THE NEW ALLIANCES
Then again, a lot of big businesses have resisted making such changes, but not because of inertia. Although enchanted with the entrepreneurial spirit, they believe a big company can never duplicate the environment of a start-up. The solution for them: Enter into special relationships with start-ups.
Such relationships abound these days, and they provide perhaps the most vivid indication of big business's new love affair with smallness. Granted, the idea itself is not new. Corporate venturing has a long history. What is new about the current round of alliances is the apparent appreciation of the need to preserve the independence and entrepreneurial flavor of the smaller company.
This appreciation grows out of a number of considerations:
* A small tightly focused operation is better able to find and service niches in a dynamic market than a large, diversified company.
* The relationship is likely to be more productive if it preserves the small company's independence.
* In the face of $2 billion in available venture capital and a strong new-issues market, such relationships may be the only way for a large company to maintain some hold on the most innovative minds in high technology.
* Such relationships give the large company a "window on technology," allowing it to leverage its R&D money and expand its array of products.
* A large company can use an alliance as a hedge against institutional blindness, which might otherwise bind it to once successful, but now obsolete, technologies.
* A relationship with a very successful small company gives the big brother an opportunity to reap far more substantial rewards than a comparable in-house investment would offer, thanks to the premiums placed by the stock market on high-tech stocks.
* A favorable antitrust climate frees corporations from fears that have acted as a brake on such relationships in the past. To be sure, different companies weigh these factors differently, but it is not unusual for a company to take all of them into account. And there may be other considerations as well -- the desire to protect a critical supplier, for example, or to protect a market by guaranteeing the survival of a "second source" of a particular product. It is clear, moreover, that a number of these factors are interrelated. Should, say, the economy turn bad, venture capital dry up, and the new-issues market go cold, fewer employees might be tempted to jump ship and go it alone, and there might be fewer alliances.
It could be argued, therefore, that large companies are making a virtue of a necessity caused by temporary market conditions. But does it matter? There is a reason that the marketplace is rewarding start-ups and small companies. The reason is that they are making money. A more serious question is whether these new alliances can last long, given the fundamentally different motivations of the corporation and the entrepreneur.
In any case, the new relationships are, indeed, blossoming, especially in high-technology industries, where the pace of change is the greatest and where it is easiest to translate mental capital into corporate capital. Among the large companies involved are Control Data, Olivetti, Lubrizol, Monsanto, Tektronix, General Instruments, Standard Oil (Indiana), NCR, and IBM. Even such a stodgy giant as American Telephone and Telegraph Co. has gotten into the act indirectly, buying a substantial stake in Olivetti, one of the most aggressive participants in the trend. More typical however is the relationship between Memorex and a California start-up called DMA Systems Inc.
MEMOREX: A STRATEGY BUILT ON ALLIANCES
Memorex has long been an innovator and leader in memory storage and disk-drive technology. With 33 buildings located within a few miles of one another, the company is a major presence in Silicon Valley. Nevertheless, a few years back, Memorex was foundering, buffeted by the moves of IBM. At great expense, the company had developed a central processing unit for a medium-scale mainframe computer, only to find that it couldn't market the product against Big Blue. Meanwhile, it had neglected its other businesses.
Weakened by the crisis, Memorex was acquired by Burroughs Corp. It sold its audio/video consumer businesses, transferred word processing to Burroughs, and decided to concentrate on computer display terminals, memory storage media, and disk drives -- its core businesses. The company also brought in a lot of new people, including Michael Haltom from Burroughs, as vice-president for finance and business development; Ray Gould from Honeywell Information Systems, as director of product management; and Stephen Manning from Rockwell International, as director of business development and strategic planning. They believed that Memorex had to go outside the company in order to achieve its strategic goal of dominating the memory-storage industry.
This represented a radical departure for the company. Until two years ago, Memorex relied exclusively on in-house product development. But that process was slow and inefficient, and the alliance concept was in the air. Burroughs, for one, had already established an alliance with Convergent Technologies Inc., a maker of small computer systems. In addition, the peculiar chemistry of Silicon Valley played a role. As Manning puts it, "[the alliance strategy] is a case of management looking at its geographical location, and its industry, and deciding that a focused group of individuals can get the job done very efficiently."
In looking at its own industry, Memorex noted that the single most expensive component of a computer today is the equipment related to the storage and retrieval of data. So the company was very interested to learn about DMA Systems, which was developing a device that might significantly reduce those costs.
The device is a small, removable hard disk drive that is used for memory storage in mini- and microcomputers. Currently, most micro users rely on floppy disks for this purpose. Floppies hold about 300 kilobytes of information, are unreliable media, and tend to be rather slow. The alternative to the floppy is the hard disk, which stores from 20 to 100 times as much information and coughs it up 6 times faster. The problem is that standard hard disks are expensive, bulky, vulnerable to catastrophic breakdowns, and nonremovable.
