Business and Marketing

AT&T provides equity, access to operating systems technology, low cost manufacturing capabilities, and credibility. Kyocera, a Japanese manufacturer of ceramic packaging for the semiconductor industry and other high technology products, also provides equity as well as access to the Asian market, sophisticated packaging technology and manufacturing capability. And British & Commonwealth, a London-based shipping conglomerate, provides equity and access to the European markets. The chairman of Kyocera and the president of AT&T Information Systems are active participants on Counterpoint’s board of directors. According to Pauline, “These relationships are just the beginning.”

Of course, simply establishing the new relationships is not enough. Companies also must know how to capitalize on the links after they are formed. ZyMos is one company that has failed to do that. As a small company manufacturing custommade semiconductor chips, ZyMos needs to convince customers of its reliability. The marketplace is fearful of a small company in today’s environment. All companies are growing so quickly that they need a reliable supplier.

They can’t afford to have their lines shut down.

Strategic relationships are an ideal way to ease these customer fears, and ZyMos has an impressive list of partners. It has technological agreements with many top-notch companies, including Intel and Apple. But ZyMos is still going out and presenting its product on the basis of technical data. ZyMos’s managers came to us and talked for an hour about line widths. That makes no sense. Pitching technology doesn’t work in this environment. ZyMos should be stressing its relationships with Intel and Apple. They have the right relationships, but they’re not using them.

The idea of strategic relationships is not limited to the electronics and computer businesses. It applies to all fast-changing industries. Strategic alliances can be critical in the biotechnology industry. As in the electronics industry, most of the innovation in the biotechnology industry comes from small firms. But bringing products to market is particularly difficult for small companies in biotechnology. Many biotechnology products must gain government regulatory approval. That is a long and expensive process. Few small companies have the resources to wait out the entire process. Teaming up with large companies solves this problem, while also giving the startups much-needed marketing muscle and credibility.

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* See the first posting about this at:
The important of Strategic Relationships

As competition continues to grow in technology-based industries, strategic relationships will become ever more important. Industry shakeouts are inevitable. Not all 500 computer companies and 10,000 software companies will survive. Small companies have to ask themselves whether they can go it alone without the resources and credibility offered by larger companies. For companies that start to slip, strategic relationships will be the only way to regain credibility, to build a new image. These slipping companies need a dramatic change. Osborne and Victor, two personal-computer companies that went bankrupt, both should have paid more attention to strategic alliances. They didn’t and they failed.

In some product categories, such as computer operating systems, one or two dominant standards will emerge in the next few years. For companies developing those products, strategic relationships are particularly important. Those companies must link up with others to help establish their products as standards.

Pauline Alker, one of the founders of Convergent Technologies, founded her second company, Counterpoint Computers in early 1984. Counterpoint is in the high performance, mini-computer business. But so are many other companies. The major difference that has made Alker’s company successful so early in its corporate life is her approach to strategic alliances. Pauline set out from the beginning by pursuing and attracting capital from three of the premier venture capital companies, Arthur Rock, Hambrecht & Quist, and Mayfield. While her products were in the development stage, Pauline set out to establish relationships that would ensure success. Counterpoint’s initial strategic alliances include technology exchanges and marketing, product development, manufacturing and equity relationships with three strategic partners: AT&T Informations Systems, Kyocera and British & Commonwealth. These companies have combined assets in excess of $150 billion.

To be continue at:
The important of Strategic Relationships -2

The product-creation process breaks down into four stages:

Basic research. Although most industrial advances rely on progress in basic research, industry funds very little of this work. Basic research seeks to answer fundamental scientific questions, such as the internal structure of matter or the properties of human-body proteins. It is a long and uncertain process. No one can know ahead of time whether it will lead to new applications or technologies. Few companies have the resources or patience to fund this type of research. So most basic research in the United States is performed at universities or national laboratories, with funding coming primarily from the government.

Applied research. When a scientific endeavor becomes directed toward a particular industrial result, it becomes applied research. Squeezed between basic research and development, applied research suffers the woes of a middle child: ambiguity and neglect. University researchers, whose main goal is to expand scientific knowledge, prefer to focus on basic research. Small companies cannot afford to get involved until research has already passed through the
applied stage. So most applied research is performed at large industrial labs, such as AT&T’s Bell Laboratories and Xerox’s Palo Alto Research Center.

Development. This is the most directed phase of product creation. Its goal is a finished product that can compete in the marketplace. All companies do development work. But in fast-changing industries, small companies are the most productive and successful in development efforts. Unlike corporate giants  who must invest substantial resources in maintaining their bureaucratic structures, small startups direct almost all their resources and energies toward development of a product. Necessity presses startups to be more innovative: The company’s very survival depends on success of the development effort.

Manufacturing and marketing. The first three stages of the cycle, from basic research through development, all represent investment costs. It is through manufacturing and marketing that companies produce a return and recoup the costs of product creation. Without this return, the investment is lost and it has generated no new capital for the next generation of product innovation. Size and resources are often major advantages in manufacturing and marketing, so big companies tend to be the leaders in this final stage of the product-creation process.

It is in this final stage that Japanese companies have their biggest advantage. Japanese companies usually lag behind their U.S. counterparts in the first three stages of the product-creation cycle. But in some fast-growing markets-such as consumer electronics and semiconductor memories-they have managed to leap ahead in the final stage, in part because of superior manufacturing technologies, and in part because of the special treatment they receive from the Japanese government and Japanese financing system. In winning the manufacturing battle, the Japanese have deprived U.S. companies of the returns they need to invest in future-generation products.

Strategic alliances can help U.S. companies share costs and expertise, and thus meet the Japanese challenge. In looking at the product-creation process, it is clear that different companies have different strengths in different parts of the cycle. Teaming up is a way to share expertise. If big companies are typically stronger in applied research and manufacturing, while small companies are the most innovative at development, why not join forces?

IBM’s strategic alliances have done just that, linking its manufacturing prowess with the developmental skills of Intel, Microsoft, Tandon, and others.

First and second article in:
Forming Strategic Relationships -1
Forming Strategic Relationships -2

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Indeed, acquisition strategies in technology-based industries have a pretty dismal record. Schlumberger, for example, tried to acquire its way into high technology. The company, a leader in the oil-services business, wanted to gain a foothold in new technologies, so it acquired Fairchild Semiconductor, the pioneer of Silicon Valley’s semiconductor industry. But the strategy backfired. Key employees left the company and Schlumberger’s corporate culture did not translate well to Silicon Valley. Schlumberger’s desired foothold has turned into nothing more than a toehold, if that.

Exxon Corporation’s effort to enter the office-automation market through acquisition of small high-technology companies turned into a disaster.

Western Electric acquired robot maker Unimation in 1982, then saw Unimation’s sales drop sharply. And AM International’s high-technology acquisitions drove it into bankruptcy in 1982.

Clearly, acquisitions are filled with pitfalls. In many cases, large companies would be wiser to buy minority interests in small companies, or sign development contracts with them. These approaches allow the small companies to maintain their culture and entrepreneurial zeal. To better understand the growing need for strategic relationships, it is important to understand the product-development cycle in technology-based businesses. There are many steps between the scientist’s workbench and the assembly line, and no company can handle all steps.

Strategic relationships are needed to bridge the gaps.

*the end.

See previous article in: Forming Strategic Relationships -1

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Many strategic relationships link a small company with a large company. These relationships are not a zero-sum game: Both companies can benefit. Small, growing companies acquire an important aura of credibility by linking up with large, respected companies. The large company acts as a credible reference that tells the market the small company is a winner. Customers are more willing to take a chance with a small company if the small company has IBM or Digital Equipment standing behind it.

At the same time, large companies can gain a window on new technology. Typically, small companies develop new technologies faster than large bureaucratic companies. So by forming links with small companies, large companies can bring more innovative products to the market, and get them there

quicker.
A good example of this type of strategic relationship is the alliance between IBM and Microsoft. IBM agreed to use Microsoft’s MS-DOS software as the primary operating system on its personal computer. The operating system, essentially the traffic cop controlling activity inside the computer, is a critical element in a computer system. Designers of the operating system and the computer itself must work closely together. For that reason, IBM had always
developed its own operating systems for its computers. But the deal with Microsoft made sense for both companies.

For Microsoft, the IBM deal meant instant credibility. Microsoft was an obscure company in Washington state, run by a kid in his 20s. Suddenly, Microsoft was seen as a significant company in the personal computer industry. Its revenues have soared ever since. For IBM, the Microsoft deal meant the giant company could get its personal computer to the marketplace much faster than it could have otherwise. IBM was already somewhat late getting to the market. If it had to develop its own operating system, it might have arrived too late to become a leader.

IBM has forged other alliances as well. To help in the development of floppy disk drives, it struck a deal with Tandon. In microprocessors, it decided to standardize on Intel’s family of 16-bit processors. It also invested in Intel, buying 12 percent of Intel’s stock, and later increasing its stake to 20 percent. In each case, IBM gained quick access to new technology, while its smaller partner gained an important shot of capital and credibility. IBM’s stamp of approval delivered a clear message: This company is a winner.

These strategic relationships allow each company to maintain its independence and unique corporate character. These alliances should not be confused with traditional acquisition and diversification moves. Acquisition strategies often suppress innovation rather than foster it. The larger company often forces the acquired company into its corporate mold, thereby killing the innovative character of the small company that made it attractive in the first place.

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To be continue at:
Forming Strategic Relationships -3

Companies in fast-changing industries need to form all types of relationships. As I have already discussed, they need relationships with venture capitalists, with dealers, with industry luminaries. But just as important, if not more so, are relationships with other companies in the same industry.

In fast-changing industries, these relationships are becoming more important than ever before. As technologies advance and become intertwined with one another, no single company has the full range of skills and expertise needed to bring products to market in a timely and cost-effective way. To produce a personal computer, for instance, a company needs expertise in semiconductor technology, display technology, disk-drive technology, networking technology, keyboard technology, and several others. No company can keep pace in all of these areas by itself.

As a result, collaborative efforts are proliferating. Fast-growing companies, once fiercely independent, are now forming all sorts of alliances, even with former competitors. Every small company, it seems, is looking for “sponsors,” while large companies are trying to link up with as many innovative startups as they can. As Business Week magazine wrote in a 1984 special report on the computer industry: “For companies large and small, collaboration is the key to survival.” These collaborations can take many forms: joint ventures, technology exchanges, manufacturing agreements, and equity positions, among others. Although some of the agreements seem aimed at R & D or fi¬nance, these relationships can play a critical role in a company’s marketing strategy.

Companies in fast-changing industries need to form strategic relationships for a variety of reasons:
-    To compete in today’s markets, companies need a diverse set of technologies. Fields like computers and communications are merging, and customers want complete solutions. No company can develop all of the necessary technologies by itself.
-   The costs of developing new technologies are rising rapidly. Companies must share the costs if they are to survive.
-    U.S. companies are facing increasing competition from Japan. The Japanese government has led and helped finance cooperative development efforts in fields such as integrated circuits and robotics. U.S. companies must team up to keep pace.
-    Technologies are changing more quickly than ever before. At one time, a company could stay at the forefront of many different technologies. Now it is much more difficult.
-    Small companies need to gain management expertise, distribution muscle, and capital in order to compete. Strategic relationships can provide these.
-    Less tangible, but just as important, strategic relationships can bring added credibility to the companies involved. By choosing the right strategic partner, a company can gain credibility by association.

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When personal computers first became available in the mid-1970s, most businesspeople saw them as a passing fad. Not Ben Rosen. At the time, Rosen was working as an electronics industry analyst at the Wall Street firm of Morgan Stanley and publishing a newsletter on the electronics business. He began writing, and talking, about personal computers. While others saw personal computers as toys, Rosen viewed them as the basis for a dynamic new industry. Through his newsletter and informal conversations, Rosen began to spread the gospel of personal computing.

Gradually, Rosen began to win converts. First the readers of his newsletter became believers. Then Forbes magazine ran an article showing how Rosen used a personal computer for financial analysis. More people started to pay attention to these new machines. Soon, companies began to view a favorable report from Ben Rosen as the key to success in the personal computer business. A bad review from Rosen was the kiss of death.
Why was Ben Rosen so influential ? Had he been an obscure broker, his endorsement of the personal computer, or any particular personal computer company, would not have been very significant. But Rosen was considered one of the top analysts in the country. People believed him to be a credible source of information.

Rosen played a key role in the infrastructure of the electronics industry. Every industry has an infrastructure, though it takes a somewhat different form in each case. The infrastructure in cludes all those people between the manufacturer and the customer who have an influence on the buying process. These people give credibility to the product and the company (or, in Rosen’s case, to a whole new industry). Without the support of the infrastructure, the product and company are sure to fail.

I like to picture the infrastructure as an inverted pyramid, with the manufacturer at the bottom and the customer at the top. Figures 5 and 6 show the infrastructures for two industries personal computers and microprocessors. In each case, information about the product and the company bubbles up to the customer through the infrastructure pyramid, largely through the word-of-mouth process discussed in the previous section.

Each level of the pyramid influences other levels, particularly those above it. Take a look at the personal-computer infrastructure. If third-party hardware and software companies develop products to be used with a new personal computer, industry opinion leaders or “luminaries” begin to take notice. These luminaries, who can be consultants or financial analysts or key users, begin to influence others. Dealers and distributors become interested.