Why intercompany teaming seldom works

Excerpted from Transcompetition, by Harvey Robbins & Michael Finley, McGraw-Hill/Business Week Books, 1998

(c) by Harvey Robbins & Michael Finley

We have seen a proliferation of new relationships between companies: partnering, strategic alliances, virtual organizations and other arrangements. Some of these are bursting with potential; others (like virtuality) are flawed from the human engineering standpoint, because the "wiring" connecting the far-flung parts is too fine to convey the full of range of knowledge -- the intuitive and cultural, along with the factual -- required for success.

Some companies don't set out to be partners, but they are stuck with the fact: the nature of their businesses lashes them together inextricably for life.

• One company is an inevitable supplier to another (US Steel's metal for Isuzu's cars, Canon's disposable drums for Hewlett-Packard laser printers, ConAgra's grain for General Mills' cereals).
• Two organizations team up to provide one another's services, and thus broaden their service base (a printer partnering with a graphic design firm, a bank partnering with a mutual fund family, an airline and a ground transportation provider).
• Some companies are the delivery or marketing or licensing or manufacturing mechanism for another (local bottlers for Coca Cola, auto showrooms for Volkwsagen and Audi, local affiliates for television networks, the New York Stock Exchange for member companies).
• An anchor company sells partnerships to franchisees (Subway, Jenny Craig, Firestone, Starbuck's, the National Football League).
• Companies form alliances with one another to solve problems neither can solve by itself (Apple and IBM working on a new chip,
• Organizations from different spheres team up to do things impossible in one sphere alone (NASA and Martin Marietta, Japan's Ministry of Trade and Information and Japanese manufacturers, Mexico's nationally owned energy company Pemex and consultants from the world of commercial oil and gas).

Howdy, pardner

The word partnership sounds easygoing. It conjures up images of cowpokes, poking along the high chaparral together, providing one another with defense, complementary skills (cookwagon, branding, roping, blacksmithery) and companionship.

But it necessarily involves tension.

The idea of intercompany collaboration is not new. Most businesses have always enjoyed close relationships with a few suppliers or dealers. What is new is the extent to which partnering has increased both the number of these relationships, and the closeness between them. Many companies, like Chrysler and [Chrysler's design partner], or Airborne Express and its corporate partners, (Booz-Allen & Hamilton)are so inextricably partnered that there is only a dotted line difference between them. They share information systems. They share office space. They share leadership. They behave like a single company.

It is stretching to call Chrysler Corp., an ocean liner's ocean liner, a trust network. And yet it has seized on a substantial value differentiation from the other two American car companies by outsourcing -- of all things -- the design of its cars.

Chrysler has turned over substantial responsibility for auto design to Eaton Corp., and in true partnership fashion shares both credit and the profits with its suppliers. This stands in sharp contrast to the devious practices the industry is accustomed to, in which supplier submit ideas, and GM or Ford reverse-engineer them, paying nothing. GM's putative savior, J. Ignacio Lopez de Arriortua, is said to have set back supplier relationships 10 years in six months with his brutal treatment.

Now, for the first time, Chrysler has the design advantage. Suppliers happily part with their best ideas, knowing they will not be ripped off. Chrysler saves hundreds of millions in infrastructure costs -- and the designs for its Neon, Ram pickup, and Viper are winning awards by the armful and new customers by the carload.

But partnerships do not always result in a happy or consistent company.

Partnering Pratfalls

True partners must learn to behave as if they were one company, and that means getting beyond the old win/win mentality. Partnering cannot succeed if one party is preying on the other.

• Some equals are more equal than others. When a bigger hub partner like promises to let you maintain your identity, check your wallet. When Canadian newspaper giant International Thomson wooed New Jersey trade publisher Peterson's (our publisher at one time), Thomson promised virtual partnership and a strict hands-off policy regarding operations. Within six months, every person we knew at Peterson's was gone -- quit, canned, or missing in action. "Equal" doesn't mean much when one equal buys the other one all of its food. Inevitably, the larger (and usually more predatory) culture will dominate the smaller.
• Add their problem to yours. You may be three years into an ISO 9000 registration plan, but your new hub partner wants you to do the Baldrige assessment as well. To get on the same page with your partner, you will either have to force employees through two mind-wrenching regimens, or dump one that people were committed to.
• Sell the farm. Many companies have partnered themselves into the intellectual graveyard, spinning off competencies that lay too close to the core. Kodak lets IBM do its data processing, which is fine. But Chrysler and Toyota both farm their auto designs to design partners -- if they can do that and still call themselves car companies, it will be amazing.
• Strings attached. When Control Data restructured in the 1980s it created a partner to perform human relations tasks, and charged it to market its skills to the outside world. Before letting it go, though, it crippled the new creature by saddling it with units that could not pay their way, putting a major drain on the new entity's prospects.
• The carnivorous collaborator. Most outsourcing is done to cut costs. By retaining high-value competencies while farming out lower-value competencies, an organization signals that the partner is little more than a sweatshop, working its people to the bone while the hub partner buys another ten years of the good life.
• No one said partners can't be mutually brutal. One of the more frightening alignments is when two giants team up to kick everyone else in the ass. In the summer of 1997, The New York Times Book Review, publishing most influential journal, joined with Barnes & Nobles, publishing's most powerful retail outlet, to form an online link, among other things. The combination of highbrow influence and discounting moxie sent an instant wave of fear through the nation's independent booksellers.
• How convenient. Many partnerships move accountability outside the hub organization's control. You say your offshore partner uses prison slave labor, or makes Bangladeshi kids work 12 hour days? News to us. File this tactic under "plausible deniability."

The most celebrated recent case of wobbly partnering involves talk show host Kathie Lee Gifford and revelations that her line of clothing for women's wear for Wal-Mart was outsourcing production to a Dickensian Honduran subcontractor -- a sweatshop. In May, 1996, Gifford went on national TV to issue a tearful denial that she was making money at the expense of Honduran children. (She was not alone. In June of that year, reports surfaced that Michael Jordan's line of Nike sneakers were made by children in Indonesia working for 19 cents an hour.)

At a news conference held Wednesday (5-28) on Capitol Hill, a fifteen-year-old girl told of abuses in a sweatshop in her native Honduras that made clothing for retail giant Wal-Mart's Kathy Lee Gifford line of clothing. Wendy Diaz said about 100 minors as young as 12 years old worked 13 hours a day for a wage of 31 cents an hour in the factory. She spoke of verbal and physical abuse by employers toward the children, as well as sexual harassment and intimidation to keep them working until 6:30 a.m. at times.

Diaz said the Global Fashions company tried to force pregnant women to quit in order to avoid paying maternity leave, forcing the women to stand for 12 hours in the heat of the pressing room. Workers were only allowed two trips to the bathroom all day, and were fired if they tried to organize a union, Diaz said.

Because of the ties to big names like Kathie Lee Gifford and supercompeter Index "Jordan, Michael" # "" Michael Jordan, the child labor issue lurched back into the public eye. But the problem of child labor is nothing new. It is as old as the idea that winning is worth anything, even the health and happiness of those least able to compete.

The contrast between the breezy glamour of Gifford's lifestyle (recall her singing "If you could see me now" for Friendship Cruises) and the squalid exploitation of her production partner could not have been greater. Newspapers and Gifford's own talk-show colleagues pulled the Brute Cycle response on her -- they exchanged information, encircled her with the broiling power of media heat, and exacted the most humiliating retribution.

To her credit, Gifford turned the scandal around by becoming a champion for fair wages and decent working conditions at third world partners. On camera, at least. But the lesson was plain. Partnering in the years ahead isn't going to be the same old, same old, with the anchor partner calling every shot and the junior partner bowing and stooping and claiming to like it.

Musketeers, watch your backs

In the big game, opportunities for betrayal are everywhere. Consider the knots in the relationship Compaq shares with Intel. Compaq has struggled to maintain its position as the number one maker of PCs, and throughout this period it has sought to portray itself as the third corner of an essential technology triangle: Intel providing indispensable microprocessors, Microsoft providing indispensable software, and Compaq providing what they hope is indispensable hardware. They were like the Three Musketeers, all for one and one for all.

Never mind that Compaq has always yearned for a cheaper supplier of chips, and that Compaq provides no essential value that other clone-makers do not also provide. Or that Intel and Microsoft are both past masters of the brutal art of isolating companies who threaten them, as Intel showed in the spring of 1997 when it cut off shipments of chips to Digital Equipment because Digital allegedly incorporated into its Alpha chips proprietary features of Intel chips.

But see what happens when Compaq messes with a fellow musketeer. In 1996 Compaq struck a deal to buy cheaper chips from Cyrix Corp., a maker of knockoff Intel-type chips. Within hours, Compaq CEO Erhard Pfeiffer was getting reamed out on the phone by Intel's Andy Grove.

Andy Grove was not pleased. Intel and Compaq had supposedly turned the page since a bitter public feud two years earlier soured their relationship. But now it was back to the future.

"If you help my enemy, you are my enemy," Grove supposedly told Pfeiffer.

Whether the story was apocryphal or not -- it's since made the rounds at Compaq -- the episode underscored the brittle relationship that still exists between the two industry giants.

The last rift between the two companies occurred in September 1994 when Pfeiffer played the role of Don Corleone. Standing up at an industry conference in Spain, Pfeiffer declared that Compaq was fed up with Intel, reciting a litany of complaints in front of an astonished audience.

The relationship improved for a while, but hit the rocks again when Compaq started buying from Cyrix. Intel turned the tables by offering (Compaq alleges) its archnemesis Packard Bell Pentium chips at below-market cost.

"They knew we were coming out with the Cyrix stuff so they cut a deal with Packard Bell," said a Compaq source. "Those guys can be pains in the butt."

Over the years, a variety of industry executives have grumbled, sotto voce, about Intel's aggressive tactics. In the back of their minds, executives say, they know Intel can exercise a carrot-and-stick discipline.

You might not get shipment allocations on time, or they could cut you down a tier on pricing," said a Compaq source. "They can make your life impossible."

Compaq, a supercompetitive company in a supercompetitive industry, is not known for playing footsie with its other suppliers. But its relationship with Intel is so critical to its future it has been forced to swallow its pride and go along.

Franchise Frustrations

A franchise is a way for very small players to enjoy some of the clout of their bigger partners. For a few thousand dollars, individuals can buy into a large marketing organization's identity. In a happy franchising partnership, the anchor partner supplies the franchise partners, both sides play by the rules, and everyone is happy.

Sometimes the anchor partner breaks the rules. Carvel Ice Cream Bakery of Connecticut lured many hundred of franchise owners in, promising them exclusive territories, only to turn around and sell their products to competing retail stores. Carvel franchisees revolted, hiring an expensive lawyer to fight their anchor partner in court. So much for the one big happy family.

In North Carolina, a judge ordered Meineke Muffler to pay its franchisees $601 million to repay money the company had collected for advertising, but had pocketed for itself. Other franchisees, including Dairy Queen, 7-Eleven, and Little Caesar's pizza shops, have taken arms against their parent partners, for offenses ranging from one-sided contracts, to problems with location, to overly restrictive rules and regulations.

Franchises are grappling to understand the rules of engagement in the transcompetitive age. Can an anchor company and its franchisees work together toward a common goal? Or are franchisees constrained by the need of the anchor company to "win" in the relationship?

it ISN'T such a Wonderful Life

Partnering also occurs between corporate entities, and cultural differences between business units cause many stresses and conflicts. Sometimes, partners collide not because of competitive practices but because of their opposite, collaborative policies.

Comedy Central announced plans to make a spoof of the holiday movie classic, It's a Wonderful Life. The parody would show George Baily, the character played by Jimmy Stewart, as gay and wanting to star in action movies. Perhaps they could have lured George Clooney to play Bailey, with Robin Williams subbing for Clarence the angel trainee. Doesn't that just sound like a sure hit?

But in November, 1996, Comedy Central said it was dropping the plan. The reason? The original movie is still owned by Republic Pictures. Comedy Central did not even realize that it and Republic were both owned by the same media conglomerate, Viacom, Inc. And Republic, for some strange reason, was not eager to sell the rights for a spoof of its greatest treasure.

Rather than step on the toes of a partner it did not even realize it had, Comedy Central canceled a sure moneymaker. This was a gesture of collaborative solidarity: one partner forsaking sure advantage rather than step on the toes of another.

The remake of It's a Wonderful Life would doubtless have been a crappy movie, but a moneymaking one. But the story points out the handcuffing potential of partnering. Independent companies do not feel constrained by the rights and traditions of other companies; they compete unaware of these limits. If you were a shareholder of Viacom, would you be happy to know one division lost money because of the druthers of another?

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