "agile" manufacturing practices - that is, they will have to become more attuned to the changing and diverse needs of their customers; be able to reorganize rapidly their systems of suppliers, distributors, workers and managers; and make use of high-speed telecommunications and transport networks to collect and disseminate information and to obtain inputs and distribute products.
Today, enterprises of all sizes will have to depend more heavily on worldwide networks of communications and transportation and establish "virtual organizations" to remain responsive and flexible. To adopt agile manufacturing practices, they have to organize them into new teams as new opportunities arise.(23) Speed-to-market practices require companies to adopt concurrent engineering in which all aspects of a product's development are planned simultaneously rather than waiting for R&D phases to end before testing them with customers and developing marketing and service strategies. Cross-functional teams representing engineering and design, marketing, purchasing, distribution and service departments and customer representatives - some of whom are scattered widely in different cities or countries - is becoming part of the product development process.(24)
Globally competitive enterprises will not only have to manage their own internal operations effectively, but coordinate the entire "value chain" of suppliers and distributors on which they depend. Virtual organizations are not constrained by requirements of geographic space or locations in cities in the same way as those that are engaged in mass production, they have to be able to have a global presence in order to attain economies of scope, connect components of a production distribution system in many locations that have the physical and geographical characteristics most appropriate for the component's efficient operation.(25)
Thus, to a large degree, the international competitiveness of companies lies in the ability of business leaders to facilitate and encourage its enterprises to respond quickly and effectively to these new bases of comparative advantage.
As a result, recent years have seen unprecedented growth in inter-firm cooperation and networking. The main reason for this rise is the realization that strategic alliances can facilitate complex coordination beyond what the market itself can accomplish while avoiding the dysfunctional properties often associated with hierarchy.
What has made networking so popular is the fact that today's corporate partners are less interested in short-term ventures designed to save a few dollars, and more focused on long-term alliances where gains are made over many years. It is a well-known fact that the natural motivation of two independent companies is to self-maximize and that a necessary condition to moving away from this focus on self-interest is a belief that the exchange relationships will be long-term.
The major factor that prevents many firms from achieving their business objectives and being productive is the lack of resources. Even for the largest corporations, leadership in some market segments that have traditionally dominated can not be maintained because they lack sufficient technical capabilities to adapt to fast-paced market dynamics.
In response, technology partnership among organizations are becoming more important and prevalent. As the costs (including risk associated with R&D efforts) continue to increase, no company can remain a "technology island" and stay competitive. The formation of strategic alliances means that strategic power often resides in sets of firms acting together as partners.
The partnership concept rests on the notion that performance can be significantly improved through joint, mutually dependent action. Information technology increases the opportunity to use cooperative strategies to reduce costs and improve productivity.
There is clear distinction between a "transactional" and a "partnership" style of relationship. The former is an arm's length relationship in which the rules of the game are well specified and the failure to deliver on commitments by either party can be resolved through litigation. In contrast, the requirements of a partnership-style relationship include risk-sharing, the need to view the relationship as a series of exchanges without a definite endpoint, and the need to establish a range of mechanisms to monitor and execute the operation of the partnership.
John Henderson of the MIT Sloan School of Management considers two dimensions of partnership-style relationships - partnership in context and partnership in action.(26) Partnership in context, which is the degree to which the partners believe that the partnership will be sustained over time, include three major determinants:
mutual benefits (financial returns, product innovations, risk-sharing and positive working environment, etc.);
commitment with its major indicators (shared goals, incentive systems, and contracts, etc.);
predisposition (an existing predilection in favour of the partnership, described by trust and existing attitudes and assumptions. The trust depends very much on the existence of an explicit track record with the members of the partnership, and personal relationships. The attitudes and assumptions are very important to believe that strategic partnership was going to be a major element of competitive strategy).
The second dimension, partnership in action, which is the ability of the partners to influence policies and decisions that affect the operational performance of the partnership, focuses on:
shared knowledge between members of the partnership;
mutual dependency on distinctive competences and resources;
organizational linkages (physical process integration, information integration and social networks. The latter is actually developing personal relationships as a major mechanism for creating organizational linkages between all levels of management - top, middle and first, supervisory level).
Competitive pressures enhance the need to tightly control costs by reducing redundant resources and activities within the organization. Firms are therefore facing the dilemma of developing competencies while limiting the resources devoted to this development. How can firms respond to this competitive challenge and meet the simultaneous needs for flexibility, quality and costs reduction in their operations?
First, developing competencies involves a clear focus on those activities that constitute the knowledge base of the organization and its foundation for growth and access to new markets. Second, focusing on such core competencies entail a redefinition of the boundaries of the firm. In order to cut costs and limit investments that tie down resources and reduce the firm's agility, activities which are independent from the firm's core competencies should be externalized, i.e., managed through market links. Such specialization of the firm creates new needs for interfirm cooperation arising from coordination requirements between firms performing closely complementary activities (process of quasi-internalization - a strategy alternative to externalization and full internalization).(27)
Consequently, the reconfiguration of firm's boundaries involves not only the externalization of independent, or standard competencies, but also quasi-internalization of complementary competencies. These new competencies management strategies can be seen as forming a consistent management model, including:
the internal development of core competencies;
the externalization of standard competencies; and
the quasi-internalization of complementary competencies.
The internal development of core competencies include a strong integration of individual tasks and knowledge within the overall activity of the organization, the importance of lateral interaction and communication as opposed vertical command, and a strong commitment of individuals to the goals of the organization. The three main features of a strategy aimed at developing core competencies, including a strong reliance on horizontal coordination process, trust, and strategic human resource management, contribute to a dynamic balance between cooperation and competition within the firm.
The externalization of standard competencies refers to the growing use of home work, the geographical relocation of particular jobs and activities, temporary workers, leased employees, subcontractors and business service enterprises. This is a way to increase internal homogeneity, flexibility and provide a means to maintain competitive pressures on the core workforce.
The quasi-internalization of complementary competencies could be based on formal links between organizations such as joint-ventures, consortia, share-holding, licensing or franchising agreements, as well as long-term contracts or exclusive dealing arrangements.
Cooperative relationships can also be supported by electronic linkages. Two areas for cooperation can be distinguished: vertical cooperation applying the coordination of complimentary activities, and the horizontal cooperation between firms involved in similar activities. Vertical cooperation allows firms to develop specialized capabilities at a particular stage of the value chain, while enjoying some of the advantages of vertical integration. Horizontal cooperation refers to bilateral or multilateral arrangements between firms performing similar or competing activities. Through such arrangements, firms can pool resources to undertake projects that are beyond their individual capacities due to high costs, high risks and/or insufficient know how. It also provides the most effective way to enlarge a firm's market base within the context of global competition.
Alliances between companies, whether they are from different parts of the world or different ends of the supply chain, are a fact of life in business today. Some alliances are no more than fleeting encounters, lasting only as long as it takes one partner to penetrate a new market. Others are the prelude to a full merger of two or more companies' technologies and capabilities. More and more multinational corporations are embracing strategic option: the cross-regional competitive alliance - ventures in which two or more strong international companies, often from different regions, join forces to compete on a regional or global scale.
6.2 Strategic alliances
A strategic alliance, broadly defined, is a contractual agreement among firms to cooperate in reaching an objective without regard to the legal or organizational form the alliance takes. This definition accommodates the myriad arrangements that can range from handshake agreements to licensing, mergers, and equity joint-ventures. Thus, strategic alliances cover all relationships within the marketplace. Alliances are constructed as effective means to acquire access to new markets and special expertise or compete with others on the market. There might be a problem with finding resources to pursue a certain strategic direction and, therefore, a partner would be called in to help. Typically, such alliances might occur when a particular company has an interesting technological opportunity but lacks the funds to take it further or the needs to penetrate other countries.
Few of the MNCs have sufficient resources of their own to achieve an effective presence in all desired markets and product areas. This is particularly true in industries where new product introduction entails a massive outlay of funds, notably the pharmaceutical, automotive, informatics, aerospace, telecommunications, electronics, heavy equipment and chemical industries. The partners in an alliance variously contribute complementary products, market presence, distribution networks, production facilities, skills, and technologies. In some cases, the partners aim at nothing less than becoming the premier world supplier for an entire market segment.
Firms can strengthen relationships with customers, suppliers, distributors, academia, and even competitors as each plays a major role in whether a firm meets its strategic objectives. Thus, a strategic alliance is formed when two or more companies come together and combine their efforts to pursue a competitive advantage that neither of them could forge alone.
A classic example of a successful strategic alliance is the collaboration between the British pharmaceutical company Glaxo, and the Swiss pharmaceutical company Hoffman-la Roche. Glaxo had a minimal sales force in the United States, so it teamed with Hoffman-La Roch and, as the result, the capacity of Glaxo distribution network there was increased more than three times.
Hitachi has been using strategic alliances for quick generation, utilization of innovations and for facilitating competence fusion innovation, as well as technology fusion innovation. Competition induced Hitachi to have a high "new product" ratio and strategic alliances catalyse the competence fusion. The strategic alliance facilitated the competence fusion innovation and resulted in the pooling of resources, quick product development, quick commercialization of ideas, joint-technology development and promoted concurrent engineering.(28)
At the beginning of the 1990s, there were at least 10,000 of these advantage-seeking combines worldwide. The strategic alliance concept has inspired many producers hoping to enlist suppliers and distributors in partnership efforts to improve processes and productivity.
The declining effectiveness of traditionally organized firms produced a new business equation. Instead of advocating resource accumulation and control, this equation linked competitive success to doing fewer things better with less and more productively. Managers who want their companies to be strong competitors in the 21st century are urged to:
maximize returns on all assets;
search globally for opportunities and resources;
perform only those functions for which the company has, or can develop, expert skills;
outsource those activities that can be performed quicker, more effectively, or at lower cost by others.(29)
As a result, collaboration in business is no longer confined to conventional two-company alliances, such as joint-ventures. Today we see groups of companies linking themselves together for a common purpose - a new form of competition is spreading across global markets - group versus group. These networks, clusters, virtual corporation, etc., consist of companies joined together in a larger, overreaching relationship. Furthermore, within the network or group, companies may be linked to one another through various kinds of alliances, ranging from formality of an equity joint-venture to the informality of a loose collaboration.
An example of such an alliance group was built by Silicon Valley start-up Mips Computer Systems which was acquired by Silicon Graphics. Mips developed a huge network of alliances to promote its new microprocessor technology. Swissair's alliances with Delta Air Lines, Singapore Airlines, and SAS sought to increase transatlantic bookings and European-Asian flights and to combine the procurements and maintenance of aeroplanes.(30)
Not surprisingly, firms following these directions frequently find themselves organizing into networks. One firm in the network may research and design a product, while another may engineer and manufacture it and a third may handle distribution, and so on
By using a network structure, a firm can operate an ongoing business both productively and innovatively, focusing on those things it does well and contracting with other firms for the remaining resources. Alternatively, it can enter new business with minimal financial exposure and at optimal size, given its unique competences.
The following is an example of Electrolux's efforts in creating, maintaining and expanding its international business network. First, Electrolux views microwave as the first global product of the white-line industry because they have similar designs and similar uses throughout the world. Second, it is concentrating on producing common components for all of its household appliances, such as compressors and controls for refrigerators and motors and pumps for washing machines. Finally, Electrolux chose its Zanussi division in Italy to be the company's export platform for the design, manufacture and supply of motors and compressors for both Europe and North America. In this way, Electrolux achieved economies of scale, commonality of parts, more uniformity in product design and targeting of an export platform able to serve its international business network worldwide.
The network form is increasingly becoming one of the key goals for resource-poor small entrepreneurial companies in both developed and developing countries seeking to build network exchange structures with outsiders, often larger companies. Networking can also serve as a transitional stage to help organizations become leaner, more innovative and responsive to meet today's organizational challenge to change. Networking is a unique combination of strategy, structure and management. It is in effect, a way of reaching out and creating visibility for an individual and his or her company in niche or larger markets.(31)
What are the major factors and conditions behind this trend in networking? The growth of competition and pressure for higher productivity could be considered as an important factor pushing companies into developing business relationships with peers abroad. Another factor favouring forming networks is the growing complexity of products and services and their design, production and delivery. Globalization is also becoming a very important factor and condition for networking. For smaller, more adaptive companies, the global economy contains not only an increasing number of competitors but also more candidates for outsourcing and partnering relationships. Indeed, whether the objective is to extend distribution reach, increase manufacturing productivity and adaptability or add design capability, the global economy is full of opportunities for networking.
The third factor, deregulation, unleashes entrepreneurial behaviour, which in turn raises the level of competition and productivity. Often deregulation creates new outsourcing opportunities as seen, for example, in the increased privatization and restructuring of public companies in many countries. Change in the composition of the workforce demographics are also driving companies to abandon the old business patterns. As the results of better education, social and health protection, workforce maturity, rising costs and decreased flexibility and mobility, more and more companies in the developed world are searching globally for new human resources and developing empowerment schemes that generate greater return on human capital. Given these demographic trends, the network structure and its operating mechanisms offer some distinctive advantages. First, as older workers and women with small children seek shorter working hours, firms already skilled in outsourcing will invent new means of accommodating these employees' requests for part-time and telecommuting work. Second, firms retain as small a permanent work force as possible, turning more frequently to consulting firms and other resources for temporary employees. Third, more and more firms will allow their employees to make their services available to other firms on a contractual basis.
An important condition for networking development is advances in telecommunications and computer technologies. Network organization can not operate effectively unless member firms have the ability to communicate quickly, accurately and over great distances.(32)
To summarize, globalization and technological change, coupled with deregulation and changing workforce demographics, have created a new competitive reality placing heavy demands on firms to be simultaneously effective and adaptive. Network structures permit both high productivity and flexibility.
6.4 Benefits and hidden costs
The most common benefit of alliances is that they expose more of your company to the outside world. This can provide you with a mechanism to bring the challenge of competition to parts of your organization that are normally shielded from it. Your alliance partner can introduce new threats as well as new opportunities by helping to shake off bad habits, re-examine pre-conceived ideas, and generate a desire to change and innovate.
Alliances can benefit the partners at various stages in the chain of business activities or, indeed, at several stages simultaneously. A good example is the formation of the Renault-Matra partnership to produce the Espace minivan. Renault benefited from Matra's flair for product concepts, its design capabilities, and its manufacturing competence. In exchange, Matra gained access to Renault's marketing, distribution, and service resources. Most alliances are based on a similar intention to exchange resources and competences between the partners.(33)
Generally strategic alliances tend to lower the transaction costs through the use of complementary assets and competences and thus to promote productivity growth in the alliance member-companies. More specifically, the main advantages of alliances and networks are as follows:
Improve access to capital. Major technological breakthroughs often require resources to develop and commercialize that are beyond the scope of a single, even a large company. By aligning themselves with firms that possess resources needed for expansion even small firms can capitalize on their own strengths to a much greater extent.
Better access to new technology and innovations. Alliance networks can help contending companies promote their technologies and gain the critical mass required to persuade enough sponsors to join their group. Networks allow specialists in each field to cooperate and exploit new opportunities much faster than if each were to try to acquire the industry-specific technology of the others as is happening in the multimedia field where computer technology is merging with telecommunications, video, and audio technologies. Creating a critical mass for R&D can be achieved more quickly by enlisting scarce resources from other firms already experienced in some aspects of technology development and application. Strategic alliances facilitate faster horizontal transfer of innovations and increase system innovations.
Facilitate the entrance into new markets and businesses. Alliances and networks also help break through barriers in local and foreign markets as policies set by local and national governments may deny local market access to non-domestic companies. The use of local technical or distributional capability can be one avenue to breaking through legal restrictions. In addition, local partners may provide better information and intelligence about customers and competitors. Linking with local companies in various markets may help a company spread its cost over larger volumes and thus increase productivity. Alliances permit smaller firms to leave the niche markets to which they have been relegated and face the dominant market players head-on.
Shared risks and liability. Shared risk is another important reason to enter an alliance, particularly in the R&D field. In commercialization the risk lies in having unknown social or environmental harm attributed to the technology and its owners. Alliances spread the risks as well as returns from developing, validating and introducing new technology.
A source for innovations in management and learning. Most forms of alliances require exposing the manufacturing and management processes to your partner, which in itself can generate valuable ideas for improvements. This happens, for example, when you place your expertise in a new context or your partner demands more than your organizational culture is able to provide. This transfer of knowledge can be a valuable source of innovative ideas as it requires you to prepare a detailed explanation of operations, which you have not examined objectively for some time. Alliances typically involve applying your knowledge under different conditions, such as a new geographical market or with a new work force or a new material input. Your experience is put to the test and this can generate valuable ideas. An alliance can improve your management processes since it brings your and your partner's organizations closer together and you come to understand each other's way of doing things, the degree of freedom and the room for manoeuvre. Your partner can also exert pressure on your organization that forces you to alter your management procedures.(34)
Other advantages often mentioned, particularly in the networks, are fewer levels of management, a broader span of control, bigger roles at lower levels, temporary and flexible organizational structures, more opportunities to use project teams, better customization and service orientation, shorter lead-time, better opportunities to involve small businesses and high demands for entrepreneurial culture.
The risks and hidden costs of alliances could include the loss of competitive knowledge, reduced management control, dependency on partners and reducing individual company flexibility, incompatible cultures, objectives and technical expertise, hidden agendas of the members and competition instead of cooperation, etc. For example, joint-ventures between western and Japanese firms are essentially learning races in which each partner tries to absorb more knowledge from the other in the shortest period of time.
While increasing size may be an indication of a network's growing success, size often comes at some expense. It increases difficulties of coordinating operations as more partners have to be consulted. The second size-related problem is as more partners are formed in a given business or country, there are fewer likely partners available for new deals.
Dependence also is inherent in networks and alliances where members lose some control. The growth of a network of alliances may gradually link an individual company's destiny to that of the network.(35)
The fear of loss also causes many managers to shy away from forming partnerships. Managers may fear that the firm will lose its competitive distinction which could be fatal; there could be loss in control and flexibility that results from the project's non-traditional structure and interdependencies; an expanded bureaucracy can cause a loss of efficiency and speed up decision-making. Incompatibilities of cultures and strategies could not only create barriers to progress but can cause a loss of identity.
Alliances that contain more competitiveness than cooperation are also doomed to failure. A partner may enter the alliance under the pretext of creating a commercial technology, when in reality the alliance was formed to fund self-serving research interests (hidden agenda).(36)
However, the reasons for most of these problems and risks are mistakes in selecting and creating alliances and in their management competence and practice. Better alliance design, selection of partners, and setting-up proper management systems would make it possible to reduce these risks dramatically.
6.5 Major alliance characteristics
There are many different dimensions to discussing the main characteristics of alliances. Analysis could help assess present and/or potential strengths and weaknesses, and to help the firms make the right strategic decisions on whether to join or not a certain alliance group, as well as possible implications of that decision. Research has uncovered a few fundamental aspects of business alliances. First of all, alliances are living systems that evolve progressively in their possibilities. They should offer the partners an option for the future by opening new doors to unforeseen opportunities. Alliances must yield benefits for partners and should create new value rather than facilitate mere exchange. They cannot be controlled by formal systems but rather require a dense web of interpersonal connections and internal infrastructures that enhance learning.(37)
There should be at least five things in common for a successful alliance:
shared objectives, hopes and presumptions;
mutual need, commitment and dependence;
shared risks and rewards, and mutual opportunities;
mutual vulnerability and reliability;
mutual trust and understanding.(38)
Some studies mention that good alliances should be the networked organizations and must be somewhat permeable to each other up and down their structure, and not just at the top of the pyramid. There should be also shared front-line information systems to enable the partners to access the same information in a timely, easy-to-obtain fashion. And certainly, there must be mutually acceptable practices in management, compensation and approval rules. Large differences can sour an alliance.
Since trust is a fundamental prerequisite to any successful networking arrangement, it is important to recognize the underlying social dimension that are prominent drivers in the establishment of trust and corporate success. As companies continue to flatten and rely on teams, managers are increasingly made to rely less on their authority and more on understanding informal networking and the social fabric that may underline them.
In fact, most networks tend to spin from informal gatherings where business owners and managers could discuss their cooperations and develop confidence and trust. Evidence from experience strongly suggests that potential conflicts between members of the alliance can be lessened through agreements that are carefully drawn up at the outset as well as through reinforcement of the informal social ties between members.(39)
Alliance groups are more focused, their purposes more strategic and the roles of their members more narrowly tailored. The aims of the old cartels, for example, were to share the world markets and to suppress the competition. In modern alliance groups, competition between them can be fierce.
Alliance groups vary in size, pattern of growth, composition, internal competition, and governance structure. Let us discuss briefly the characteristics:
Size. Alliance networks often grow out of the need to gain scale economies or market share. When the competition among networks focus on the establishment of an industry standards, the number of companies in the network and their combined share of the total market are critical to success. Overall size may be less important in alliance networks driven by the convergence of two or more industries like those in the multimedia field. The idea here is to link complementary technologies or markets.
Pattern of growth. Most alliance networks do not spring into existence fully formed, they are built piece by piece. Two general principles about the process of growth emerge from many examples.(40) First, to attract new members, a network must show a potential for joint-benefits. Second, previous relationships between allies and potential allies can be important in attracting new members
Composition. In networks of companies in converging industries, more important than network size or business volume or even market share is composition - ensuring that the network covers all technologies or markets crucial to the product development and distribution. The mix of companies in these groups tends to reflect the new opportunities that convergence offers for combining technologies. For example, both Ford and GM alliance networks contain members with comparable skills and specialities - strong Japanese companies (Mazda with Ford, and Toyota with GM).
Internal competition. The level of internal competition depends both on how many members perform similar functions and on the structure of the relationships among the members. It has two opposing effects on performance. It increases group flexibility, drives innovation, and ensures security of supply. But it can fragment a part of the business so much that none of the members reach efficient scales or earn a sufficient return to reinvest in growth. The line between just enough and too much competition is a fine one.
Governance structure. The structure of the partnership must provide incentives for performance. Without some sort of collective governance a group risks becoming no more than a haphazard collection of companies. One characteristic of a network governance structure is the degree to which it is managed as a collective. At one extreme, many formal consortia have governing bodies composed of representatives from member companies with no individual member in control. On the other hand, there could be a central management body without representation of the alliance members. Sometimes, alliance networks may also function without joint management.
6.6 The types of alliances
Collaborative arrangements between firms range along a continuum from weak and distant to strong and close. At one extreme, in mutual service consortia, similar companies in similar industries pool their resources to gain a benefit too expensive to acquire alone. At mid-range, in joint-ventures, companies pursue an opportunity that needs a capability from each of them - the technology of one and the market access of the other, for example. The strongest and closest collaborations are value-chain partnerships such as supplier-customer relationships. Commitments in those relationships tend to be high, the partners tend to develop joint activities in many functions, operations often overlap, and the relationships thus created substantial change within each partner organization.
The 65 partners in Inmarsat, a consortium that operate a telecommunications satellite, are simultaneously owners investing capital, customers routing calls through satellites, suppliers of technology to the venture, regulator-setting policy, and competitors offering services similar to Inmarsat's.(41) The well known types of strategic partnership are as follows:
subcontracting - involves buying supplies from another firm and working closely on detailed specifications for a complex product;
licensing - includes permission to manufacture a product under license, to distribute a product and to include product in another design;
joint-venture - involves the creation of a third firm to manufacture or market a product which had been developed by the entrepreneurial firm. Equity was usually shared by the partners;
strategic alliance - is essentially a joint-venture without the creation of a third firm and no equity is involved;
consortium - is usually a group of firms joining together in a buying group to purchase components or equipment, which they mutually share.(42)
The independence of the entrepreneur is usually decreased as one moves down the list. One study indicates that the frequency of agreement types between small entrepreneurial and large firms is also reducing, from 37 per cent for subcontracting down to 18 per cent for consortium agreements.
A useful classification of the types of alliances suggested by Chan and Heide(43) are based on the principles of selection of primary candidates for technological collaboration: customers, suppliers, competitors, and complementary firms (figure 2). The firm's relationship to potential partners determines the type of alliance to form.
Customer alliance. Looking for possible customer needs for technological advancements may provide great opportunities for R&D, provide an advantage over other suppliers and help garner more of the customer business. Customer alliances permit longer time horizons for the participants to plan and grow together. By serving customers' technical needs, a firm benefits by extending its own technical frontiers. R&D supplies the creativity and technical skills to satisfy the market ahead of the firm's competitors.
Marketing can furnish a deep understanding of customer needs and demands. Operations has the knowledge and experience to cost effectively produce and deliver the product to the market.
Supplier alliances. Just as the customer provides revenue to the firm, suppliers may represent the bulk of the costs. Because the company's product and processes depend on healthy suppliers, management must look backward when planning production and research strategies. Establishing suppliers as partners is generally a win-win situation. Alliances geared towards reducing supplier costs or improving the quality supplied can greatly affect the productivity and attractiveness of the firm's own products and services to its customers.
Competitor alliances. The key to derive mutual benefit from a competitor alliance is to fully understand the major difference between the two firms. Planning and operating must be done in the context of this differentiation, otherwise the firm will loose its competitive distinction. Care should be taken in specifying and limiting the nature of cooperative agreements and in setting limits to avoid breaking anti-trust laws. If the alliance is a strategic move for joint stronger competitive positions, for shorter response time to market changes, or due to over-demand on or lack of internal resources, then the mutual benefits are possible.
Complementary alliances. Complementary alliances exist when two firms possess similar technology but different product lines. In this case a single technology may be implemented differently by firms with different products on various markets. A coalition of their energies and resources may yield much greater advancement of the overall technology than the sum of their individual efforts. This kind of technology coalition may be classified as a "vertical" alliance.
Complementary alliances also exist between large and small entrepreneurial firms. It could bring to market new innovations that neither firm alone could accomplish. This synergy results from the small, entrepreneurial firm offering innovative technology while the larger firm supplies the necessary production and marketing resources. In either case, combining complementary strengths enhances each firm's competitive position: productivity and financial performance above what individual paths could have provided.
Facilitating alliances. Actions by government and academic institutions can encourage cooperative efforts. Governments can do it through their economic policies, regulations and direct participation in the nationally-strategic programmes and projects. Research coalitions with academic communities could facilitate the supply of advance technologies. Because the transfer time from theory to application is rapidly shrinking, academic contributions are directly shaping the form of new product development. However, industry must participate with both money and personnel in collaborative efforts to affect the type and direction of academic research. For example, about 60 per cent of all basic research and a smaller, but still substantial, percentage of applied research in the USA are performed in universities.(44)
Joint-ventures. There has been growing recognition of the role of joint-ventures, particularly international joint-ventures. This has been highlighted by the fact that technological and other forces rapidly make all business global. The fact that each participant in a joint-venture does have a home base and, typically, enjoys certain areas of strength, make it possible for a modern strategic alliance to create an advantage beyond what the wholly-owned multinational firm might achieve. The investment in time and energy can only be justified if the international joint-venture option is covering a central strategic concern.
A joint-venture is typically the result of a "gradual formation" based on an iterative process among the prospective partners, gradually leading to common understanding and trust. During the initial stage it is important to create a clear and easily understood "win-win raison d'être" for the alliance to endorse the basic joint-venture philosophy and approach by all key stakeholders in both organizations. During the main negotiation phase it is necessary to develop a clear plan of action and to commit resources, as well as to sell the prospect of a strategic alliance in both participating organizations to reduce the resistance.
In developing a strategic plan for an international joint-venture, achieving a realistic resource focus is often particularly challenging. When it comes to the selling of the strategic alliance within both partner organizations, it is important to be sensitive to cross-cultural resistance and national sentiments. Most important, the self-respect of both parties must be maintained.
According to Peter Lorange's expression, the joint-venture as an organization entity is more or less "empty" it is a contract regulating the cooperation between the parties. As time goes on and the learning accumulates on both sides, it often becomes apparent that executives involved in the strategic alliance should be dedicated to these tasks on a more permanent basis to not only ensure efficiency, but also so that they can benefit from being together and form an effective team.(45)
The important thing in joint-venture long term success is that all parties must act as if they are fifty-fifty despite the fact that the legal side of their alliance agreement may say something different. Only then will true complementary efforts from the parties emerge and only then will positive value creation beyond the capabilities of each partner emerge. If this understanding is not brought to bear, then legally-driven actions can handicap the joint-venture.
An interesting classification of the types of alliance networks is suggested by Snow, Miles and Colleman.(46) They distinct three types of network structures: internal, stable and dynamic. Since an internal network typically arises inside companies without involving too much outsourcing, and since the firm usually own its network, we shall not discuss international networks here. Our present interest is in the external alliances and networks and we shall concentrate only on stable and dynamic networks.
Stable network. The stable network typically employs partial outsourcing and is a way of injecting flexibility into the overall value chain. In this case, assets are owned by several firms but dedicated to a particular business. Often, a set of vendors is nested around a large "core" firm, either providing inputs to the firm or distributing its outputs.
BMW, for example, is organized as a stable network. In principle, any part of BMW is a candidate for outsourcing and somewhere between 55 and 75 per cent of total production costs at BMW come from outsourced parts. Various internal operating units must prove their competence according to market standards.
A stable network spreads asset ownership and risk across independent firms. In bad times, however, the "parent" firm may have to protect the health of smaller "family members". The benefits of stability are the dependability of supply or distribution, as well as close cooperation on scheduling and quality requirements. The costs of stability are mutual dependence and some loss of flexibility.
Dynamic network. Business such as fashion, toys, publishing, motion pictures, and biotechnology may require or allow firms to outsource much more extensively than in the stable networks. In this case, the lead firm identifies and assembles assets owned largely or entirely by other companies. Lead firms typically rely on a core skill such as manufacturing (Motorolla), R&D and design (Reebok), design and assembly (Dell Computer), or, in some cases, pure brokering (Lewis Galoob Toys).
Lewis Galoob Toys has only about one hundred employees to run the entire operation. Independent inventors and entertainment companies conceive most of Galoob's products, design and engineering. Galoob contracts for manufacturing and packaging with a dozen vendors in Hong Kong, and they, in turn, pass the most labour-intensive work to factories in China. When the toys arrive in the USA, Galoob distributes through commissioned manufacturers' representatives. In short, Galoob is the chief broker among all of these independent specialists.(47)
Dynamic networks can provide both specialization and flexibility. Each network node practices its particular expertise, and, if brokers are able to package resources quickly, the company achieves maximum responsiveness. The dynamic networks operate best in competitive situations where there are myriad players, each guided by market pressures to be reliable and to stay at the leading edge of its speciality. An example of the dynamic network is value chains or commodity chains.
Commodity chains. As mentioned, productivity has become increasingly dependent on a firm's capacity to organize and manage backward and forward linkages with others (affiliates, allies, suppliers, subcontractors and distributors) in more than one industry and location. Similarly important has become a firm's ability to move along activities and locations in response to changes in product markets, technology and policy environments, in particular to shift or retain control of crucial functions for innovation and sustainable competitive advantage (marketing, image-building, R&D, product development, etc.). In producing goods or delivering services for end markets, firms see themselves as economic actors variously embedded in value systems or chains encompassing sequences of activities that cut across many industries in many locations.
In the chain firms, different levels are joined together through various types of backward and forward linkages ranging from exclusively market-mediated transactions to dependent relationships (such as those established by dominant multinational enterprises), to cooperative relationships (such as those found in the industrial districts of northern Italy), to complete vertical integration. Such chains also include an affiliated "infrastructure" of equipment vendors, information networks, transportation systems, and banking and financial institutions, and they may have ties to informal micro-enterprises and household production.
Global Commodity Chains (GCC) are rooted in transnational production systems that link the economic activities to technological, organizational, and institutional networks that are utilized to develop, manufacture and market specific commodities. Globalization implies a degree of functional integration between these internationally dispersed activities. The emerging of GCCs manifest the fact that international production and trade are increasingly organized and managed by industrial and commercial firms involved in strategic decision-making and economic networks at the global level.
Two distinct types of structure for GCCs emerged - "producer-driven" and "buyer- driven" commodity chains. What distinguishes "producer-driven" systems is the control exercised by the administrative headquarters of MNC manufactures. "Buyer-driven" commodity chains refer to those industries in which large retailers, branded marketers and trading companies play the pivotal role in setting-up the decentralized production networks in a variety of exporting countries, typically located in the Third World. This pattern of trade-led industrialization has become common in labour-intensive, consumer goods industries such as garments, footwear, toys, housewares, consumer electronics, etc. The specifications are supplied by the branded companies or large retailers that design and order the goods. Profits in buyer-driven commodity chains thus derive not from scale, volume, and technological advances as in producer-driven chains, but rather from unique combinations of high-value research, design, sales, marketing, and financial services that allow the retailers and branded marketers to act as strategic brokers in linking overseas factories and traders with evolving product niches in their main consumer markets.(48)
Buyer-driven chains are characteristic of substantial, labour-intensive phases of production, and thus of locations in which the traditional basis of comparative advantage lies in factor costs such as labour. In the buyer-driven chains it is thus the distribution channel that drives production. While this is most obvious in the case of retail or department stores such as Marks and Spencer or Toys'R'Us, it also applies to "branded firms" such as Nike and Reebok in footwear or Amstrad in computers. The latter are associated with products that bear their name, but, for the most part, own no production facilities. They are just marketers that design but do not make the branded products they order.
"Producer-driven" commodity chains are capital and technology-intensive and include capital and technology-intensive industries such as automobiles and semi-conductors in which multinationals play the central role in controlling the chain and its backward and forward linkages. It is thus the manufacturer that plays the predominant role in establishing the terms and conditions of production in components and supply industries as well as the conditions of final distribution. Whether a chain is producer or buyer-driven depends upon where the greatest barriers to entry are. For the apparel chain, these lie with those firms that control access to final distribution.(49) Actual production requires relatively little capital or advanced skills and can thus be located and relocated where costs are most favourable. Machine tools, however, are both capital and skill-intensive which both minimizes the importance of labour costs and narrows the locations where appropriate inputs can be found.
Therefore, "producer-driven" capital and technology-intensive commodity chains, and buyer-driven labour-intensive (at the manufacturing stage) commodity chains, lead to a very competitive and globally decentralized factory system.
Triangle manufacturing. One of the important adjustment mechanisms, particularly for maturing export industries, often used in GCCs management is the process of "triangle manufacturing" which came into being in the 1970s-1980s. The essence of triangle manufacturing is that, for example, USA buyers place their orders with Hong Kong manufacturers who in turn shift the requested production to affiliated offshore factories in one or several low-wage countries - China or Indonesia. The triangle is completed when the finished goods are shipped directly to the overseas buyer under the US import quotas issued to the exporting nation. Today the East-Asian NICs are extending their supply networks for low priced foreign orders to far-flung production frontiers in Asia, Latin America and Africa, which create new challenges of coordination and control in GCCs. Triangle manufacturing has important implications for Third World development. As industries have become globalized and producers in different parts of the world are more tightly linked, the pace of change has quickened and exporters have shorter periods and production cycles in which to exploit their competitive advantages. Besides "triangle manufacturing" is an effective tool in breaking through the trade barriers of the developed world.
The shortening of product life cycle for countries pursuing export-oriented industries has multiple cases, including rapid technological innovation; the growing number of buying seasons for fashion-goods; the proliferation of new models of popular consumer products; the spread of Third World manufacturing capabilities; and the speed with which developed countries have imposed tariffs, quotas, and other import restrictions on successful exporting countries.
6.7 Building alliances and networks
As management designs an alliance network it should address a number of critical questions. First of all, a firm must define what "core" technologies or other capabilities give them the greatest advantages. Then to achieve the maximum leverage of these strengths, they must seek peripheral capabilities from the external environment. The management should ask themselves whether or not the firm has all the capabilities it needs to access the market quickly enough. If the answer is no, it should start looking for a way to accelerate its entry into the market by forming an alliance with a firm that already has the technology or marketing network that it needs.
It should also ask whether the whole is greater than the sum of its parts - could the partners complement one another or, at least, if they do not conflict? It should also assess how the network would be governed and controlled, shared influence, the effectiveness of the whole and the fate of individual members. And, certainly, it should be clear where competitive advantage is created. The creation of successful alliances generally requires five overlapping phases:
courtship - two companies meet, attracted and discover their compatibility;
engagement - they draw up plans and close the deal;
newly partnered companies, like couples setting-up house, discover they have different ideas about how the business should operate;
the partners devise mechanisms for bridging those differences and develop techniques for getting along;
each company discovers that it has changed internally as a result of its accommodation to the ongoing collaboration.(50)
There are several key issues to consider while forming an alliance. Among them are partner selection, building quality relationships, project selection and specification and reaching a formal agreement. Let us discuss them briefly.
Partner selection. Finding a suitable partner is important and takes a lot of time. Trust is essential if two partners are to share the necessary strategic information. The cultures, interests and objective of the two partners should be compatible. Only if both firms are in full agreement will the alliance managers have the freedom and flexibility they need to operate effectively. Collaborating with the right partner satisfies several key requirements:
ensuring benefits received by all participants outweigh the drawbacks;
getting powerful and assertive top management dedicated to the joint project;
gaining project personnel with the competence and commitment to succeed.
A working relationship will not prosper without mutual respect for cultural differences or if either partner tries to dominate. The firm must also offer comparable levels of competence, otherwise the lack of professional respect and equity will undermine effective cooperation.
Common or compatible design philosophies must also be sought or the project could be jeopardized with perpetual disagreements. Synergistic benefits are also necessary for a successful alliance. All sides must gain. Finally, there should be no hidden agendas. Familiarity and effective communications are extremely helpful in avoiding misunderstandings and irreconcilable differences.
Quality of relationships. The ultimate success or failure to achieve the intended targets resides with the people directly involved. Because these people are uniting from different organizations, the quality of their working relationships takes greater importance than if they belong to the same work unit. These relationships must allow project members to constructively confront, challenge and compromise in a give-and-take manner. This builds mutual trust and promotes cooperative problem-solving.
Project selection and specification. Before contractual formalities progress very far it is essential that the project be clearly defined and agreed upon by the project designers. Definition must include the purpose, scope, objectives and task descriptions. The project should narrowly focus on the expected results. As early as possible, precise, and if possible, quantified specifications should be issued showing the contributions and responsibilities of each firm and individual participants.
Formal agreement. Mechanisms to deal with different problems or disagreements contractively should be included in the agreement. For example, aspects of property rights should be stated: what innovations belong to whom; how anticipated innovations will be jointly shared; and how licensing rights will be handled. In addition, revenue distribution should be decided before commercialization.
A delicate balance must be struck in clearly defining alliance project objectives, member responsibilities, commitments and resources each partner is to contribute.(51) The best formal agreement could be based on such organizational relationships as a true partnership and tend to meet the following criteria:
Individual excellence: both partners are strong and have something to contribute to the alliance.
Importance: the relationship fits major long-term strategic objectives of the partners.
Interdependence: the partners need each other. They have complementary assets and skills. Neither can accomplish alone what both can do together.
Investments: the partners invest in each other through equity swaps, cross-ownership, or mutual board services, etc..
Information: communications is open for both sides. There is a commitment to share information and not to abuse it.
Integration: the partners integrate processes, objectives, management systems and create teams, and if necessary establish a third organization around alliance objectives.
Institutionalization: they formalize decision-making processes and responsibilities.
Integrity: the partners behave towards each other in an honourable way that justifies and enhances mutual trust.(52)
6.8 Productivity networks sponsored by governments or NGOs
Though traditional networks represent a voluntary partnership of business companies which put together, manage and sustain their network, there are more and more cases of networks of organizations organized by government or non-governmental non-profit organizations and even by international organizations. Such networks' main purpose is mainly learning from each other through voluntary exchange of information, experiences and joint participation in PIP projects, and thus to contribute to productivity and performance improvement of their members.
There has been much publicity on the different international networks of management development institutions, productivity centres and small enterprise development centres, etc. An example of such a network is INTERMAN which is a global network of management training and development institutions created and supported by the UNDP and the ILO.
INTERMAN's mission is to lead in the global development of management through, and practice by, promoting, linking and strengthening regional and national networks of management institutions. It provides a forum for members to examine and shape management education and training worldwide. It contributes to the growth of management knowledge and practice which is both relevant and specific to each region's social and economic environment. By serving as clearing house and broker, INTERMAN is uniquely positioned to promote a global partnership for innovative management development.
Actually, INTERMAN could be considered as a network of networks since it combines 15 regional and national management training and development networks/associations, including well-known networks such as EFMD (Belgium), AMDISA (India), AMTIESA (Tanzania) and CLADEA (Peru). There are also a number of international and regional productivity networks such as the Asian Productivity Organization (APO, Tokyo), the European Association of National Productivity Centres (EANPC, Brussels), and the International Productivity Services (IPS, Washington), which play very important roles in organizing learning from each other and through an exchange of experience and knowledge and contribute to their members' productivity improvement.
Below is a case of when a national productivity network of companies is organized by government-supported non-profit organizations with the purpose of learning and productivity improvement. This case is of the National Productivity Board in Singapore which served the main catalytic role in the recent setting-up of such a network with excellent results.
A Singaporian caseThirty-two companies in Jurong employing more than 15000 employees belong to a unique grouping called Jurong Productivity Zone. Set up in July 1994, the Zone is a joint effort of the National Productivity Board's productivity activist scheme and the National Productivity Association (NPA). This network enables member companies to pool their resources for a more effective exchange of information and expertise in support of Singapore's productivity movement. Through this network, it is expected that companies will be able to benchmark their productivity practices against one another and improve their skills and techniques.
The programmes of the Zone are planned and implemented by an eight-member committee comprising senior managers from member companies. A key activity is an inter-company exchange programme launched for a pioneer group of twenty companies. Other programmes include forums and plant visits. Funding for these programmes comes from the NPA.
The companies come from various industries comprising local, foreign and joint-venture concerns. They share information and assist one another in implementing specific productivity improvement programmes. All of them have effective on-going programmes in at least one of the following five areas of productivity improvement, namely: total quality process; just-in-time techniques; on-the-job training; suggestion scheme; and good housekeeping.
The companies were paired off on the basis of their expertise and their interests in implementing a new productivity improvement programme. In other words, each participating company had a strength to share, and in turn, expected to learn something new from its partner.
Participating companies went through a three-phase cycle over a three-month period. During the warm-up phase, companies exchanged corporate brochures, newsletters and other relevant information. This was followed by a get-to-know-you session where one party visited the other and was briefed on the company's operations.
In the second phase, the planning phase, the score of assistance and expected results and their measurement were determined. An implementation schedule covering the proposed activities and deadlines was worked out. Both parties also established and agreed on the means by which to transfer their knowledge and expertise.
In the third and final implementation phase, regular monitoring of the exchange process was undertaken to ensure that it was on course. All the participating companies were provided with a set of operational guidelines which spelt out their responsibilities in the exchange process.
As a result of the exchange programme, the participating companies all reaped tangible improvements. For example, Turbine Overhale Services (TOS), a manufacturer of aircraft parts, adopted a TQM model of Stahl Asia and set up a continuous improvement team steering committee to spearhead TOS's efforts towards improvement process. Their efforts resulted in a lowering of the reject rate from 24 per cent to 6 per cent. Cross-functional communication and teamwork also improved. Jurong Shipyard, which was paired with Insulpack Styrotek, initiated a 5S programme with five contractors. The tangible improvement included a reduction in the incidence of lost tools amounting to cost saving about $30,000, and an increase in the usable floor space by 10-20 per cent. Insulpack Styrotek, on the other hand, revitalized its suggestion scheme by improving its reward structure based on Jurong Shipyard's criteria.
The companies which participated in the exchange programme all found the sharing of experience and new knowledge gained highly beneficial and the inter-company exchange programme allowed them to short-circuit the implementation process, avoid pitfalls and find solutions faster and more cost effectively.(53)
7. Adjustment measures for a more open global economy
7.1 Shifts from a "strong" government to market forces
There are two very important systematic, structural and long-term shifts in the world's economies that affect the strategic development patterns and alliances development. The first one is the changing role of the state mainly in response to past failures by governments to improve welfare through state actions. The second systemic change is that markets have become steadily more integrated, both within and between the nations. The countries that have achieved the greatest gains for their people are those that decided early to take advantage of international opportunities and to rely increasingly on market forces rather than the state in allocating resources.
Structural adjustment, often combined with the need for stringent stabilization measures, has become a global phenomenon and has been particularly required by many developing countries and economies in transition. However, any element of a structural adjustment programme, including privatization, can be justified only when it provides better conditions and business environment to more people and capital in more productive activities - total productivity improvement. Thus, total sustainable productivity paired with social justice could be rightly considered as the main objective of structural adjustment at the national and enterprise levels. In this sense, structural adjustment can be safely regarded as a gigantic national productivity drive.
At the same time, we can observe that structural reforms have certain painful side effects: excessive cuts in budget and sudden withdrawal of subsidies, cuts in income, retrenchments, unemployment, deteriorating public and social services. More than a decade of experience with structural adjustment has brought us one clear message - progress cannot be achieved at the expense of excessive human suffering and hardship. Structural reform should have a "human face" and clear social dimension to ensure the protection and motivation of people to cooperate.
Of the world's 2.5 billion workers, 1.4 billion live in countries which are in transition from state interventionism; have a high degree of protectionism; or have central planning. Economic reforms can create opportunities for some workers and have wrenching effects on others. Moving the economy as quickly as possible to the new growth path is key to minimizing of social costs of adjustment and making macroeconomic stability and credibility of the overall reform critical. However, where initial conditions allow gradual non-productive job destruction without jeopardizing the reform that is needed to generate new jobs, it would make sense to do so (such as in China).
East Asian governments pursued development strategies that encouraged economic growth resulting in the rapid expansion of the demand for labour and substantial investment in physical and human capital. Rarely did they attempt direct intervention to improve labour outcomes, for example, by raising minimum wages or imposing onerous job security legislation on the private sector. They did not try to manage short-term fluctuations in their domestic economies, nor did they try to control the economic weather. They focused instead on creating the right economic climate. They keep inflation low, they invested heavily in education and training, they rewarded savings and investments and penalized consumption. These countries also tried to enhance the competitiveness of their industries in the world economy.(54)
Their development strategies supported agriculture - initially the major labour-intensive sector - through relatively light taxation and investment in rural infrastructure and in some cases land reforms that supported family farming. East Asian countries also expanded the size of their markets beyond their domestic economies, and, as exports fuelled growth, rising domestic incomes led to even more demand for labour. At the same time, labour productivity increased as a result of high rates of investments in plant and equipment, acquisition of new technologies, and an increasingly educated and skilled labour force. The case of Taiwan(55) is an excellent illustration of this strategy (see box 3).
Box 3: The case of Taiwan development strategies
1950's: Emphasis on innovation and efficiency in agriculture to ensure social, economic and political stability. Promotion of import substitution industries to preserve foreign exchange.
1960's: Policy to encourage export-oriented industries. Their products began to penetrate world markets, the domestic investment climate was improved and foreign capital and technology began to flow into Taiwan.
1970's: Heavy industries were developed to reduce reliance on imports of basic industrial materials. Infrastructural development and backward integration by establishing intermediate goods industries.
1980's: Upgrading industry: automation, development of high-tech industries and products with high value-added, infrastructural development, economic liberalization and privatization.
1990's: Industrial upgrading and automation, infrastructure, high-tech industries, technology transfer for manufacturing key targeted products - aerospace, information, semi-conductors, automation, communications, medical equipment, consumer electronics, and pollution control, developing Taiwan as an international transportation and financial centre.
Key factors behind Taiwan's economic growth: Land reform programme; SMEs development; HRD; establishment of the China Productivity Centre to disseminate modern management and technology and provide management consulting service focused on productivity and quality.
Participation in international markets particularly helped East Asia in many ways. It not only expanded the size of the available market to domestic producers, but helped finance capital accumulation. A combination of rising domestic saving rates and international capital in the form of loans and foreign investments financed the region`s high level of productive investment. Access to technology also permitted producers to climb the value-added ladder, moving from primary products to light manufactures to higher technology goods. Governments intervened to varying degrees in their economies but markets, including labour markets, have played an important role in directing the allocation of resources. Success in exports has been based on market-determined wages which have risen in step with productivity gains.
Expanding employment opportunities and rising wages are the consequences of growth and economy-wide increases in output per worker, and not the result of job creation in the public sector or wage increases mandated by government. A market-based development strategy means that government above all enables businesses and households to invest in themselves, for example, by protecting property rights and providing access to education and other infrastructure. However, changes in the average number of years of schooling of workers alone are weakly linked to faster growth. In Africa, many countries expanded their educational systems raising the average years of schooling of their labour force, but have seen little corresponding aggregate growth.
Growth not only depends upon how quickly inputs are accumulated but also on the quality of inputs, the technology embodied in them and on how efficiently they are employed. The critical role of government policy is in creating an environment that encourages productive investment. A market- based development strategy which encourages enterprises and households to invest in the future in a productive and profitable manner will enable low and middle-income countries to expand employment opportunities and raise wages. An excellent illustration of the shifts towards these strategies is the differences between the development paths of northern and southern East Asian countries (see box 4).(56)
Box 4: East Asia: differences in strategies between North and South
The economic stars of Southeast Asia - Singapore, Malaysia and Indonesia - have followed a distinctive path to development from Japan and South Korea. As a result, they are now exporting not just goods but ideas. There are three major differences in their strategies: 1) South is much more open to foreign direct investment; 2) it is much less prone to try to replace the market through a government-directed industrial policy; and 3) it has been much quicker to allow financial markets to develop.
The Japanese and Koreans have been determined to build-up national champions and have made it difficult for foreign-owned companies to set-up shop. Southeast Asian tigers have built their booms by welcoming foreigners. The export industries of Thailand and Malaysia are heavily reliant on foreign firms. Though both Indonesia and Malaysia have tried nurturing winners, in aerospace and cars respectively, such efforts remain peripheral. In Indonesia, framework for growth has been established by an orthodox group of economists who have concentrated on macroeconomic stability and who opposed subsidies. Thailand, which has followed the standard Southeast Asian strategy of luring in foreign direct investment, seems likely to become the regional hub for motor manufacturing.
Southeast Asian countries have also been much faster letting financial markets flourish. In the early stages of South Korean and Japanese industrialization business in search of credit had little option but to go to the banks whose lending decisions were, in turn, heavily influenced by government. By contrast, the stock markets of Thailand, Malaysia and Indonesia were cleared for take-off early on the path to economic development, allowing companies to raise more money without heavy borrowing.
Increases in real wages also encourage labour-saving production techniques as workers move from low to high-productivity activities. In Korea and Malaysia about 60 per cent of the total productivity growth comes from rising labour productivity within sectors, and most of the rest comes from shifts between sectors. By contrast in Brazil and Bangladesh, which had weak total labour productivity growth, productivity improvements within sectors did not contribute to overall gains.
7.2 Some common problems in industrial policies
Attempts by governments to force the pace of change by favouring industry and formal employment have proved an unsustainable and often counterproductive development strategy, slowing economic growth, depressing labour demand and encouraging informalization (except perhaps in Japan and South Korea). Too often the transformation of employment fails to reflect market-driven changes but instead results from government attempts to forcefully speed up the shift from low to high-productivity activities and sectors through:
policies that introduce a pro-industry, anti-agricultural bias such as protection, price controls and an anti-rural bias in the regional allocation of investment in public goods such as infrastructure and social services;
policies which are biased against labour demand within agriculture affecting credit and land markets;
regulations designed to make formal sector employment more attractive to workers.(57)
All of these could worsen growth in labour demand and sooner or later hurt overall economic growth as explained below.
A pro-industry bias. Long-term policies that emphasized import-substituting industrialization eventually proved bad for industrial employment, agricultural growth and overall economic performance (India, Latin America, Ghana, Zambia). Protecting industry failed to produce dynamic industrial employment growth. It also introduced biases within the industry against labour. By contrast, economies which emphasized exporting had moderate biases in favour of industry and low agricultural taxation speeded the transformation from agricultural to industrial and service employment. Its technological advance in agriculture is slow, this major labour-intensive sector becomes a laggard in a country's overall advance.
Anti-labour biases within agriculture. Between 1950 and 1980 it was viewed that large farms were efficient and that the sector's best hope lay in capital-intensive modernization. This has been proved wrong. A few economies, mostly in East Asia, not only avoided excessive taxation of the agricultural sector, but also provided strong infrastructural support for small-scale farms. This was facilitated by distributive land reforms (Korea, Taiwan, China), and by swift transition to small-farm production. These economies enjoyed rural growth, productivity improvement, and, as a result, a significant shift to non-farm employment within rural areas.
Labour legislation and informal sector. Policies that favour the formation of small groups of workers in high-productivity activities lead to dualism and tend to close the formal sector from broader influences from labour market at the cost of job growth. This often happens when a protected output market combines with government labour regulations designed to protect or support the conditions of workers in the formal sector. This can create a small group of relatively privileged workers with an interest in the perpetuation of their favoured status relative to workers in the rural and informal sectors.
Biases that favour industry over agriculture, capital over labour, and formal over informal work paradoxically tend to slow not speed the shift towards a higher productivity and more formalized economy.
7.3 How active should industrial policies be?
Today, the advocates of industrial policy often portray their prescriptions as aggressive forward-looking strategies to develop national competitiveness. Nonetheless, although these policies often explicitly recognize the importance of innovation, learning-by-doing and investing in human capital, their immediate goal remains the same - the survival of "vital" national industries and to support welfare. When domestic industries are perceived as falling behind their international competitors, governments feel inclined to design policies which redress the shortfall. However, knowledge of how to do this is limited. In addition, practical options are more often circumscribed by trade and common market agreements against monopolies and state interventions. As a result, industrial policy makers have increasingly focused on two of the remaining "weapons" in their armoury: competition policy and public procurement, and, in doing so, create and support the new national champions.
The misplaced faith in national champions in many cases promotes policies which are ultimately doomed to failure. The worldwide experience indicates that domestic competition is strongly correlated with national competitiveness. Unfortunately, the response to cries to "do something" about declining competitiveness reflects the general confusion about the precise meaning and implications of national competitiveness. Since the ultimate goal of competitiveness offers focus on "meeting the tests of foreign competition" it implies that the domestic non-traded sectors are not important. As a result, policies are pursued which harm these sectors but advance international performance, many policy makers overemphasize domestic collaboration in the pursuit of international dominance.
The simplistic analogy between the company and the nation leads to the conclusion that since a company will always harness its total resources when competing in a market, a nation should do so as well. This approach questions the wisdom of having several parts of the national "corporation" competing against each other when they could be competing against foreign "corporations". As a result, many strategies for achieving national competitiveness emphasise the importance of joint effort of national institutions and ultimately the creation of national champions, arguing that only through co-operation can a region win the "coming economic battle".
The recent case of Sweden(58) is an excellent illustration on how damaging this approach could be to the national and company competitiveness (see box 5).
There is increasing evidence that the dynamic performance of national champions is inferior to that of firms which operate in more competitive domestic markets. In a series of cross-section regression tests, domestic competition is found to be positively associated with total factor productivity growth while foreign competition has a less significant impact. The consistent conclusion of case studies of a wide range of industries in OECD countries is that domestic rivalry strongly influences competitiveness.(59)
Box 5: Sweden: Too much cooperation?
In Sweden there was a belief that cooperation is always good. The report of the US-based management consultants, McKinsey & Co. concludes that "Cooperation has indeed been good - too good. It has allowed vast sections to post profits while selling goods at prices far above those paid by consumers elsewhere in Europe. More important, it has stifled the need for innovation and for efficiency that are the lifeline of market economies." In Sweden the pressure on companies to innovate that come from competition has been lacking.
Ulf Jakobson, Chief Economist for the Swedish Federation of Industries, stated that "We have become a society of negotiations and not of competition". "It is government", he said "that largely accounts for the preference shown by many Swedish businessmen for carving up a market among themselves over lunch rather than adjourning to the streets and shops to fight for it". Bill Lewis, the Director of the McKinsey Global Institute added that the situation in Sweden was only "A milder version of the situation in Japan: Both countries were being held back by their lagging and inefficient domestic sector". The above report suggests such measures as continued deregulation and, crucially, a stricter enforcement of antitrust laws could dramatically improve competitiveness and productivity in this country.
A wide range of econometric studies get similar results. Caves and Barton show an indirect link between competition, technical efficiency and productivity growth of US manufacturing industries.(60) Then, Geroski (1989 and 1990) finds that "Rivalry has an unambiguously stimulating effect on innovation" of UK manufacturing industries, and that domestic competition has a positive impact on industry-level productivity growth. Also, Blundell, Griffith and Van Reenen (1994) determine that competition promotes innovation for publicly-quoted UK firms.(61) Finally, Nickell obtains support for the positive relationship between competition and productivity growth of UK manufacturing companies.(62) In all of the studies which distinguish between domestic and international competition, domestic rivalry is found to play a particularly important role in fostering the creation of competitive advantage.
Evidence suggests that there is a strong broadly-based case against the supporting national champions (Air France) as even those of them competing in globalized markets appear doomed to failure. As pressure rises to initiate these passive or soft industrial strategies, some governments have moved toward more activist industrial policies, for example, based on favourable public procurement programmes. Unfortunately, these measures often bring new problems which undermine their effectiveness.
The experience indicates that the net benefits of activist industrial policies, such as favourable public procurement programmes, may be substantially dissipated by indirect, corruption-induced effects on investment. Industrial policies such as preferential procurement usually result in corruption through large transfers of "rents" to favoured groups. A variety of lower rank bureaucrats like taxmen, regulators and custom officials may try to obtain a share of the rents by exchanging any control rights they may have over favoured firms for bribes. Thus, while industrial policies could have a direct beneficial effect on investment, its total effect would be reduced by the increase in corruption activities that they foster.
Ades and Di Tella(63) show that this is indeed the case. By using statistical techniques the total effect of industrial policy on investment can be decomposed into a direct, positive effect and a negative, corruption-induced effect. In the presence of corruption, the total effect of preferential procurement on investment is only 56 per cent of the direct effect. Similar results are obtained using data on R&D expenditures: this is a positive function of the level of public procurement policies to promote national champions, and a negative function of the amount of corruption. The total effect of preferential procurement on R&D spending is again only about half of the direct effect. Both the magnitude of the corrections and the fact that it comes from a source used by industrial policy activists to back their views suggest that the consideration of corruption should not be absent from cost-benefit analyses of an activist industrial policy.
8. Implications on the quality of human resources and management competence
One of the key forces in the process of helping organizations to become more competitive will be played by the human resource management function. This means that this function will have to serve more and more as a "strategic organizational development" advisor to senior management in creating a learning organizational culture to facilitate positive changes. HRM must redefine its role from the more traditional administrative orientation to a more proactive catalyst for change to become a "professional service business within a business" rather than an administrative personnel function.
To raise company competitiveness, productivity improvement and human resource development must be inseparable. It is important for employers and managers to motivate workers by adopting personnel policies conducive to productive behaviour, humanistic management practices and open communication.
A casual relationship exists between effective managers in an organization and that organization's success. Competitive and productive companies are always distinguished by their effective and competent management. What is competent management and what is the role of managers?
If we look into the evolution of the definition of management at the beginning and middle of this century, management was defined as planning, organizing, creating, controlling, motivating and communicating (Henri Fayol, Peter Drucker). Later on it was considered as the ability to manage people effectively: creating people who are proud and happy to work with you and excel at the things they do. Then there was a focus on management of processes which lead to the creation of effective organizations, change management, developing and implementing effective strategies and changing organizational cultures (Tom Peters, Robert Waterman, Rosabeth Moss Kanter).
Finally, more and more specialists agreed that the most constructive view of management would be an integration of all of the above: good management focus their efforts not just on the tasks that they are managing, but also on the individuals with whom they are working and on organizations they are working with. Indeed, effective managers should be able to understand the business environment, think strategically, be client-oriented, organize and manage all major resources (particularly people), use available management methods and techniques, create and build organizations and a strong culture. What is even more important is that good management should be able to recognize the global environmental changes, be both proactive and reactive, change organization structure, systems and management style when necessary.
Management practice and management development are not exempt from the effects of increasing globalization of the economy, structural changes and trade liberalization that are sweeping across the world, and the rapid advance of production and communication technologies. All these have brought on a production system that is flexible, network-based, lean and competitive to serve a market characterized by end customers whose preferences are internationalized, demanding more product differentiation and specialization.
These trends in the domestic and international environment require that the managers become even more entrepreneurial and continuously upgrade their capabilities to enable them to adapt their practice and business to the very dynamic, highly competitive world. The most competitive organizations become flatter, more project and network-oriented, lean and knowledge-based. The organizations of the future will be intelligent networks very different from today's hierarchical structures and will look more like an organism. The authority distribution would be also modified. Change in any organization happens at the edge where the company interfaces with the customer and the competition, and the managers at the front end have a detailed knowledge of the situation, but often little authority to instigate change.
Indeed, one of the toughest resource to acquire and sustain is knowledge or intellectual capital. This may be the only sustainable competitive advantage in the future and, because companies cannot innovate, they cannot analyse and they cannot make judgement and produce knowledge - only people can do these things - the most important resources will always be people. This is where the role of management must be changed in the new knowledge-based organization. The managers' role in the intelligent network is not as an overseer of others' activities but to coach others; a provider of tools; a facilitator; a doer in their own right and someone who is comfortable only to interfere by exception and use their authority sparingly and trust people.
A new manager should also become an inventor, and if one agreed that the most enlightened definition of innovation is "commercialization of creativity", it would help to understand how and why an organization is creative and how people apply creative skills in the workplace to support commercially successful activities. If creativity is about knowledge management and if knowledge management is the basis for a successful strategy, how can we encourage thorough and purposeful development of people, and particularly, managers become the key issue and objective of management development for global alliances and network organizations.
Challenged by higher productivity and competitiveness enterprises, the more advanced economies have embarked on "participatory productivity drives" by enhancing the role of workers and teambuilding. Leading car manufacturers, for example, are now organizing their plants into smaller groups of workers, the results are wider participation in decisions-making, better working conditions, increased job satisfaction and, finally, higher productivity and competitiveness. Furthermore, experiences of the "humanization of work" movement in the industrialized countries show that an improvement of working conditions leads, in many cases, to higher productivity.
Management is also expected to assume a more prominent role in a less centralized business environment in human development. The future managers should have better ability to manage horizontally; to focus more on work environment than administrative commands; to deal with people; and possess necessary organizational and motivational skills. They should be more aware of new wage systems; rules and regulations on health; safety; taxation; education and training policies and practices; and international labour standards. New managers should be better at delegating and supporting initiatives and creativeness of employees. They should be able to take risks and even permit mistakes. They should be able to create a learning environment.
Moving to more innovative organizations requires more flexibility and creativity from managers. Their underlying principle should stem around their emphasis on "people and ideas" and not on "politics and procedures". Thus, the efficient use of available human resources and their development is central to the effective management for better productivity and competitiveness.
Managing global competitive alliances and networks presents difficult challenges. The success or failure of a strategic alliance lies directly with management competence in allied firms. Effective management and planning are critical to the success of the alliances and could reduce the risks inherent in this strategic option. Successful management of a competitive alliance begins in the negotiating process. During this time it is important to make sure to involve both top and line management in the negotiation process. Certainly top management support is necessary for successful alliance building and to its long-term health, but it is the line management who makes the venture work on a day-to-day basis. Involving the line management in the negotiation process early on lays the groundwork for effective management and gives them an opportunity to see if they are compatible and at stake in the venture success. Through line management, it would be much easier to "sell" alliance to all employees and, thus, developing line and project managers in negotiation skills is of critical importance to building-up and managing alliances.
During the negotiations, partners involved in a project meet in team-building sessions to uncover mutual interests and to create the mechanisms and build the trust necessary for resolving the inevitable disputes and inequities. Understanding the processes of collaborative negotiation is an essential characteristic of the lead manager. Here, the team-building and team-management training is becoming the next important competence to be developed.
The traditional organizational hierarchy controlled by vertical management philosophies will not be effective in realizing the power inherent in collaborative efforts. Smooth working relationships and total commitment with downward delegation of decisions to those ultimately responsible are hallmarks of a successful alliance manager.
As the competitive-alliance phenomenon spreads, companies must also create systems to deal with multiple alliances. The latter has three dangers:
company divisions often conclude alliances on their own and as a result executives from different units may unknowingly approach the same company;
some companies find they have created ventures that work at cross-purposes;
unless care is taken, one partner's secrets inadvertently may be leaked to another.
In order to maintain its alliances within a strategic framework, ICL created a director for collaborations who had four major functions: coordinate negotiations; serve as a liaison between ICL divisions and their partners; oversee the existing network; and ensure that conflicts of interests do not arise between the various arrangements.(64)
In building up effective alliances and networks, human resource management and personnel relationships should also be addressed at an early stage. The most productive human relationships could be achieved at five levels of integration:
Strategic integration involves continuing contact among top leaders to discuss broad goals or changes in each company. The more contacts they have, the more changes they will hear about, the more chances they will have to work things out, the more likely that the companies will evolve in complementary rather than conflicting activities.
Tactical integration brings middle managers and professionals together to develop plans for specific projects or joint activities to identify organizational or system changes that will link the companies better or to transfer knowledge.
Operational integration provides ways for people carrying-out day-to-day work to have timely access to information, resources or people they need to accomplish their tasks. Participation in each others' training programmes helps, for example, a technology-based relationship develops a common vocabulary and product development standards.
Interpersonal integration builds a necessary foundation for creating future values. As relationships mature beyond the early days of scrabbling to create initial projects and erect structural framework to manage them, the network of interpersonal ties between members of separate companies grow in extent and density. Leaders soon feel the need to bring people together to share information. Many strong interpersonal relationship help resolve small conflicts before they escalate.
Cultural integration requires people involved in the relationships to have the communication skills and cultural awareness to bridge their differences.(65)
It is of crucial importance to select and develop managers who can work within an alliance framework on an ongoing basis with counterparts from different corporate and national cultures. There are a few considerations to be taken into account while dealing with managers' selection. Among the critical skills and qualities of those to be involved in managing alliances are broker skills with highly pronounced entrepreneurial characteristics. Some skills or even positions are labelled as network architect, operator, or caretaker.(66)
For example, in consumer-packaged goods, firms' product and brand managers learn to build informal networks among the various designers, producers, distributors, and marketers involved in the offering of their products. Similarly, project managers in matrix organizations develop network-building skills as they work across the functions of their firms and with outside contractors.
Network designers and managers are essentially entrepreneurs, not only pulling together the skills and equipment needed to produce a new product or service, but also arranging the financing. The characteristics of entrepreneurship are individual initiative, cross-functional team-building, resource acquisition, and so on - all of these are very consistent with the development of successful networks and alliances. Let us consider some of these managerial roles in detail.
Opposite to hierarchically-organized firms, network organizations' key managers operate across rather than within the hierarchies, creating and assembling resources controlled by outside parties. These managers can be thought of as brokers. Three broker roles are especially important to the success of network organizations: architect, lead-operator, and caretaker.
Managers who act as architects facilitate the emergence of specific operating networks. At the beginning, such managers seldom have a clear or complete vision of all the specifics operating networks that may ultimately emerge from their efforts. Frequently, the architect has in mind only a vague concept of the product and of the value chain required to offer it. This business concept is then brought into clearer focus as the broker seeks out firms with desirable expertise, takes an equity position in a firm to coax it into the value chain and helps create new groups that are needed in specialized support roles, and so on. The broker has to identify several outside firms who would be suitable partners for long-term relationships. The overall results of the architect's efforts can be portrayed as a grid of firms and value chain elements.
Managers who act primarily as lead operators should be able to connect specific firms together into operating networks. They should also be able to select from a set of partners those individuals and firms needed to design, manufacture and sell products. The lead operator outsources virtually every operating activity, choosing to perform only the brokering role in-house. This role is often played by a firm positioned downstream in the value chain. Brokers in the lead firm rely on their negotiating and contracting skills to hook together firms into more or less permanent alliances.
Caretaker managers look after continual enhancement of the networks. This role is multifaceted and may include monitoring a large number of relationships to the specific operating networks as well as to the larger grid of firms from which it came. It means sharing information among firms about how the network runs as well as information on recent technological and marketing developments, schedules, etc. Downstream firms in the value chain need to be kept abreast of new manufacturing capabilities, and upstream firms need an awareness and understanding of coming changes in the marketplace. The caretaker helps the network to plan and to learn and could also be engaged in nurturing and disciplinary behaviour. A more important purpose of the caretaker is to develop a sense of community of a network, an organizational culture that transcends ownership and national borders.(67) As alliances and networks become a major instrument of globalization and integration, managers must be found and developed for an increasing number of broker positions in the future.
9. Future prospects
In the future, alliances and networks are even more likely to flourish across organizations with shared values, mutual trust, influence and support. The networks will appear on the fringes of those mature industries that are in danger of stagnation. The ability of networks to generate new products with lower levels of investments will help to invigorate these industries. At the same time, networks will be very effective in emerging industries as well. The productivity-oriented networks will become the dominant organizational form in mature, healthy industries.
Globally competitive firms will have to enter into international strategic alliances more aggressively in the future for the following major reasons:
1) to learn - that is, to acquire knowledge about how to enter foreign markets more effectively, develop technology and products that are suitable for those markets, and manage their operations overseas;
2) to take advantage of partners' specialization advantages - especially in developing supplier and distributor activities in foreign markets and in obtaining resources and infrastructure that the home country firm does not have in the host country;
3) to leverage resources - by fully integrating firm operations with partners that can provide missing elements of production and distribution;
4) to create linkages - that is, to develop closer relationships with suppliers and customers;
5) to leap over existing constraints - by pursuing radically new business opportunities in foreign markets; and
6) to "lock out" the competition - by forming partnerships with the strongest firms in foreign markets.(68)
Global competition in the next century will force every firm to become a network or alliance member. The most successful firms will not only maximize the utilization of their assets, but they will learn how to market and deploy those assets to other firms. Eventually, cost-based networks which rely on inexpensive labour will approach an equilibrium from which it will be difficult to extract further competitive advantages. There will be better prospects in the future for investment-driven networks based on technology-intensive and high-skilled labour-intensive processes, which could be self-renewing.
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Updated by GT. Approved by HH. Last update: 24 January 2000.