Category Archives: complementarities

Alliance Radar: Locate Competitive Advantage Outside of Your Firm’s Value Chain

PSA Peugeot Citroen, or Peugeot for short, is a former French industrial icon. In the past two years, it struggled to escape from € 7 billion losses. A €3 billion capital increase from the French state and Dongfeng, a Chinese carmaker, should help Peugeot secure its future[1]. Will it be bright?  
The alliance between Peugeot and Dongfeng is one of the thousands of alliances that companies formed around the world in the past 10 years. The classic frameworks of strategy analysis, however, don’t provide much guidance for how to extract value from alliances. Take for example a classic “value chain” tool popularized by Michael Porter:

* This figure is borrowed from http://www.insemble.com/software-value-chain.html
As a business educator and a consultant, I love this framework. It helps map activities of a firm and to think about how they relate to its competitive advantage. The weakness of the framework is that it is too much focused inside the firm and is not meant to help executives think about opportunities for value creation by collaborating with other companies.
I recently co-authored a book “Network Advantage: How to Unlock Value from Your Alliances and Partnerships”. In this book we offer advice on how companies can achieve competitive advantage by managing alliances and partnerships with customers, suppliers or competitors.
When I taught this book at INSEAD, a group of Executive Education participants[2] proposed a really cool way to integrate the logic behind the value chain with alliance thinking. This gave birth to a new framework which we call “Alliance Radar.”
The Radar can help you look outside of your firm.  It:
·       links alliances to specific parts of your value chain
·       helps visualize all of the alliances which your company has
·       identifies new opportunities for value creation across different alliances.
Let’s use this tool to compare alliances of Toyota and Peugeot. I picked these examples because I own cars from both car makers. Another reason is that lately Toyota has been much more innovative than Peugeot and this tool can help understand why.
Let’s start by identifying the key areas of two companies’ value chain. For simplicity, let’s assume that they are Production, R&D, Sales and After Sales.  You can draw a radar like this:

Now let’s take all of Toyota’s alliances and classify them into three categories: primarily aimed at cost reduction (red), aimed at innovation and differentiation (green) and those aimed at both cost reduction and differentiation (yellow)[3].


This approach helps us immediately see that most of production alliances are aimed at cost reduction (and efficiencies in general), whereas in other areas Toyota focuses on differentiation of its products.
We can also see areas in which Toyota can create value across different alliances. For example, let’s take three alliances and move them in the “bull’s eye”. Between 2008 and 2013, Toyota worked with Google to optimize search experience for Toyota’s products, collaborated with GM to make Prius in the U.S. and worked with Intel to integrate sensors inside the car with your smartphone. The tool tells us that Toyota can create value by integrating ideas across these three alliances and make a new product “Smart Social Prius”. I am not sure such car exists yet, but it is definitely in the works!

Because of Intel’s sensors, the car will feed information on your Prius driving habits to your social network. Some “friends” (like your parents or your insurance company) might actually want to know how well you are driving. In fact, an insurance company might even lower your premiums for good driving habits and make your insurance really “personal”! And you can even have a contest among your friends who is a safer (or environmentally friendlier) driver.
Now let’s compare Toyota’s Alliance Radar to that of Peugeot :



It is clear that Toyota has a lot more alliances than Peugeot, most of Peugeot’s alliances are aimed at cost reduction and not much on differentiation. Peugeot has a lot fewer opportunities to innovate across alliances. For once, it can work with both Mitsubishi and Changan: make electric cars in Spain (with Mitsubishi) and outfit them with Chinese interiors. Not as exciting as a “Smart Social Prius”? Well, Peugeot’s network of alliances doesn’t allow it to do much better than that because most of the collaborations are focused on cost reduction anyway. If I were to consult to Peugeot, I would have suggested to take a hard look at their alliance network and see if they can collaborate with partners that can provide them with something better than just cost cutting. 


Does your company want to have a big space for innovations a la Toyota? The Alliance Radar tool can help you see the opportunities. Experiment with moving different circles into the bull’s eye and challenge yourself whether you can create value by combining ideas or resources or market access across different partners. If you don’t see exciting opportunities, then maybe you need new alliance partners!
Lately Peugeot has been on an upward swing financially. Sales are looking brighter as the European market recovers[4]. Hopefully the company builds more and varied alliances that will help it not only to cut costs, but also to create innovative solutions by integrating ideas, resources or market access across its customers, suppliers or even competitors.
If you find Alliance Radar tool to be useful for thinking about your company’s alliances or to identify new value creation opportunities (like a Smart Social Prius), share your story with me (shipilov@insead.edu).
If you want to discuss this tool, you can do so in the “Comments” section.




[1] http://tinyurl.com/melxd2a
[2] Thomas Gudbjerg, Arvid Svenni, Haakon Fjeld-Hansen, Finn-Arne Lorentsen and Jarle Steen Stueflotten
[3] The data is on alliances which were formed between 2008 and 2013.
[4] http://tinyurl.com/melxd2a

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




[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.

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




[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.