June 1993

Companies Embrace Alliances To Wage Economic War

by Samuel Fromartz (Reuters)

Corporations are rushing into alliances at a frenzied pace, mixing talent, technology and capital across industries and borders to create new products in an intensely competitive world.

Companies are forming networks, breaking down rivalries, and farming out design, manufacturing, and marketing -- the guts of the old corporation -- to create the future more quickly.

The new movement marks a radical departure from the 1980s, when companies used financial clout to expand through mergers, acquisitions and leveraged buyouts, often ending up debt-ridden and directionless.

"Conglomerates were built by financial leveraging," David Nadler of the Delta Consulting Group said. "Now you're leveraging skills, talent and capabilities" -- what the experts call "human capital."

There is an urgency in the corporate world, as products and technologies overtake old ones in months. Companies admit they can't do it all anymore -- they focus on their strengths rather than trying to be the best at everything.

Where International Business Machines Corp. tried to offer all computers to everyone, or General Motors Corp. made nearly all the parts for its cars, companies are now relying on partners to develop products quicker.

"Even with the size of AT&T, we don't have all the competencies, skills and talents to create all the productive capabilities we want," said Robert Kavner, Group Executive of Communications Products at American Telephone and Telegraph Co.

AT&T is putting up $3.8 billion for a one-third stake in McCaw Cellular Communications Inc. to get a piece of the exploding mobile telephone business and contribute its own expertise in wire communications to McCaw.

The largest phone company in the world has also provided seed capital in Silicon Valley to create products like its personal communicator, a hand-held computer, telephone and fax machine that responds to the tap of a pen.

Alliances also become imperative as diverse industries -- computing, communications, television, entertainment, and publishing, for instance -- converge. No company has all the skills to create the products of the future.

"If we believed we could do everything ourselves it would probably be the seeds of our own demise," Kavner said.

Among recent headline-making developments:

• Apple Computer Inc. Chairman John Sculley stepped down as chief executive to focus exclusively on forming links with other companies that are viewed as key to its future.
• Apple has a partnership with former rival IBM and chip maker Motorola Corp. in developing a new computing operating system and has ties to Japanese electronics firms for its new hand-held computer and fax.
• Tele-Communications Inc. and Time Warner Inc., the nation's two biggest cable-TV companies, joined software leader Microsoft Corp. recently to create standards for interactive television -- a potential blockbuster business.
• US West Inc. pumped $2.5 billion into Time Warner, giving the world's biggest media company money and technology to develop interactive cable systems.
• Cie des Machines Bull of France bought a 19.9 percent stake in Packard Bell Electronics Inc. this week to jointly develop a full range of personal computers.
• Robert Greenhill, the new chief of Smith Barney Shearson, said U.S. mergers and acquisitions are undergoing a revival but in a different form from past deals. He said today's deals have a "different shape" and often involve "corporate affiliations" instead of the outright purchase of one company by another.
• In this movement, the vertically intergrated, do-it-all company is replaced by the "virtual corporation" -the latest buzzword to describe stealth-like management teams that seek expertise wherever they can to expand.
• While the means of creating these links may be new, the concept is not. Japanese car companies, for instance, worked closely with their suppliers for years to get the best parts and develop products quickly. Their concept has been adopted the world over.
• Microsoft Corp. and Intel Corp. developed crucial parts of IBM's personal computers in pioneering ventures that helped them both to huge profits and set off the PC explosion in the 1980s.
• Companies now find it pays to look to others for design, components, manufacturing, even marketing, if it means they can get the product to market faster.
• InterSolve Group, a Dallas consulting firm, has made a business out of promoting just such alliances, working with chief executives to assemble teams from diverse sources to create new business opportunities.
  
• " You orchestrate the best of the breed to create the product," said Edward McPherson, President of InterSolve, which has IBM and First Interstate among its clients.
  
• Nadler said he foresees a time when the corporation itself will be a place where ideas are generated, rather than carried out at all levels.
  
• "The corporation becomes a network that does very few things by itself but it has a very clear idea of what it wants to do well," he said.