Companies in coalition: When enemies become (temporary) friends

Our politicians are starting to get the hang of a coalition, but businesses have been working together for years.

by Richard Reeves
Last Updated: 04 Jun 2015

Perhaps you agree with Benjamin Disraeli that ‘England does not love coalitions’. In which case you’ll be hoping for a clean result in the general election of 7 May, so that traditional government, under the dominant rule of a single party, can be restored.

This has been the British political way for generations: a binary choice between two parties. Just like a boxing match, there is one winner and one loser. The victor gets the spoils, presiding over what Lord Hailsham  accurately described as an ‘elective dictatorship’; the victim gets to lick its wounds on the opposition benches, try to score the occasional political point, and wait for its turn in office.

In a new book, The Coalition Effect, the most comprehensive study of the 2010-2015 government, the political scholar Anthony Seldon asserts it ‘will be remembered as one of the most historically significant and unusual since the Second World War’.

Maybe not so unusual, if the polls are right. As MT goes to press, the outcome of the 7 May poll looks highly uncertain, with the odds of a second general election within the year shortening to 4/1. Most pollsters were predicting another hung parliament, with no single party winning enough seats to form a government alone.

‘The taboo has been broken and whatever the electorate thinks of coalitions, it doesn’t actually regard the prospect of another one as a complete nightmare,’ says Tim Bale, a leading Tory-watcher and politics professor at London University’s Queen Mary College.

But while British politics is still getting used to the novel idea of coalition, businesses around the world have been working this way for decades. Harnessing diverse interest groups in the pursuit of common goals over specific periods of time is now a key requirement of successful corporate enterprises.

Just as command-and-control politics is waning, for-cing a new coalition-oriented approach on SW1, so the move towards more flexible business models, faster innovation and mass communication have made coalition-building a vital corporate skill. Coalition expertise is valuable not only in the Cabinet room, but the boardroom, too. Harnessing separate horses to pull the wagon together, even just for a while, is not easy. But it can often be profitable – if you get it right.

This is not to say that business has become any less competitive. Many markets still have a ‘winner takes all’ structure. But as businesses have become more specialised, more international and more flexible, so the range of relationships with other businesses – even competitors – has widened. The growth in the number of joint-ventures (JVs), which slowed during the economic downturn, is picking up again. According to McKinsey research, 68% of companies think that they will be involved in more joint-ventures in the coming five years.

Once businesses become comfortable with JVs, they see them as offering more flexibility and advantages than mergers or acquisitions. Firms with at least six JVs are more than twice as likely to see them as serious alternatives to M&A activity.

Coalitions in business represent an example of what has been labelled ‘co-opetition’ – a blend of co-operating with rivals in some spheres while continuing to compete in others. So your rival firm becomes your business frenemy. Co-opetition was coined by V Frank Asaro, a self-described ‘lawyer, musician/composer, inventor and theorist’. After circulating his ideas among writers, Asaro was urged by Spencer Johnson, author of the management classic Who Moved My Cheese?, to publish, which he did, first in novel form (The Tortoise Shell Code), then in a non-fiction format recently reissued as A Primal Wisdom: Nature’s unification of cooperation and competition.

There is more than a hint of hippy philosophy here, but there are plenty of hard-headed businesses that are into co-opetition without the tie-dye overtones. The car industry provides some of the best examples. BMW and Toyota are sharing their expertise on carbon-fibre and hybrid technology to create a hybrid sports car, which each will sell under its own brand and with its own unique selling points. This is an example of what management scholars have labelled ‘dyadic’ co-opetition (with two partners), as opposed to ‘network co-opetition’, with multiple members. In many of these dyadic examples, components or product lines such as automatic gearboxes or engines are jointly researched and/or produced, while distribution and marketing generally remains competitive. One description of these ventures is ‘allied in costs, rival in markets’.

But you don’t have to be in manufacturing to get involved in co-opetition. UK retailers, for example, are starting to share transportation costs, under an IGD initiative, which is reducing road miles, carbon emissions and overall costs, while continuing to fight tooth and nail to get customers in the aisles. As Asda network transport manager Chris Hall says: ‘There is a willingness to share. The competitive battle is on the shelves rather than with the supply chain.’ Some analysts predict a future in which Tesco and Asda share lorries, not only for distribution but even for delivery. Technology, by connecting goods needing shipping with lorries that might be driving home empty, is further lowering the barriers to coalition commerce.

The increasingly porous boundaries of business and the potential for technology-boosted networks to replace standard organisational hierarchies, from hotels to transportation, is likely to make the flexibility of coalition commerce more attractive in the future. Nor is this simply a question of tinkering with business models: in their fullest form, coalitions represent a different economic of business. The academics Giovanni Battista Dagnino from the University of Catania and Giovanna Padula from Bocconi University highlight the potential for what they dub a ‘co-opetitive system of value creation’, in which cost-sharing, knowledge transfer and lower transactional costs create a positive-sum game: in other words, a new way of making money.

A 1939 cartoon inspired by the short-lived non-aggression pact between Hitler and Stalin

Whether in politics or business, there are five laws of successful coalitions. First, they are contingent, not fixed. A coalition is not a merger, an alliance, a partnership, an arrangement, a deal, or a contract. ‘Coalition’ has the same lexical root as the verb ‘to coalesce’, in turn derived from the Latin coalascere. The closest synonym is the idea of a ‘group’. A coalition, then, consists of people, groups or countries that have joined together for a common purpose.

Once that has been achieved, the coalition members can go their separate ways: a good example is a military coalition formed for a specific conflict, such as the Gulf War or Syrian engagement. (While I worked in government, my heart would stop, just for a moment, when I saw headlines such as ‘Coalition Bombs Libyan Forces’.)

Unlike a marriage or merger, coalitions are explicitly contingent. In business, a common legal means for creating a coalition is a joint-venture. A clear acknowledgement of the contingent nature of the arrangement is vital for clarity of purpose. The chemical elements of a coalition do not dissolve into each other; they simply form a new, but temporary compound.

It is a mistake to confuse permanent alliances or mergers with goal-specific coalitions. In an influential book within its field, Corporate Responsibility Coalitions: The past, present and future of alliances for sustainable capitalism, by David Grayson and Jane Nelson, permanent organisations are confused with time-limited coalitions. Business in the Community, one of the examples cited in the book, may be a fine organisation but it is not a coalition. This may seem a semantic point but it is not.

Even when a coalition is long lasting, the separate nature of the parties has to be maintained. In another automotive example, Renault and Nissan have a mature coalition underpinned by significant cross-shareholding: Renault has a 43.4% stake in Nissan and Nissan holds a 15% (non-voting) stake in Renault. This has allowed cost-sharing agreements and R&D spillovers between the two firms. But Carlos Ghosn, the French-Lebanese-Brazilian chief executive who sits at the top of the coalition, compares the relationship to a modern marriage: ‘A couple do not assume a converged, single identity when they get married. Instead, they retain their own individuality and join to build a life together, united by shared interests and goals, each bringing something different to the union.’ The relationship between Nissan and Renault is built on the separate identities of the firms.

The second Law of Coalitions is that the overall purpose must be clearly stated early on. While a family, company or political party stays together out of semi-tribal loyalty, a business coalition stays together only as long as the joint purpose is being pursued. In politics, the goal may be to form a government. In business, it may be to win a contract or gain entry to a market.

Half of joint-ventures fail, according to repeated studies by the Harvard Business School. A critical risk factor for failure is insufficient attention to setting clear goals at the outset. Writing in the Harvard Business Review, James Bamford, David Ernst and David G Fubini note that ‘the first challenge’ for corporate joint-ventures is ‘building and maintaining strategic alignment across the separate corporate entities’. Analysing the failure of two JVs – one in pharmaceuticals, the other between two chemical companies – the scholars conclude: ‘In both cases, the companies had failed to discover strategic conflicts early enough in the launch process, when the partners might have been more amenable to negotiation.’

An early example of coalition building based on a clear market purpose was provided by Novell, which in the late 1980s and 1990s became, almost overnight, a dominant player in network operating systems. Boss Ray Noorda may be the only corporate leader to use the term co-opetition to describe his approach and he practised what he preached, building dozens of coalitions with other firms, including potential competitors, rather than trying to swallow them up. Having superb tech helped (Netware 386): but Noorda’s real genius was to skip hiring a sales force, and work instead with 13,000 independent distributors, who could sell their own wares too. Noorda died in 2006, but his approach, then radical, is now mainstream.

The Third Law of Coalitions is that everyone should be a winner. All members of the coalition will achieve something they could not achieve on their own. In both politics and business, the circumstances in which a coalition can form are the same: when the coalition members can achieve something together that they cannot achieve alone: a market, a new product, a client.

The perils of working together: the frog carried the scorpion across a river, trusting that self-interest would stop the scorpion from killing it. Alas, the scorpion could not help its nature, and stung the frog, dooming them both

Coalitions can form within organisations too: between executives on a board, department heads or divisions. But all the same rules will apply. Don’t make the mistake of confusing a clique with a coalition. Cliques are drawn together by emotion and shared values; coalitions are born of reason and shared interests.

For all the management literature on collaboration and co-operation, perhaps the best rationale for a coalition was provided by the Office of Community Planning in the US Department of Housing and Urban Development, in a 2009 report titled Building Effective Coalitions: ‘It must be able to achieve goals and objectives that its individual stakeholder organisations would benefit from but would not be able to achieve on their own. Otherwise, its stakeholders would not be willing to invest the time and effort to participate in the coalition.’

This was in reference to building coalitions to fight homelessness; but it applies equally to coalitions to win market share for telephones in West Africa, or contracts for consulting in West Virginia, or joint-ventures to sell retail loyalty cards in West Lothian.

Business coalitions are not touchy-feely kibbutzim; to succeed, they have to be hard-headed, zero-bullshit operations. Businesspeople – indeed people generally – are not intrinsically wired to collaborate selflessly. Coalition members will always, and rightly, ask: ‘What’s in it for me?’ Coalition does not wish away competition, hunger and aspiration. Instead it orchestrates them into a profitable deal for all parties.

There is a ludicrous management saying: there is no ‘I’ in team. It is ludicrous because people will always have their own agenda, their own goals and desires. Acknowledging different aims and interests, while working together on one shared objective – that’s the art of successful business today. There may not, as an alphabetical fact, be an ‘I’ in team. But there are, quite properly, two ‘I’s’ in coalition.

The Fourth Law of Coalitions is that trust and transparency are necessary. Much of business life consists of – even demands – a degree of opacity. But when different agents or companies are working together while remaining distinct, keeping things clear and keeping promises are essential.

As the Harvard researchers discovered, coalitions in the form of joint-ventures are more trust-dependent than integrated companies, precisely because they are more contingent and more fragile. In one of their case studies, a 50-50 telecom joint-venture, ‘one partner was allocating its corporate overhead and other non-shared costs to the JV, thereby creating significant profits for itself while hampering the venture’s ability to set competitive prices and make a profit’. Following the discovery, the pricing regime was altered, but the JV never fully recovered: ‘The distrust that was created continues to plague the venture.’ As transactions costs fall, the economic purpose of hermetically sealed corporate units is altering. Companies very often need other companies to achieve their goals in quick enough time to win in the market. The worth of a company is increasingly captured in the value creation potential of its relationships: just ask Google or Apple.

The fifth and final Law of Coalitions is to know when to quit. Parting is not sweet sorrow when the goal was clear, and the terms of engagement carefully agreed. A coalition may end because the parties involved screwed up its creation: in fact this is probably the most common reason. But they should properly end when the goals for which they were formed are achieved.

Coalitions form when the members cannot achieve their goals on their own: when strength in numbers is required. The need for coalitions therefore grows as power is dispersed and uncertainty increases. In his 1967 book, Organizations in Action, US academic James Thompson described the importance of a ‘dominant coalition’ within an organisation. Thompson predicted that as technology developed and competition intensified, power bases within companies would multiply, resulting in a growing need for coalitions.

He was right. Today’s business environment is one in which coalitions are more important than ever before, so it is as well to understand how to create and manage them. Coalition requires a different kind of leadership (see box, below, Coalition Leadership: Five Lessons) and this is at least as true for business as it is for politics.

In English, the word ‘coalition’ remains a noun. The French have a verb too: coaliser, to ‘unite into a coalition’. I doubt we will follow suit anytime soon. But verb or not, we need to get better at it. Coalitions might be about to become the norm in politics. For many people in business, coalitions, perhaps under different labels, are already mainstream – or should be.

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