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.

Do they still compete? Absolutely. For instance, Brown works with a machine shop in Buffalo to produce metal studs because, in this case, combined expertise results in larger profit margins for both companies and a higher-quality product for the customer. But the two bid competitively on jobs that require the manufacturing of special shafts, because each has the ability to make that product efficiently on its own. They let the market--and the numbers--tell them when to choose cooperation over competition and, in the process, create a larger playing field upon which one company's success is less likely to result in another's failure.

Consultants, academics, and economic-development folks know Brown or know of him because he successfully (and unwittingly) created a flexible manufacturing network that many experts believe could--and should--be replicated nationwide. The concept began to take hold in the United States more than a decade ago, when two professors at the Massachusetts Institute of Technology, Charles F. Sabel and Michael J. Piore, published The Second Industrial Divide. The book examined the Emilia-Romagna region of northern Italy and its rise to economic prosperity through the creation of networks among small companies. That research inspired captains of government and industry in this country to flock to Italy in search of a model that might help bolster flagging competitiveness in the states.

They came home with visions of a national business agenda that never came to fruition but that, nonetheless, eventually spawned several state and local organizations charged with helping small companies (most commonly, but not exclusively, manufacturers) form networks. "A lot of it turned out to be the marketing of an organizational device," says Sabel, now a professor at Columbia Law School. That "organizational device" took many forms. Like Harry Brown's network, some coalitions of companies were pulled together by a CEO who took on the nearly full-time job of coordinating their efforts. Other groups began to look like hybrid trade associations, while still others actually created separate entities under whose umbrella all cooperative work was organized. Some of those efforts were successful; many were not. What continues to distinguish those that flourish from those that fade is that they not only have found a way to solve the market challenges that brought them together in the first place but have used their collective clout to create new opportunities. Consider the following stories:

John Anson had been in the equipment-design and -building business for 30 years and was no stranger to the concept of networking. Like many small-business people, he had often called upon friendly competitors to help him out if a job was too big or too complex for his shop to handle. But 4 years ago Anson began feeling pressured by the new demands of outsourcing. "Companies would outsource larger and larger chunks of their business, and I sometimes couldn't handle it alone," he says. When General Electric, a longtime customer, wouldn't even allow Anson to bid on a job because his shop was too small, the Louisville CEO figured it was time for radical measures. He went to his two largest competitors with a plan to complete the $15-million project together; he would coordinate the work while serving as the single point of contact that GE desperately needed.

Since it landed that contract, in 1993, Anson's network has expanded to include a dozen more companies. The business generated by GE is now worth $60 million, and the networked companies work together on other jobs as well. "It's like combat," says Anson. "You have to use the buddy system." The enemy? Competition from Mexico and the Pacific Rim. "By forming this network, we've given ourselves the opportunity to retain business that would have gone overseas," he says. What's more, Anson's sales have skyrocketed from $3 million to $80 million, and he reckons that the $25 million he's spent on expansion would have been closer to $40 million if it weren't for his network partners. "But it's not just the capital investment that I've saved on," he notes. "It's also the people. I was able to use the talent of the people in those other companies."

The Oregon Brewers Guild is a group of 40 local microbrewers that network broker Nick Harville, of Gleneden Beach, Oreg., helped assemble three years ago. Originally, the group of brewers banded together to lobby for their common position on legislative issues such as excise taxes and advertising limitations, but they quickly realized that their alliance had marketing power as well. Large breweries had begun creating what Jerome Chicvara, director of sales and marketing at Full Sail Brewing, calls "pseudo craft brews"--a direct assault on the Brewers Guild market. So the guild developed a common quality-assurance label that helps differentiate its members from the knockoffs. "None of them has the financial resources to combat Miller or Anheuser-Busch alone," says Harville.

Neither would they have the opportunity to test overseas markets on their own. "Our product is still so high-end that the guy on the other end would never want a full container of Full Sail," says Chicvara. "But collectively, we have a portfolio that is very diverse and compelling." Over the past two years Chicvara and seven other guild members have together exported about six shipping containers of beer to Japan, where the appeal of craft brews is just beginning to catch on. They've also wielded their collective clout at home. Last spring they shared a booth and expenses at a Chicago trade show, where Chicvara landed a distribution deal with a 90-store chain in Indiana--not for himself but for four of his competitors.

Five years ago Bill Hanley, CEO of Galileo Corp., a $34-million Sturbridge, Mass., fiber-optics company, was faced with a dramatic decline in the military contracts that had long constituted the lifeblood of his industry. "When you're faced with a market segment that's shrinking, companies can't start competing with each other more voraciously, or they end up doing each other even more damage," he says. "I viewed the whole industry as being at risk." Hanley's proposal to five of his competitors: come together to promote the Sturbridge area as home to a fiber-optics brain trust. Together they would develop fiber-optics applications for new markets such as the telecommunications and analytical-instrumentation industries, utilities, and hospitals. "We focused on making the pie bigger by marketing ourselves together," says Hanley.

The group--now comprising 12 companies--formed a separate nonprofit entity called the Center for Advanced Fiber Optic Applications, which markets the combined capabilities of its member companies. Hanley says there are currently a dozen cooperative projects in the works and that "companies are also forming independent alliances on projects outside the center." It seems that cooperation, once mastered, becomes a possibility that one carries into each new business opportunity.

But does it also create an uncomfortable interdependence among networked competitors? What happens when such relationships go sour, as some ultimately will, or when they simply dissolve? Harry Brown has seen such things happen; so has Nick Harville. The question often is not whether such a scenario will play itself out, but when and how. In an economy where nearly everyone competes globally and where the only predictable factor is that things will change, one can reasonably expect partners to come and go. "The networks last only as long as the opportunity does," says Harville. How do you know that when your partners leave, they won't take a chunk of your business with them? You don't. But consider what is at stake. "The risk is extraordinarily high if someone cheats," says Hanley. "The group would make it very difficult for that company to participate in the community; a natural process sets that company up for failure." Also bear in mind that an economy driven less by transactions than by relationships fosters an environment in which a loyal customer is less easy to steal. But while "coopetition," the consultant's word for what we're describing, seems to carry with it a set of internal and external checks and balances, it is surely no more risk-free than any other aspect of business. For many, the greater risk is one of lost opportunity.

In the end there are no assurances, no guarantees, no proven formulas for a successful competitor network. "They're all experimenting," says Sabel of Columbia Law School. He worries that people focus too much on the experiment itself and are ultimately blinded to its larger implications. "There's a vision of this network idea that assumes that any form of cooperation is as good as any other form," says Sabel. "But that's just too general. It doesn't put discipline on anyone to change. The real problems have to do with mastering the model of decentralized coordination. You need to be small and flexible in a way that allows you to coordinate with others that are small and flexible." It's like a 6-year-old with a Lego set, meticulously building and rebuilding a model that is a significant expression of ideas and desires that are, nonetheless, ephemeral. There is no expectation of permanence; disassembling comes quickly, with little regret. After all, the marketplace, like a 6-year-old, has a limited attention span, and expects--even rewards--continuous creation and destruction.

Competitor networking is a concept that should revolutionize the way business owners think about producing and marketing a product or service, about capital investment, and about employees, because the proficiency with which CEOs run their own companies will no longer determine how much or how fast those companies grow. Everything will depend on how CEOs manage the process of cooperation within and beyond the boundaries of their companies, the agility with which they recognize a market need, put together the talent to meet it, disperse that talent, and then bring it together again in a way that they--or you--might not have imagined yesterday.

It isn't a particularly tidy way of doing business; it is dynamic and risky, and it defies the labels of "big" or "small." It is a third way of operating--and is as complex, challenging, and mysterious as the other two. Call it competitor networking if you must, but understand that the label is merely a convenient, albeit inadequate, conceit. Before anyone put a name on it or declared it a trend, it was simply the way people like Harry Brown and John Anson did business. It will be the same for Ron German. It will be the same for you.

Donna Fenn is a contributing editor at Inc.

Close Encounters of the Third Kind

Running a "competitor-networked" business isn't like running a small company or a big one--it's a third way of doing business altogether. Here's what we know about competitor networks--and life inside them--after a decade of their existence:

It's Not Easy
"The biggest problem is CEO ego," says Bill Hanley, chief executive of Galileo Corp. "You get five people together who are used to running their own show, and now they have to become part of a team that is interdependent. That's difficult." Hanley says it took 18 months for his group of fiber-optics companies to coalesce and develop trust--18 months of hand-wringing doubt, of wondering, "How much information should I divulge? Could I have this client to myself? Am I jeopardizing my own position in the marketplace?" If there is one phrase uttered most often by CEOs involved in competitor-network relationships, it is this: "It all boils down to trust." Not just trust that your competitor won't steal your secrets or your customers, but trust that forfeiting some of your independence will yield a handsome return.

It Takes a Leader
Show us a successful network, and we will show you a leader who champions it. He or she is the person who drives or coordinates cooperation, the one who refuses to let the others slip back into the old way of doing business. For Harry Brown, that has become a full-time job. "One of the things I've learned is that you can't expect things to flow without day-to-day involvement," he says. Brown's company, $8-million EBC Industries, is usually the lead company on jobs that require input from several of his network partners. Because he accepts liability and responsibility for the final product--in this case, machine parts--he has to make sure that his partners' standards are compatible with his own.

All networks don't function like Brown's, but all were started by individuals with vision. Although CEOs often play that role, a third party can also offer the outside perspective needed to plant the seed. Network brokers, whose very existence is testimony to the growing prominence of this trend, sometimes have a flair for getting overburdened CEOs to see the big picture. And increasingly, state or county economic-development offices promote and aid networking efforts. For instance, Rodney Brown, director of the business and entrepreneurship division of the Kentucky Cabinet for Economic Development, spends 95% of his time helping small companies create manufacturing alliances. "Our role is to turn on the light, then get out of the way," he says.

It Redefines Competitor
Rodney Brown recently "turned on the light" for Robin Hunt of H&W Plastic and Charles Rothe of Summit Molding and Engineering, both small custom-molding companies in Kentucky. The two formed a networking arrangement, the Plexus Group, to pursue projects larger than either could manage on its own, in new markets that both would like to penetrate. "What I struggle with most is having to spend a lot of time explaining Plexus to people who know me as H&W Plastic," says Hunt. "They wonder why I would do this with a competitor."

But is Rothe really a competitor? Like so many entrepreneurs who have formed similar relationships, Hunt discovered that a company that looks like a competitor very often appears less threatening when you get a little closer. For example: Rothe's machines are bigger than Hunt's, which means he usually attracts a different kind of job; his expertise is in engineering while hers is in sales and marketing. In short, what they do becomes secondary to the skills and resources they possess.

"What happened in our case is that companies that thought they were going after the same market applications and business segments weren't actually doing that," says Hanley of his fiber-optics network. "We had evolved to serving different segments of the market that were noncompetitive." That realization helped quell the partners' nagging fear of losing customers and compelled them to identify and evaluate their own unique capabilities.

It Makes Specializing Less Risky
"The way the marketplace is developing now, you have to be more specialized, and you have to be fast," says Patricia Stansbury, president of Stansbury Staffing Inc., a $3.7-million San Francisco-based recruiting and placement firm. That's virtually a universal truth in the new economy. But with specialization comes risk: when you develop a niche, you invariably make painful choices about what you won't do. Stansbury's relationship with four competitors eases that pain for everyone involved.

"We'll call each other and say, 'I can't fill this order for my client; can you help?' " she says. "I know they won't go behind my back and try to get the client." Why? Because they need one another too much. Stansbury specializes in graphics, technology, administration, and human resources; another partner is developing a specialty in legal placements; yet another is focusing on conferences and conventions. Their relationship gives them the freedom to specialize because they know they aren't forfeiting their ability to serve a broad range of clients. "It's my relationship with the client that makes all the difference," says Stansbury. "They don't have to call the agency down the street, because I'm doing it for them, and they like that."

It Depends on the Weakest Link
Yes, that's uncomfortable--even dangerous. Your worst nightmare is that your partner's poor quality standards become your problem, jeopardizing your relationship with your most valued clients. It happens. About a year ago Nick Harville, an Oregon network broker, assembled a group of companies to develop wastewater-treatment systems for a particular industry. "On our first project, we found that one of the people in the network was making recommendations for equipment that wasn't up to manufacturer's specs," says Harville. The system didn't work properly, and the group had to absorb substantial retrofitting costs. The offending partner was ousted, and Harville restructured the group. The lesson is obvious but bears repeating: a network or a partnership is only as strong as its weakest link.