Business and Marketing

Strategic relationships helped establish Genentech as a leader in the biotechnology industry. Genentech had a fair amount of credibility from its very beginning because its funding came from one of the most respected venture-capital firms, Kleiner Perkins Caufield & Byers. Using that initial credibility, Genentech was able to attract the interest of Eli Lilly, the pharmaceutical giant. The two companies signed a deal under which Genentech would develop human insulin using recombinant DNA technology and Lilly would produce and market the product. This deal gave Genentech production and marketing capabilities it never could have financed on its own. Equally important, the association with Lilly gave the startup an aura of credibility and established it as the technology leader in the infant industry.

While strategic relationships seem increasingly attractive, there are problems. Nothing is an automatic success. There are many factors working against the formation of strong bonds between companies. Perhaps the biggest source of problems between partners is poor communication. Oftentimes things do not get done because each partner believes the other is responsible. When entering into a new relationship, all companies involved need to be explicit about their objectives and expectations. The companies must agree on all details: What is to be done, by whom, and when.

Management responsibilities and financial policies should be clearly stated. In some cases, companies define their markets and goals so differently they always will be in conflict. These types of philosophical differences should be aired and resolved before any agreement is reached.

Antitrust also can be a problem. In light of the economic challenge from Japan and other international competitors, the U.S. government is allowing companies a greater degree of flexibility in structuring alliances. The government has raised no objection to the Microelectronics and Computer Technology Corporation, an alliance of a dozen computer and electronics companies that was formed to share research costs. But other relationships are sure to raise objections. The intent of the partners is the critical factor. Relationships structured to restrict competition are, and should be, unacceptable.

Another problem is that small companies can become overly dependent upon their larger partners. This is similar to the problem faced by military contractors, many of which survive at the whims of the Pentagon. Companies that depend on a single relationship as a primary source of business can end up in big trouble.

MiniScribe, a tiny Colorado company that supplies disk drives to IBM, saw its stock plummet by more than one-third when IBM changed its buying patterns. The situation can be even worse when a large company decides to vertically integrate, developing its own production capabilities for parts that it once bought from outside partners. Small companies must remain aware of where they stand in their partner’s plans, and should never get in a position where their very survival depends on the continuation of the relationship.