In the past, adversarial competition and in-house design and production typified the climate and model for business success. Today, that climate has changed, according to management professor Farok Contractor. Cooperation and networks are the new tools for success in the global economy for a whole host of reasons. First, many projects are so large that one company cannot possibly shoulder the risk or the cost to bring a project to completion. Additionally, with many products requiring hundreds of production steps, it is inefficient and difficult for one company to try to master every step. Thus companies must cooperate within a network of suppliers and partners to remain competitive, perhaps even survive. Such cooperation can lead to “altruistic” sharing in which companies may wait years for a project to turn a profit, in the mean time relying on the good faith of the involved partners to uphold their commitments. In such an environment, the fittest corporation will be the one that collaborates best with others. – YaleGlobal
Capitalism’s Future Lies in Networks and Cooperation
Altruistic collaboration is the new recipe for business success
YaleGlobal, 20 April 2009
|Global sourcing: Boeing's 787 'Dreamliner' is assembled with components built by partners in seven nations
NEWARK: The global financial crisis has increased protectionism in some
countries, raising questions about whether international business and
global cooperation will recede. This year is also the 200th anniversary
of the birth of British naturalist Charles Darwin. Darwin theorized that
individuals in a species that are a better “fit” with their environment
would out-compete and replace those less fitted. Notions of cooperation
or altruism bear only a passing mention in Darwin’s works.
The past 25 years celebrated a culture of corporate triumphalism based
on competition and profit-seeking. But, beneath the veneer of such a
popular, mainly Anglo-American, corporate ideology, a different economic
trend has taken root – one that makes a return to protectionism or
isolationism unlikely. Cooperation, as much as competition, is slowly
being recognized, by evolutionary scientists and behavioral economists,
as an engine of progress.
Cooperation among companies is an integral part of the new model for
business in a globalized economy. Today, the largest economic grouping
is not the multinational corporation, but the global industry network
consisting of companies that simultaneously compete and cooperate. The
“fittest” corporation of the 21st century and beyond is one that masters
the art of competition, when acting alone, and the art of collaboration
when part of a worldwide network.
The new knowledge and service economy of the 21st century relies on a
model of corporate “alliances” and “networks,” by breaking down the
sequence of research, production and distribution – previously done
in-house within the same company – over separate enterprises that take
joint risks and share rewards over longer periods of time. Boeing used
to build entire aircraft themselves, with parts purchased from thousands
of suppliers with whom their relationship was adversarial.
Today it is a cooperative process. While Boeing guards proprietary
technologies, the 787 “Dreamliner” is built with major inputs from
partners in seven nations, all part of the research and development team
from the beginning, sharing in development costs and providing
specialist knowledge that Boeing did not have. Each network “partner”
incurs R&D costs based on faith and trust, with no assurance of
recouping these outlays for a decade or more.
Foregoing immediate gain, good ideas and technology are altruistically
shared within the “network” of suppliers, even though there may be no
immediate gain for that partner. However, the whole network gains. The
altruistic member firm, sharing good ideas or incurring costs, does not
demand immediate recompense, anticipating eventual reward because the
other companies remember its contributions. The new network economy is
based on forbearance and trust among cooperating firms, long-term memory
and social networks, rather than formal contracts or directed
Three decades ago companies believed in doing it all themselves, under a
hierarchical, internally controlled, management. Rather than accept the
Indian government’s mandate to accept local partners, IBM withdrew its
entire operation from India in 1977. Today,
IBM alone claims to have more than 90,000 business partners.
Cooperating networks range from strategic to operational to tactical,
with hundreds of thousands of cooperative relationships worldwide.
For many industries, a global scale of operations is mandatory for
efficiency reasons. The huge costs of R&D or production in high-tech
sectors make it too difficult for a single company to develop the
product or brand, bear the risk and span all segments of the value chain
on a global basis.
The new alliance network economy provides more flexibility, lowers risk
for each member company, and speeds response to changing markets or
fashion conditions, more than is possible within a single firm. The
value chain is outsourced over several companies, in different nations.
A Nike sneaker may have components produced by independent suppliers in
nine countries, which are then assembled under Nike’s coordination in
Asian factories. Nike is “merely” a designer, a coordinator of a global
supply chain encompassing 800,000 workers worldwide, and a weaver of
dreams whereby the user derives satisfaction through subliminal
association with Tiger Woods.
Consequently, the basic model of business is being revised. Where Ford
Motor Company once occupied every part of the value chain – from making
the steel to marketing its cars – the predominant model today is for
each firm to find its core competence while collaborating with partners
occupying other parts of the value chain. Each partner specializes in a
function it does best or cheapest. For example, Nike specializes in
design and marketing, outsourcing the production of shoes to its
Most outsourcing is not an arms-length transaction, but entails an
intimate, cooperative relationship between the managements and engineers
of the network firms. The better managed the relationship, the greater
the performance of the alliance. The behavior, quality standards and
reputation of foreign prospective partners is easily discerned in a
connected world. While outsourcing in manufacturing is a 200-year-old
phenomenon, business-services outsourcing has exploded recently, aided
by reduced data-transmission costs and an increase in absorptive
capacity in emerging nations.
The cooperative revolution is also being aided by sweeping changes in
the global regulatory environment such as the liberalization of foreign
direct investment rules, the international spread of
intellectual-property enforcement, the harmonization of standards and
the codification of business functions. Hence, ultimately, any business
process or task that can be codified or digitized is amenable to
“Codification” simply means that companies make a concerted effort to
document management processes and engineering techniques that formerly
resided in the minds of their engineers and managers in the
semiconductor, steel, chemical and many other industries.
Another form of cooperation involves partners pooling resources for the
same business function or piece of the value chain. More diverse talent
is thereby tapped, costs are lowered and good ideas are gleaned –
especially if the research is done abroad. Another motivation is simply
to spread risk. The cost of a semiconductor fabrication factory, being
as much as $4 billion, few single firms can justify the investment. The
entire pharmaceutical industry is evolving in that direction with ideas,
costs, benefits and risk shared between large firms and their smaller
biotechnology partners. Buying options for potentially good ideas
outside the company also motivated Microsoft to invest in small-equity
stakes in Facebook and other startup companies.
To a degree unimagined just two decades ago, development risks are
driving more industries to recognize that global returns are mandatory
for competitive survival. Budgets for Hollywood movies are never set
without an estimate of the non-US market proftit potential. Few single
companies can today market to all potential customers – or all
end-applications – to maximize return on R&D. Applied Materials, Inc., a
leading provider of manufacturing equipment for chip makers has
accumulated expertise in nanotechnology, which has potential
applications in fields as diverse as solar energy, flat-panel displays,
energy-efficient glass and fuel cells. But Applied Materials does not
have in-house expertise in the production or marketing in these other
areas. The solution is alliances in those business areas.
Besides increased codification of corporate knowledge, the capacity to
absorb technology better in emerging nations, and the IT revolution, a
series of global institutional developments have also fostered
international corporate alliances: Increased patenting makes
technologies more visible to prospective allies. Better patent
enforcement reduces fears that allies may engage in opportunistic
behavior. Of course, several emerging markets are a long way from
effective enforcement of intellectual property rights, but this is bound
to improve. All in all, the global spread of intellectual property
rights will increase cooperation.
Liberalization of the world’s investment climate continues, a trend
going back to 1975. For the 16 years, 1992 – 2007, of 2,788 regulatory
changes, as many as 91 percent were liberalizing, and 9 percent or fewer
were more restrictive toward incoming FDI. Governments now voluntarily,
even eagerly, subscribe to treaties such as that of the WTO that
circumscribe their internal economic freedom. This applies even to
authoritarian governments such as China that loathe outside scrutiny.
The old industrial economy of objects emphasized mass production and
ownership, control and vertical integration within a single company. An
economy of ideas favors flexibility, customization, rapid response and
risk, reward and idea sharing within networks of companies. Cooperating
entities in a network attract more members into the network, which in
itself increases value, reduces costs and promotes common standards.
As we question, in 2009, the shape of future global capitalism, a
cooperative model has already evolved without much fanfare. In the
evolution of life on our planet, cooperation has been as essential a
theme as competition. A planetary-scale economy and civilization make
Dr. Farok Contractor is Professor in the Management and Global Business department at Rutgers Business School and can be reached at email@example.com. He is the author of several books on alliances and cooperation including "Cooperative Strategies and Alliances."
© 2009 Yale Center for the Study of Globalization