Diamonds Are Not Forever: How to Avoid Problems with Your Alliance Partners

A recent New York Times article [1]  describes a serious conflict between Lazare Kaplan International—the century old diamond cutting and polishing merchants of New York-- and their former business partner Antwerp Diamond Bank. Lazare alleges that the Diamond Bank helped a high flying Israeli dealer launder 135 million dollars from illicit sale of Lazare’s rough diamonds. An Antwerp prosecutor sides with the Diamond Bank and calls the Lazare’s suit “defamatory”.

There is nothing strange about one business partner suing another. What’s unusual in this story is that diamond trade has been used as an example of an industry in which participants have almost blind trust in each other. A famous American sociologist James Coleman in the late 1980s marveled at the fact that the traders frequently give each other bags of diamonds to inspect in private without any formal safeguards [2].

The reason, according to Coleman, was that these people are connected in dense social networks and these networks comprise their “social capital”. The diamond traders have high trust because they have known each other for a long time, they live in the same neighborhoods, they worship together, their business associates all know one another, in short, they have a very dense social network. If one network member were to cheat another network member, this person risked ostracism from the community — the punishment that was worse than anything the courts could deliver.  

A lot of academic research since then has shown that dense social networks indeed promote trust which lowers the costs of doing business for the network members.

What happened to the social capital in the diamond trade? Regardless of who is right and who is wrong in the Lazare-Antwerp dispute, the story does point to the fact that a particularly daring company (or an individual) can decide to cheat its partners, especially if there is a considerable degree of trust in the relationship. This can happen when "the cheat" doesn't feel that there is any value in continuing collaborating with its partners.

The broader lesson to firms forming partnerships and strategic alliances is this: even though you trust your current partner, you still need to periodically check whether you still have strong strategic and resource complementarities with it. If the answer is yes, you are likely to continue cooperating well in the future, if the answer is no, then you are at a risk of being cheated.

In the new book “Network Advantage: How to Unlock Value from Your Alliances and Partnerships” (networkadvantage.org) together with Henrich Greve and Tim Rowley, we develop a set of tools that can help you understand the risks and benefits of continuing to cooperate with your partners.

Based on over 40 years of collective research on the success of alliances and partnerships, we have developed a set of key questions to ask to determine whether you still have complementary strategy and resources with your partner.

Complementary strategies mean that collaboration continues to help both companies achieve their own long-term goals, but it should not make either firm a powerful competitor in the other firm’s markets in the long run.  

Some specific questions to evaluate the extent of your strategic complementarities are:

• What are the current objectives of this alliance from the standpoint of each partner?

• What are the key performance indicators for this alliance from the standpoint of both partners?

• What are each partner’s long-term objectives?

• Are the partners current competitors or are they likely to compete in the same product or geographic markets in the future?

• How might each partner cheat the other? What would each partner gain from each form of cheating?

Partners should also bring different resources to the table: human, financial, technological, market access, knowledge, intellectual property or brand. If your firm and its partners bring exactly the same resources, this begs the question, why did you decide to collaborate in the first place? Unless both firms want to pool their similar resources to achieve economies of scale in some markets, it’s best when partners contribute complementary resources to the relationship. This way both partners can gain from the alliance by creating synergies.

You can evaluate resource complementarities between your firm and its partner by asking these questions:

•  What resources does each partner contribute to the relationship?  Are they similar or different?

•  How do the resources contributed by each partner increase the value of the resources provided by the other partner?

•  What return on the contributed resources does each partner plan to obtain? How will each partner evaluate this return?

•   How will each partner’s resource contributions change over time?

Thus, a good old dictum “trust but verify” is a very important lesson that diamond merchants, and members of other industries, ought not to forget. Even after you have worked together with a partner for a long time, it is still important to periodically evaluate the extent to which there are complementarities in the relationship.

Andrew Shipilov is a co-author of “Network Advantage: How toUnlock Value from Your Alliances and Partnerships” with Henrich Greve and Tim Rowley. The book’s website is networkadvantage.org. #unlockvalue

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[1] “Scrutiny Pries Open Insular Gem Trade” International New York Times November 26, 2013

[2] Coleman, J. (1988). "Social capital in the creation of human capital." American Journal of Sociology Supplement 94: S95-S120.

Is Losing Talent Always Bad? Management Lessons from Prada

In a recent post to the Harvard Business Review blog, I wrote that the recent departure of Marc Jacobs from Louis Vuitton might seem like terrible news for the company.  But if you look a little more closely at the fashion industry you’ll find that turning over your talent isn’t always a bad thing.

Prada is a case in point.  Between 2000 and 2010 Prada lost a lot of designers to competing fashion houses, yet its fashion collections were consistently rated as much more creative than the average.

How does that happen? In a recent study (co-authored with Frederic Godart and Kim Claes) I found that when a designer leaves a fashion house to work for competition, he or she tends to stay in touch with friends and former colleagues from the old job. These ties act as communication bridges through which former colleagues can learn what the departed designer is up to in the new job.  And when several designers leave to work for different fashion houses, the colleagues staying behind build bridges to lots of companies. This provides them with a lot of creative input for their future collections.

The phenomenon is not confined to fashion. McKinsey consultants famously stay in touch with former colleagues, who have left to to work for other firms, most of which are potential customers.   The same thing happens in Silicon Valley where people change jobs across customers and competitors. To be sure, we are not talking about industrial espionage here. The positive effects of communication bridges on creativity come from friends catching up with friends in very general terms about what is going on in their professional lives.

Fashion houses that benefit the most from talent turnover also have long serving creative directors who mentor and befriend the new hires. At Prada, this is Miuccia Prada, who has a long tenure as the company’s creative director.

Prada (the company) gets infusions of fresh ideas every time it hires a new colleague. Prada (the designer) welcomes and helps train the newcomers. When a designer eventually leaves to work elsewhere, after a fruitful stint at Prada, she remains on good terms with former colleagues, spreading the message throughout the industry that Prada is a great place to work and learn. These positive tendencies are reinforced by a culture of transparency and collaboration in the company, as described by CEO Patricio Bertelli in an HBR article.

The messages to the non-fashion world are clear. Don’t part with former employees on bad terms and don’t forget about them. Stay in touch with them as they are your communication channels and ambassadors in the industry. Replace them with talent from different companies to preserve diversity of ideas inside your firm. And make sure senior executives take time to train and socialize the new hires.

Now every time we see someone wearing Prada, let’s think not only about the fashion, but also of the management lessons that we can learn from this company.

Follow me on twitter @shipilov

Samsung Beats Blackberry in the Global Alliance Game

To the investors of Research in Motion (RIM), the maker of Blackberry, the recent years have been really disappointing. It lost the fight to Apple and Samsung. There may be several explanations to this failure, but one which particularly stands out is the failure of RIM to build a strong alliance network. Alliances and partnerships are the sources of "network advantage"--the ability to improve operating efficiency and increase product innovation by combining resources and knowledge with partners. We discuss how companies can benefit from their relationships with customers, competitors and suppliers in a new e-book "Network Advantage: How to Unlock Value From Your Alliances and Partnerships". The print version of the book is available from January, 2014.

Let's look at the alliance network of RIM. This picture is built by looking at the RIM's alliance announcements between 2008 and 2011. Since these alliances happened a while ago, their positive or negative effects should be felt by now.

RIM is the firm at the centre of the picture and it has 4 (four!) alliance partners only. The alliance with the Royal Bank of Canada and Thompson Reuters (Woodbridge is its parent company) provided venture capital fund services to invest in mobile applications and services in Canada. The alliance with TiVo aimed at providing mobile television entertainment services for BlackBerry users globally. The alliance with NII Holdings Inc was to provide Blackberry Smartphone services in Latin America.

Did these alliances make sense? They sure did. But network advantage doesn't come to firms who simply build alliances, it comes to firms who build better (and more) alliances than competition. 

Let's compare RIM's alliance network to what Samsung is doing with its alliances. Below is the picture of Samsung's alliance network based on the announcements between 2008 and 2011:

Samsung works with Kia motors to build the car around its Galaxy tab, manufactures 4 G communication infrastructure in Russia, collaborates with Telstra to develop Internet TV for mobile devices, works with Nanosys to build better screens and batteries for smartphones using the nanotechnology. It works with Intel and Juniper on mobile security solutions and works with Korean Telecom (plus Intel) to transmit 3D signal through the mobile grid. It works with Dreamworks and Technicolor (Thompson) to develop 3D movies and viewing equipment. We might soon have 3D video enabled mobile phones!!!... Not to mention the fact that Samsung uses apps from Android platform for its phones. 

In short, the alliance network of Samsung allows it more (and cheaper) opportunities to innovate not only in hardware but also in content.

The sad story of RIM did not begin this year. It began several years ago when it failed to build a big enough network of alliances and partnerships to counter the network of Samsung (and of course the network of Apple). Samsung has excelled at the global alliance game and extracted its Network Advantage. Kudos to Samsung and condolences to RIM. May your company not repeat the RIM's mistakes!

How to make your company more creative? Hire a senior executive who worked abroad.

Creativity is an important driver of competitive advantage for companies. One way your company can be more creative is to hire executives who worked abroad. These people are likely to offer non traditional solutions to your problems.

I recently did a study with Frederic Godart, Will Maddux and Adam Galinsky. We looked at how foreign working experience of fashion designers affected creativity of their collections. We found that fashion critics and buyers were more likely to view a designer's fashion collection as creative, if this designer worked (or is currently working) abroad.

Apparently, working outside of your home country changes the way you think: by looking at how different people in different cultures solve problems differently, your brain learns to think about how to approach any business problem differently. If a problem is solved in France in one way, perhaps the Italians solve it in a different way. And you can perhaps think of the third way to solve the same problem--by combining the French and the Italian approach. Karl Lagerfeld is even reputed to work in Italy and France during the same day!

Working abroad also shapes your personal network. If you work in one country and then go work to another country, you become a bridge between professional communities in both countries. For example, a fashion designer who works in France gets to know other French designers and when she moves to work to Japan, she can get to know Japanese designers. If she still stays in touch with her French friends, she will know what is going on in French fashion world while she is working in Japan. And this knowledge will help her combine French and Japanese fashion influences in the future collections. Our study shows that such collections are seen as being very creative.

So, next time you are looking for a senior executive to fill a job that requires creativity and ability to innovate, look up their Linked-In profile. Does it indicate that the person worked in several different countries? If so, she or he is worth looking at, as this person is likely to be indeed creative.

Russian Businessmen Play the Global Status Game

How can a new company signal its quality to customers, suppliers and other business partners? One strategy is to "borrow status" from the well known people in the industry. If the prospective partners cannot judge the quality of your new company, they will think that your company must be of high status if it associates with high status people. After all, the prospective partners will think that your new high status associates must have done their due diligence before joining, thus it is safe for the prospective partners to work with your firm even if it is relatively new.

Russian businessperson Mikhail Friedman understands that very well. He is the man whose company received around 14,000,000,000 (14 Bln) dollars for the sale of its stake in TNK-BP-- the joint venture between a Russian oil and gas company TNK and British Petroleum. With these proceeds, Mr. Friedman set up a company -- called L1 Energy. This firm will make investments in oil, gas, telecoms, banking and retail. To add credibility to his venture, he hired a former BP chief Lord Browne to its international advisory board. Ironically, in the late 1990s and early 2000s Mr. Friedman and Lord Browne have been fighting over the control of Siberian oil fields, but eventually decided to cooperate on the creation of TNK-BP joint venture.

Apparently, having billions of dollars in the L1 Energy's war chest is not enough for success. So, Mr. Friedman turned to making status signals. What does Lord Browne bring to the table? He clearly has a lot of experience and knows people in the oil and gas industry, but his hiring is also designed to signal L1's status to prospective partners. James T. Hackett, former chief of the American company Anadarko Petroleum, and Andrew Gould, the former head of Schlumberger are also well known industry insiders. Naturally, their hiring is also aimed to enhance the status of Mr. Friedman's operations. The question is whether these status signals will persuade potential partners that it is safe to deal with Russian businessmen, knowing their tough reputation in the industry.

The lesson for other firms is clear. Get the well known people to work for you, this will help you enhance your status. Even if you have a lot of money, sending status signals is really important for continued success. 

What can Sony and Apple learn from the British MP Expense Scandal

My friend and co-author Henrich Greve recently made a blog post regarding the advantages of high status. He was wondering why every little bit of news about Sony or Apple made big waves in the media space and his conclusion was that this happened because both were high status companies. High status essentially means that the companies are thought of as leaders in their industries and whatever they do attracts a lot of attention. High status brings lots of positive things: customers buy your products and they think your products are of high quality, even if this is not always the case.

Status has a dark side too. Remember the discussions about student labor in the assembly plants of Apple's supplier Foxconn? That generated a lot of negative publicity not only for Apple but also for Foxconn. When French Tax Collector-In Chief—Jerome Cahuzac—was caught with undeclared Swiss bank account, everyone took notice and even the approval of his close ally—French President Francois Hollade took a dive. Essentially, high status means that falls from grace will be observed by a lot of people.

In a recent study Jonathan Bundy, Joseph F. Porac, James B. Wade and Dennis P. Quinn found that high status British MPs were not more likely than low status MPs to cheat in their expense claims. However, high status MPs were more likely to be targeted by media and other stakeholders with shaming after the false claims were discovered. Thus, more high status MPs had to quit parliament as compared to lower status MPs. 

What lessons does this study have for high status firms like Apple or Sony? You are being watched, so don’t slip, because if you do, you will crash spectacularly. 

Do you have "the right" alliance portfolio?

As you can see, the latest post on this platform was a while ago. This is because I was working on a book called "Network Advantage: How to Unlock Value from Your Alliances and Partnerships" which is due to come out in December 2013 (or maybe January 2014).  This is a joint work with Tim Rowley and Henrich Greve. The publisher is Wiley and we wish them well in converting our ideas into a tangible BOOK! 

The idea behind this book is to translate what we (as researchers) know about alliances and partnerships into the language that business executives can understand. Since "knowledge is power" we hope that thoughtful executives, including entrepreneurs, can use our ideas to build better alliances and partnerships. We extensively taught ideas and frameworks from this book in the exec ed classrooms while we were writing this book.

Now the book is in the publisher's hands, so I have some free time to write the blog posts.

While we were working on the book, Harvard Business Review published an article which is based on one of our ideas. The idea is that all of the firm's alliances should be managed as a portfolio of relationships. Most firms think of their alliances as one to one deal: a company forms an alliance with partner A, then an alliance with a partner B, then an alliance with a partner C without thinking about how these three alliances fit together.

Based on over 40 years of collective research (remember, we are three authors), we argue that the existence or absence of ties between partners of your firm will make a difference what you can use your alliance portfolio for. Your firm might play a role of a hub among your partners if your partners don't work with each other. If this is your portfolio, then you are well positioned to produce radical innovations, but you are unlikely to receive much help from these partners in times of need.

Other companies have portfolios with partners that have alliances with each other. If you are such company, then you are best positioned for incremental innovations – and for getting a whole lot of help in times of crisis.

We collected data on alliance portfolios of two well-known companies: Sony and Samsung. Samsung's alliance portfolio looks something like this. It is a hub and spoke portfolio, where Samsung is a hub and its partners are the spokes:

Sony's portfolio is different. It looks like this:

 Samsung’s alliances allow it to look to the future: From its vantage point at the hub of a network, Samsung can combine insights from diverse partners such as Dreamworks and Korean Telecom that are doing interesting things with 3D technologies but don’t typically work together. Like Apple, which invented the iPhone after gleaning insights from alliances with Motorola and disparate other partners, Samsung is well positioned to forge seemingly unrelated sets of knowledge into a breakthrough product – perhaps something such as the first handheld device for watching 3D movies without special glasses. Its recent Galaxy S4 mobile phone already includes cutting-edge gesture- and eye-tracking features.

Sony’s network, by contrast, seems more focused on the here-and-now. Its allies, including Sharp and Toshiba, which manufacture its LCD panels, work with one another and know what the other members of Sony’s network are doing. The group is thus more integrated than Samsung’s. Our research shows that such a network can help each partner make incremental technological improvements, but isn’t likely to yield breakthrough innovations.

Integrated networks can be helpful in another way, though. Highly interconnected partners tend to have a lot of trust in one another and are willing to assist in time of need. For example, after the March 11, 2011, earthquake in Japan, customers and suppliers of microchip maker Renesas Electronics, a firm with an integrated network, sent 2,500 of their own workers to help reconstruct a partially destroyed plant and quickly put it back into operation.

Our article describes several factors that affect whether you need a hub and spoke or an integrated alliance portfolio. If you are interested, you can access the full text of the article by clicking here. The text is free :).