Wednesday, July 2, 2014

Quirky Appliances: Network Advantage through Complementarity

Quirky is actually the name of a company. It collects ideas on innovative products, has "community members" on its list vote and comment on them, and arranges to have some of them manufactured and sold. The idea is roughly similar to the wisdom of crowds, with many people being smarter than a few, and has the same strength and weaknesses. The strength is that many people are in fact smarter than a few, especially in a topic that they have some knowledge about. The weakness is that a product that has never been made or sold is not a topic that most people are knowledgeable about. So, Quirky has some successes and some failures.

General Electric (GE) is also a company that has thrived on innovation and still does. It was an Edison company, after all, and it is in many industries where only the advanced and innovative stay ahead. But, GE is at least thought to be very traditional in its approach to innovation, with research and development staff making improvements to existing products and technologies, and doing some exploration of new ones. This means, of course, that a collaboration between GE and Quirky would mean two firms with the same idea of innovating, but totally different and potentially complementary approaches. Sound like a good idea? So did GE and Quirky, and they are working together.

So how is this working? Well, there is a new air conditioner called Aero that is pretty smart. It can do some things humans can't, in fact. The main point is that it is network connected and can be controlled by the smartphone of the user, which is effective but not truly smart. The truly smart options are little details like geo-fencing. Geo-fencing means that if you let it, the Aero will keep track of where your smartphone is, and use the location and movement to tell when you are headed home, so it can start up at the right time. Many think this is a neat idea, and the Aero has sold well.

But how did the collaboration work? In fact, GE stayed GE, if the information now reported is correct. They did collect some ideas from Quirky, but the rest of the design was thoroughly in-house. This is perhaps not surprising, because GE knows a lot about air conditioners. But it is also clear that GE benefited from the complementarity that gave these ideas. And GE is getting the idea that complementarity is not just something you pick up in a single alliance; more alliances make it better. In fact, many of the early sales of Aero were done through a collaboration with taxi company Uber. Selling air conditioners through a taxi firm? Truly complementary. Now GE is getting close to the type of hub-and-spoke network that I, Tim Rowley, and Andrew Shipilov discuss in our book "Network Advantage: How to Unlock Value from your Alliances andPartnerships."
Mann, Ted. 2014. GE's First Quirky Device Isn't Very Quirky. Wall Street Journal, July 2 2014.

Thursday, June 19, 2014

Monitor your Teenager by Satellite: How Google May Demonstrate the Power of Complementarity

Google has just acquired satellite firm Skybox, and got plenty of attention for the acquisition. Two things stood out. The first was the low price – well 500 million dollars, but this is not expensive for a firm with the capabilities of Skybox. The second was the potential for new services combining the satellite imagery with other technologies and services. Skybox has six satellites in space and is launching 18 more, giving it the majority of satellites in the world that can take images of very high resolution and sell the images commercially. Sell commercially, as opposed to deliver the images to the government that owns them, like spy satellites do. This advantage is likely to continue for a while because its satellites are currently the cheapest high-resolution satellites in the business.

What exactly does high resolution mean? They can take pictures of parking lots that allow counting of vehicles parked there, a capability that has already been used to predict revenues of Walmart and iPhone release dates (although Apple is secretive, it is still necessary to park trucks outside Foxconn factories in order to ship out iPhones). All it takes to use the capability is to know a location and a good time to take the picture, because the satellites pass frequently, so you can now check for cars parked near your house when you are away for the weekend and have told your teenager not to host a party.

Of course, the main use of such satellite imagery is corporate intelligence. And, I am using the word intelligence in the same meaning as its use in naming CIA: spying. Although some of it will have no particular target and much potential usefulness, like finding out whether crops are failing in some part of the world (helps speculators, but also farmers elsewhere) or giving real-time improvements of maps (the first use of these satellites that Google is planning), other uses are less benign. Corporations can monitor each other’s facilities easily, just as Foxconn is now being monitored. Governments that do not have the resources to launch spy satellites, meaning most governments, can now order images whenever they want to check something -- like the location of refugees that they would like to remove or imprison.

As I write this, it strikes me that the examples I am giving are simple, and might not be enough to justify the price of Skybox. But, that is where the complementarity comes in. Skybox satellites have good flight paths and optics, but at the end of the day they are flying cameras with decent software. But add Google to the equation, and you get flying cameras, excellent software, and immense databases. These two companies have different capabilities, and when listing them it looks a lot like they could be combined to make something completely new. Skybox and Google are complementary, and complementarity is a good start of innovation. The innovations might involve valuable new products and services, and they might also involve worrying levels of monitoring and privacy breaches. We don’t know in advance, except that there will be surprises.

Mims, Christopher. 2014. Amid Stratospheric Valuations, Google Unearths a Deal With Skybox. Wall Street Journal, June 15 2014.

Saturday, June 14, 2014

When to Merge? Looking at External and Internal Relations

The merger between advertising giants Omnicom and Publicis created news for a long time, until the day when the cancellation of their merger created news. What happened? The story reported by Wall Street Journal involved many operational issues such as incorporation, choice of who firm to make the formal acquisition, and regulatory approval, but it was also pretty clear that the relations between the firms had become problematic. The CEOs clashed over a number of issues related to the new organization, such as its location (Omnicom is a US firm, Publicis is French) and key staffing choices. In the end, the firms called off the plans and both CEOs admitted that the relation between the potential merger partners had not been good enough.

Is that a good reason for calling off a merger? Possibly, but it is one that gets too much focus because such internal relations are relatively small-scale and temporary. For example, one of the CEOs, Publicis’s Levy, was supposed to retire soon but had not done so because of problems finding a successor. But relations are still important for merger success, except they are a different kind of relation. All firms have relations with other firms, as alliance partners, suppliers, or customers. Not all relations are important, but some are, like key client relations are for advertising firms. Managers pay surprisingly little attention to what kind of relations would be best for a merger, and even researchers have overlooked the issue.

A recent article by Michelle Rogan and Olav Sorenson in Administrative Science Quarterly addresses it by looking at mergers, and in fact mergers among advertising firms. Their focus is on whether firms are more likely to merge with each other if they share clients, and whether mergers have lower performance when the firms share clients. The reasoning is simple. Shared clients means familiarity because the firms are close competitors, and it can also mean over-confidence in the results of the merger. Shared clients also means that little new is added by the merger, because the merged firm gets a deeper relation with existing clients rather than a broader set of clients. Two problems follow. First, the client may not want to have a deeper relation because it sees the advertising firm as trying to gain power (Michelle Rogan and I have an article about this). Second, the firm will fail to build complementarities in its client portfolio, which can hold back innovations (my book with AndrewShipilov and Tim Rowley discusses this). So far theory.

What did they find? Evidence showed that the theory was correct on both accounts, meaning that the firms made exactly the wrong mergers. They merged when sharing clients, and shared clients meant that the performance was reduced after mergers, both when looking at loss of clients and in looking at billings per client. 

So the conclusion is clear. When looking at whether to merge or not, relations really matter. Except that the relations that matter are between firms, not between CEOs.

Wednesday, April 23, 2014

Practical Alliances: When Two Rivals Ally to Counter a Third

The news came out a few days ago that Samsung and Globalfoundries had initiated a collaboration that would make Globalfoundries users of Samsung developed production technology for the latest generation of 14 nanometer chips. This is interesting news because such production technologies are important sources of competitive advantage in chip production, and there is little indication that Globalfoundries were failing in their efforts to generate their own 14 nanometer technology. They still decided to abandon it and use Samsung's technology.

The motivation is actually different. With both companies using the same technology, they can make identical chips. That can be convenient for customers who want multiple sources of their chips and who order many enough chips that they have some ability to negotiate. Apple would an example. So, the alliance is helping their customers by giving better service. But, the service improvement in this case is actually that Samsung and Globalfoundries are giving away power by making it easier for the customer to set up competition between them. What exactly would be the benefit of that? Well, the answer is simple. Neither Samsung nor Globalfoundries is the largest chip producer (foundry) in the world – Taiwan Semiconductor Manufacturing Co (TSMC) is bigger. Apple is known to have increased interest in TSMC because they see the irony of fighting Samsung in the smartphone market and courtrooms while depending on their chips. And, the competition does not stop there. Intel also can make 14 nanometer chips, and is known as a pretty competitive firm.

So, to understand this alliance it is necessary to see the entire market, and to see how it is a way for two firms to gain some advantage over the competition. In many ways Samsung and Globalfoundries are not ideal alliance partners – if you follow the analytical methods of our Network Advantage book you would find problems with the match between them especially related to whether they really will have shared interests and goals in the long term. But, in the short term TSMC, and Apple, is a big enough problem for them that they are willing to collaborate. This will be an interesting alliance to watch, especially in the long term.

Clark, Don. 2014. Samsung, Globalfoundries Agree to Adopt Same Production Process. Wall Street Journal, April 17 2014.

Tuesday, April 1, 2014

Where will China’s firms establish subsidiaries? Where there are Chinese

Europe and China are currently negotiating a raft of trade issues, with wishes to increase exports and investments from abroad. It is not necessary to distinguish who wants what; both want to export more and receive more investments. Basically the governments would like to receive more money from the other party, as governments often do. But one part of this story is new and interesting: Europe is still suffering from an economic crisis and many Chinese firms have reached considerable size, so European nations are very eager to become targets of Chinese investment. While EU negotiates on behalf of all, each nation competes with the others.

So where will China’s large firms place their subsidiaries? Well, they might behave like other multinational firms, which would be interesting news for Europe. In research published in Administrative Science Quarterly, Exequiel Hernandez found that foreign firms entering followed a very clear pattern: they preferred locations in which immigrants from their nation were numerous. It is easy to think of an example. Honda became famous for their early and successful entry into the US, which started in Los Angeles – a city with a large Japanese-American contingent. But this research is more than a set of examples, it is a clear pattern that can be shown by studying many firm entries.

The pattern makes sense too, because immigrants from the same country are ideal for firms that establish a subsidiary. They are in between. They understand the origin country, and they understand the new one. They can be employees, contractors, trading partners, teachers: in all roles they benefit the company more.So, the choice of locations with many immigrants is not a simple reaction to liking, it makes sense for the firms. In fact, the research also showed that the new establishments survived better in locations with more immigrants from the same country.

So what does that mean for Europe? Well, one thing that is obvious from looking around is how few Chinese immigrants there are, many fewer than in the US or Canada. And a bit of knowledge of politics is enough to learn that many European nations have political groupings that see immigration as problematic and are trying to seal themselves off. There is variation in how much of this happens, of course. And probably the people campaigning for fewer immigrants are unaware that they may be campaigning against companies and jobs too, not just people who look different from themselves.