The Best of Both Worlds

More and more companies are joining forces - even with the competition - to gain collective market strength. But the most successful are strengthening their individual identities, too.

By Jessica Lipnack and Jeffrey Stamps
from Inc. Magazine, March, 1994

Most managerial gurus today herald the coming end of boundaries - between divisions within a company, between companies and their suppliers or customers, and between companies and their competitors. Many agree with General Electric's CEO, Jack Welch, who has written, "Our dream for the 1990s is a boundaryless company...where we knock down the walls that separate us from each other on the inside and from our key constituencies on the outside."

But we hold that the contrary is true. The fact is, corporations need boundaries to distinguish themselves in the marketplace. Their ability to cross those boundaries and still maintain their own distinctive identity as they develop their own core competence becomes their competitive advantage.

To meet the challenges of dry capital markets, high costs or research and development, new technology, state-of-the-art training, and the opening up of global markets, a growing number of small companies are creatively cooperating with their competitors. They are forming networks that enable them to benefit from the economies of scale available to larger corporations while they retain the benefits of being small. Companies adopting such a strategy also resolve a crucial tension: how to retain one's own identity while working cooperatively with others. The most effective networks-

• Are organized around a well-defined joint project and have simple shared goals that keep members from overshooting and failing.
• Identify a core group that operates not as a merged identity but as one that strengthens the independence of each participating company.
• Establish rich communication links that enable the members to build and develop relationships.
• Reduce the number of bosses and increase the number of leaders. Since no single person is in charge of cooperating competitors, everyone involved needs to assume some aspect of leadership to make the network successful.
• Involve people at all levels of the cooperating companies, so communication can flow quickly and smoothly.

For a large working model of the system, look at Denmark. In 1989 Denmark's small businesses started to form into teams of three or more companies working together to create new brands, expand product lines, and conquer the export market. Within 18 months, 3,500 Danish businesses -from textile and furniture manufacturers to lawyers and landscaping companies -were operating in those networks.

The results were impressive. For the first time in 32 years Denmark reversed its negative balance of trade with Germany. Even more remarkable, it was the only European country to do so, enabling it to claim title to the world's highest per capita trade balance in 1992.

Similar cooperative structures are appearing in the United States. In 1986, for example, Harry Brown took over as president of Erie Bolt Co., a Pennsylvania bolt maker on the brink of bankruptcy. With 38 employees, annual revenues of $3 million, and dilapidated equipment, the company was on the dreary path to Rustbelt extinction. Brown aggressively formed strategic alliances with 16 other companies. In some cases he struck deals with competitors who could make certain parts more cheaply; in others he lent engineers and equipment to suppliers to help them improve their production processes. Today EBC Industries, as the company is now known, has 100 employees, state-of-the-art equipment, and revenues of $8 million.

Howard Norberg, CEO of Minnesota's Tri-State Manufacturers' Association, provides another successful example. In the association's buying cooperative, companies that are competitors jointly purchase manufacturing supplies and sophisticated training. If each company were to do ISO 9000 training alone, it would cost $900 per employee plus travel costs, Norberg estimates. By jointly importing a trainer, the cooperative cut per-employee costs to $300, with minimal travel costs.

To survive and prosper, small companies must learn to work together. A network of companies has the power to compete globally while maintaining the speed and independence that come with being small.

In today's new economy, it is not enough for companies to simply ask, "What business are we in?" The critical follow-up questions are, "How do we redeploy assets and re-think strategy in response to the competitive environment? How do we enter relationships with companies we traditionally competed against - while fundamentally thinking who we are?"