Sleeping With the Enemy

Competing

Creating alliances--even with direct competitors--is a risk more small companies are taking as they confront a cruel reality: many market opportunities are impossible for them to pursue on their own

Consider Ron German's dilemma. The plastics-molding company where he is vice-president of sales and engineering has an opportunity to do some work for a new customer--a very large customer. There's just one problem. Although German's company can mold the part the prospective customer wants, it isn't set up to do the decorating work that the job also requires. A competitor down the road, however, is. German can do one of two things: tell the customer he can do only the molding and risk losing the business, or align himself with his competitor to complete the job and--you guessed it--risk losing the business. "We're scared to death, but we don't have any choice," says German. So the two companies will produce the part together, and German will hope like crazy that the customer won't eventually be lured away by the competitor--his momentary ally--with both molding and decorating capabilities. "It's a big risk," he says.

But it's a risk that more and more entrepreneurs find themselves taking as market conditions compel them to consider a rather cruel reality: while advances in technology, communications, and transportation have created an unprecedented number of opportunities for growing companies, it's now nearly impossible for entrepreneurs to take advantage of those opportunities on their own. Market pressures are forcing small companies to work together in ways that few people could have imagined 10 years ago--and that many still find terribly discomfiting. Today small companies share benchmarking information, seek help from one another to achieve better quality standards, or jointly market their services to customers. And increasingly, they even find themselves working shoulder to shoulder with their direct competitors.

You may be tempted to dismiss it as a trend solely among manufacturing companies, but the fact is that you can find competitors cooperating in nearly every segment of the economy--in service businesses such as insurance and recruiting, among retailers and catalog companies. None of them will say that it's easy. Perhaps like you, many balk at sharing information with their most trusted employees, let alone with companies they perceive as their fiercest competitors. Rightfully, they worry about losing their competitive advantage, diluting their market share, exposing their weaknesses, and damaging their relationships with customers. It's one thing to embrace the latest management trends--opening the books, creating teams, forging strategic alliances--but it's quite another to take the next logical (but most threatening) step by getting into bed with your enemy. Until you find yourself in Ron German's shoes. And you will.

If you doubt it, take a look at the auto industry, where the big manufacturers have methodically and relentlessly winnowed the supplier base. The remaining primary, or "tier one," suppliers are expected to forge more intimate relationships with their customers--the auto companies. At the same time, the suppliers are expected to provide a broad range of services in one-stop-shopping fashion while also meeting specific quality standards, such as ISO 9000 specifications. Companies all the way down the supply chain are being pulled in two opposing directions: specialization and comprehensiveness. The rapid pace of change and increased quality requirements force a company to focus, yet the customers doing the outsourcing are expecting do-it-all solutions. "The suppliers that survive are being asked to provide all kinds of capabilities at reduced costs," says Kenneth Preiss, coauthor of Cooperate to Compete: Building Agile Business Relationships. "And that forces them into cooperative relationships with other companies willing to share their core competencies."

In other words, broad but quickly changing market demands can't be met any longer with bricks and mortar, with broad, embedded, inflexible capacity; they must be met by enlisting the skills needed at any given moment to serve a customer for that moment only. And the customers--whether they're large auto companies seeking to outsource or parents shopping for toys--are unforgiving. They don't want to micromanage their supply chains anymore; they want you, dear vendor, to do it for them. So you're out of Playmobil pirate ships? You'd better be able to call the retailer in the next town and have one sent to you--fast. Can't make the mold and produce the part? Find another company to help you do it, or your customer will find someone else who can do it all, leaving you entirely out of the loop. More and more, independence may be prized, but scale is rewarded.

Or so it seems. In fact, it isn't scale that's valued--it's the illusion thereof. Scale, in the traditional sense, has been tried, and it has failed. Remember when vertical integration was all the rage? Large companies that boasted about their ability to manage their processes from beginning to end, totally on their own steam, are now systematically dismantling what they had worked so hard to build. Curiously, they are getting smaller in order to prosper, and are doing so in a way that is transforming our economy. What remains are leaner, more focused versions of their former selves. No longer are they obsessed with scale; they're fixated on scope--the breadth of capability that's achieved by assembling the right players at the right time. They call it "outsourcing" and "strategic partnering." And while entrepreneurs have also embraced those techniques successfully, they're now finding that they, too, must stretch the boundaries of their companies even further--into what once looked like enemy territory.

That's exactly what Harry Brown did. Ten years ago Brown bought an ailing Rustbelt company, Erie Bolt Corp. (now called EBC Industries). He transformed it, mostly by building alliances that are a shining example of what can happen when competitive companies begin to think less about what they make and more about what skills they possess and how they can combine those skills to maximize revenues, reduce costs, and increase quality. Sound a little too idyllic? In the beginning Brown's competitors thought so. "There was resistance at first," recalls EBC president Brown, "but then people saw the success we had." He and his competitors--about 50 of them--jointly market their capabilities to land business they couldn't possibly get alone; they share information about quality systems, consult one another before investing in machinery, use one another's sales reps, and pass on customers to one another. Together they can efficiently serve the customers of the new economy by offering a single point of contact for a variety of products, much the way that our Japanese competitors have done for years.