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
