E-business transformation via alliance clusters

DEWEY

28

1^-\^

i

MIT

Sloan

School

of

Management

Sloan

Working

Paper

4178-01

September

2001

E-BUSINESS

TRANSFORMATION

VIA

ALLIANCE CLUSTERS

Fares

A.

Ghandour,

Pauliina

Girsen-Swartz,

Heidi

M.

Grenek,

and

Edward

B.

Roberts

Thispaper can be

downloaded

without charge

from

the Social Science Research

Network

Electronic PaperCollection:

MASSACHuSliTsINSTITUTE"

OFTECHNOLOGY

JUN

_{3 2002}

E-Business

Transformation

via

Alliance

Clusters

Fares

A.

Ghandour*,

Pauliina

Girsen-Swartz^

Heidi

M.

Grenek**, and

Edward

B.

Roberts^

Abstract:

The

number

offirms usingalliances as partoftheircorporateventuring or market

entry strategieshas surged overthe past decade. Three

common

reasonscited forpursuing

alliances are technology convergence, market access

and

alliance partners'

complementary

resources. This papercontrasts the alliance strategies of

HP

and

IBM,

two major

competitors in

electronic services (i.e., Internet-based "e-service") businesses.

Whereas

the

HP

strategyisto

attempt to establishits technologyinfrastructure as thestandard e-services infrastructure

on

the

Internet,

IBM

aims

toposition its

IBM

Global Services, ratherthan its technology, atthecenter

ofthisecosystem.

Keywords:

alliances, corporate entrepreneurship, corporate venturing, e-business,Hewlett

Packard,

IBM

Biographicalnotes: Authorsare listed inalphabetical order. Allcorrespondence inregardto

thisarticle shouldbe sent toProfessor

Edward

B. Roberts, Massachusetts Institute of Technology, Sloan School of

Management,

50

Memorial

Drive (E52-535),

Cambridge

Massachusetts 02142,

USA.

([email protected]).

* _Fares

_Ghandour

iscurrentlyanAlliance

Manager

atLucent Billing

and Customer

Care,

Cambridge

MA

02142,

USA,

focused

on

developingpartnerships withsystem integrators and

companies

inthe

3G

mobile space. Previouslyhe

worked

as a strategy consultantwithArthur D.

Little inthe

Middle

East.

Ghandour

received a Bachelor

Degree from

the

American

University

ofBeirut

and

the

MBA

from

the M.l.T. Sloan Schoolof

Management.

+

Pauliina Girsen-Swartz is an Associate atAnalysis

Group/Economics, Cambridge

MA,

USA.

Earliershe

had

servedas a Senior Associate in Investment

Banking

at State Street Capital

Corporation inBoston. Girsen-Swartz received a Bachelor ofArts degree

from

Brandeis

University andthe

MBA

from

the M.l.T. Sloan Schoolof

Management.

** Heidi

Grenek

isa

Manager

ofStrategyand Business

Development

forthe Global Solutions

Group

at

Xerox

Corporation,

Webster

NY

14850,

USA.

Followingreceipt of Bachelor

and

Master of Science degrees in Mechanical Engineering

from

Cornell University,

Grenek

received

the

MBA

from

the M.l.T. Sloan School of

Management.

++

Edward

Robertsisthe

David

Samoff

Professorof

Management

of

Technology

atthe

Massachusetts InstituteofTechnology, Sloan School of

Management, Cambridge

MA

02142,

USA,

where

hehas

been

a faculty

member

since 1961.

He

also Chairsthe M.l.T.

Entrepreneurship Center. Roberts has four degrees

from

M.I.T., including the Ph.D. in

1 Introduction

Accompanying

theexplosive

growth

oftheInternet in recentyears,

one

ofthe fastest

growing

technology sectors ise-business solutions.

Much

ofthis

growth

has

been

by

innovativestart-ups

and newly emerging

industry leaders.

As

a resultlegacy technology

companies

such asHewlett

Packard

(HP) and

IBM

have

quickly

formed

allianceswiththese innovators inordertosecure

theirplacein the evolvingmarket.

Both

large firms are leveragingtheir financial resources, their

technical expertise in platforms, hardware

and

software,

and

their large sales

and

service forces

so that theyare attractive alliance partnersforthese

new

firms. But their strategies are different

as wellasthe likely

outcomes

ofthosestrategies.

This paperfirst reviewsrecentstudies ofalliancesacross industries, developing

frameworks

and

concepts for analysis.

We

thenapply theseconceptstoanalyze

HP's and

IBM's

e-services

alliance strategies.

HP

and

IBM

were

chosen for

comparison

because theyarebothold-line

important

companies

inthetraditionalhardware-oriented

computer

industry.

Both

firms

have

recently undertaken

major

effortstobroaden into software

and

services,especially in

relationship totheInternet. Infocusing

upon

theirallianceefforts,

we

examined

their alliance

activities overthepast

two

years, utilizing various industry

and

company

web

sites

and

general

data sources.

We

complemented

that data gatheringwithpersonal interviews atboth

companies

to clarify

company

intentions

and

activities. Following our independentanalyses,

we

compare

the

two

firm's strategies

and draw

some

conclusions as to thelikelihood thatthesealliances will

succeed.

The

presentationdemonstrates

how

major "headto head" competitors can both adopt

and apply a

major

strategicbusiness

development

approach, i.e. alliances,

and

yet

employ

that

strategicapproachtoverydifferentends.

2. 1

Trends inallianceactivity

The

number

offirms usingalliancesaspartoftheirgo-to-market strategies hassurgedoverthe

pastdecade

and

was

estimated toexceed 20,000

worldwide by

the

end

of

2000

(fromabase of

2,000 in 1990 and 10,000 in 1995). [1]

More

than

20%

ofall revenue earned

by

Fortune 1000

companies

isderived

from

alliance activity

compared

to lessthan

5%

just fifteenyears ago. [1]

And

whiledifferent firms define"strategic alliance" differently,the

upward

trend is stillclear,

withjoint ventures

and

alliancesseen assecond inimportance onlyto internal

R&D

inproviding

key development

technology sourcesworldwide. [2]

A

study

by Booz-Allen

&

Hamilton

concludesthat alliances

have

ingeneral generated

good

returns tothe partners.

During

the 1988-1995 periodalliances

had

an average return

on

investment of

16%, compared

to

\2%

overallreturns forFortune

500

companies. [1] Moreover,

a relatively steep learningeffect

was

observed.

Companies

withnine or

more

yearsofalliance

experienceearned twicethe return

on

investment (20%))

on

theiralliances

compared

tothe return

earned

by

inexperiencedfirms (10%). [1]

However,

notall alliancessucceedstrategicallyor

financially. Estimates

from

various sources indicate asuccess rate of only

50%

to

65%.

[3]

2.2

Why

alliances?

Firmscitethree

common

reasons forpursuingalliances [4]:

•

Technology

Convergence

.

Technology

convergence

and

demand

for"end-to-end solutions"

have

prompted companies

to seekalliances inorderto fill gapsin theirproduct and service

offerings.

•

Market Access

. This is frequently the motivationforcross-borderalliancesbecause a local

partneris a desired

and

sometimes

a requiredpartof doing business(as inthe People's

alliances,

when

by

virtue of an alliance a finn

becomes

"known"

inan industryin

which

it

otherwise

had

littleprior reputation. This

may

be the "ticket" that traditional hardware firms

such as

HP

areseeking

when

they allywithpartners ine-business.

•

Complementary

Resources. Alliancesprovideinstantaccess to top-tiertalent, technologies,

capital, distributionchannels,

and

manufacturing capabilities.

"Big

bets", such as

on

standards, encourage

companies

tocooperate withothersto spreadtherisk

and

tostrengthen

theirposition

by

securing"buy-in" ofothers inthe market.

Other

common

rationales for alliances are listed inTable 1.

[INSERT

Table

1:

Other

rationales for

pursuing

alliances]

But alliancesare fraught withproblems aswell asthese potential benefits. Cultural

differences

between

the firms(sometimes called

"impedance mismatch")

arethe source of

most

frequently citeddifficulties. Different levels of

commitment

between

the partners, especiallyas

strategic objectives shift overtheoften longlife of an alliance,

and

loss ofindividual firm

autonomy

to its partnerdue to

complex

interdependencyagreements posecritical issues that

need

resolution. _[5]

Alliancescan be "strategic"or"operational"intheir goals.

Those aimed

at: (1) creatingan

entry opportunityforthefirm into a

new

industry, or(2)targetedatpossibly significant

growth

and/ordiversification, orindeed(3)focused

upon

theverysurvival

of

theprimarybusinessare

seenas "strategic".

Those

alliances that are principally attemptingto achieve

improved

performance ofthe current businessare seenas"operational".

They

might be

aimed

at filling

out apresent product line, or closinga technology gap, oropening

new

but incremental

geographic markets.

And

they

may

be "developmental"or "distributional" in

mode,

the

previouslyexisted, whilethe distributional alliances areintendedto

move

one firm's existing

products orcapabilitiesthrough anotherfirm'sexistingchannelsto market. [5] All might be

important but theydifferdramatically intheir riskprofiles

and

intheir potential forindividual

gain.

Given

the synergiesthatoftenexist

between

multiplealliance partners,

why

aren't firms

pursuing mergers

and

acquisitions

(M&A)

as analternative toalliances?

A

detailed

comparison

ofalliancesversus

M&A

is

beyond

the scope ofthispaper, butbriefiy,alliances areadvantaged

to

M&A

because they (usually) bypassantitrustorotherrestrictions,

have

lowercapital

requirements, involvelowerrisk,can narrowlydefine the scope ofthe relationship,avoidtalent

drain

and

are lessaccountable forshareholders. [6]Furthermore,

companies

choose alliances to

avoid sobering

M&A

failurerates:

78%

of mergers

(compared

to

-50%

ofalliances) fall apart

within thefirst threeyears. [3]

3 E-services at

Hewlett

Packard

HewleU

Packardis

one

ofthe world's largestcompanies, achieving U.S. $48.8billion in

revenues in fiscal year 2000.

As

partofits effortsto redirect its energies

HP

launched an

aggressive e-services

campaign

in 1999. Sincethen,

HP

has introducedseveral

new

products,

services

and

technologies fore-services, includingits e-speak middleware,

which

isdesignedto

help

companies

create

and

deliver services overthe Internetviaagent-basedinteractions.

HP's

e-servicesbusiness iscurrently focused

on

delivering e-services infrastructuresolutionsto

segments ofthemarket thatare large

and have

significant

growth

potential, including application

serviceproviders,next-generation portals, wireless e-services, digital

imaging

and

electronic

campaign

is starting to yieldresults: its revenue from its services business,

which

is increasingly

focused

on

e-business opportunities,

grew

9%

in 1999

and

15%

duringfiscalyear2000. [8]

3.1

Why

is

HP

in thisbusiness?

Since CarlyFiorinajoinedthe

company

as

CEO

in 1999,

HP

has

undergone

a corporate-wide

effort to revitalizethe

company

and

its image.

HP

has

promised

to"reinvent" itself,to returnto

its "rootsin the

Garage"

(referring toits foundingplace in SiliconValley)

and

tobegin acting

like a start-up again. [8] Fiorina hasarticulated a

new

corporate strategy for

HP

based

upon

her

vision thatthe "pure productera is

coming

to aclose". Rather, she believesthat inthe

new

Net

Economy,

companies

that integrate appliances, e-services

and

infrastructure willbe successful.

HP's

goal is togain acompetitive advantage inthe

Net

Economy

by

beingatthetechnological

intersection ofthese three buildingblocksofe-business.

To

accomplishthispositioning,

HP

is

aggressivelydeveloping apresence ine-serviceswhile also leveraging itsexistingmarket

position,customerrelationships

and

installed base.

Since

HP

was

a lateentrantto the e-servicesbusiness, it electedtousepartnerships

and

alliances to gainquick access tothemarket. Itfocused

on

developinginfrastructure technologies

fore-services (both

hardware

and

software),

and

usedpartnershipstogain access to other

e-servicetechnologies

and

products (mainlye-service applications).

By

partnering withleading

e-serviceplayers

HP

has

been

able toenter

and

ramp

up

its e-businessveryrapidly.

Given

the

significant uncertaintyas tothe

winning

technologies

and

business

models on

the Internet,

HP,

like

most

other firms, has chosen todiversify its "bets" across

many

platforms

and

industries

by

entering into a large

number

ofe-servicesalliances.

HP's

long-term visionis tocreate

infrastructure as the

dominant

standard

on

the Internet, clearlyastrategic goaltoward

which

alliancesareseenas

key

contributors.

4

HP's

e-services alliances

We

studied sevendifferent

HP

e-service alliances forthispaper. (The

Appendix

includesa list of

the

HP

and

IBM

alliances and theirdescriptions.)

Most

ofthe individual alliances are

"operational" inthesense that they fill gaps in

HP's

e-services technologies orproduct lines. [5]

However,

when

analyzedas a portfolio, the alliances are "strategic"

from

HP's

corporate

perspective.

Due

to its late start

and

lack of previous experience ine-services,allianceshave

enabled

HP

quickly toenter

and

developitse-servicesbusiness.

Through

thealliances

HP

has

gained access to

new

products, services, technologies

and

customers.

4.1

Common

characteristics

among

the

HP

alliances

HP's

e-services alliancesshare

many

common

characteristics. First,

most

ofitspartners

(excluding

Nokia and

Oracle) are relativelysmall

companies

thatare focused

on

aspecific

e-servicetechnology, productor service. Furthermore, thesesmaller

company

partnerships are

almostexclusively "distributional" alliances. In contrastthe

Nokia and

BEA

partnershipsare

"developmental"alliances,

where

the partnersare seekingjointly to develop

new,

previously

non-existing, technologies.

As shown

inTable 2,

HP

typicallybrings toits alliances

infrastructuretechnology(aswell as brand, capital

and

distributionchannels),

and

the alliance

partners typicallybring in specific e-serviceapplications.

HP

has entered into

numerous

partnerships since it launched itse-services campaign. Inour

search

we

found over twenty

HP

alliances ine-services since 1999. Sixofthe sevenalliances

we

chose to study are non-exclusive(theOracle alliance,

which

is

more

focused

on

cross-sellingthe

andnon-exclusivity ofthe alliances, it isquite

common

for the parties toan alliance toalso ally

withthe partner's competitors. For example,

HP

hasanalliancewith both Ariba and 12,

who

are

directcompetitors inthe vertical portal market(aswell as alliancepartnersof

IBM).

The

high

number

ofalliances can be explained inpart

by

thehighuncertainty inthe e-services market.

As

a resultthe

major

playersaretryingto coverallthepossible anglesto

make

sure that their

technologywill be partofthe

emerging

industry standards.

Many

of

HP's

partnerships

were

set

up

todelivertoaspecific

customer

acompletee-service

solution that integrates

complementary

technologies

from

the alliance participants.

Consequently, suchpartnerships arefocused

on

specific customers and/or industrysegments

and

[INSERT

Table

2:

HP's

e-services alliances]

seem

short-term

and

transactional innature. For example,

HP's

partnership withAriba

combines

the

two

companies'

complementary

technologies

and

servicestodeliveran e-procurement

solution forthe catalog purchasingbusiness.

The

Ariba

example

highlightsanotherinteresting

featureof

HP

partnerships. Increasingly the alliancesblur the lines

between

HP

and

its

customers

and

suppliers.

HP

actuallyconsiders

most

ofitse-services customerrelationships

"alliances" since in

many

cases

HP

gives its infrastructure tothe

customer

forfreewiththe

hope

thatthecustomerwill build

new

e-service applications

on

the

HP

platform. This bothdelays

revenue

growth

for

HP

and

raisesissues asto

which

firmsare truly partners thatoughtto receive

"partnership

management"

attention and

which

are purely customers.

Due

to itslackof previous trackrecord ine-services

HP

continuesto

have

difficulties in

positioningitselfas anInternet innovator

compared

to

IBM

and others. Partnerships are a

way

servers),

and

access to capital

and

saleschannels

make

ita desirable partnerfor

many

e-service

companies.

4.2FamiliarityMatrixanalysis

of

HP

alliances

Several yearsago Roberts

and

Berry [10] introducedtheconcept ofthe Familiarity Matrix asa

vehicle forassessing the appropriatenessofvarious

"new

business entry" alternatives suchas

internal development,alliances, joint ventures, acquisitions, and minority equity investments.

The

matrix focuses

upon

thepositioningofa proposedbusiness

development

alongthe

two

axes

of technology and marketfamiliarityto the

company.

The

firm'sprimary current business

utilizes its "base technology"

on

behalfofits"base market";

any

potentialendeavor

may

be

closeto ordistant

from

those bases.

[INSERT

Figure

1: Familiarity

matrix

for

HP's

e-servlce alliances]

We

analyzed

HP's

e-services alliancesusing the FamiliarityMatrixas

shown

in Figure 1. In

preparing the analysis

we

assumed

that

HP's

current"base market" in e-servicesincludes

corporations developinge-services solutionseither for internaluseorfor theircustomers.

HP's

"base technologies"

were

seen as including its internallydeveloped e-servicesinfrastructure

technologies (both

hardware and

software).

We

gained thefollowing insights

from

the Familiarity Matrix analysis:

• Four ofthe seven alliances that

we

studied

(BEA,

Oracle, Ariba

and

Yahoo)

involved abase

or familiarmarket for

HP.

These

alliances targetedmainly corporate customers. Interms of

technologiesacquiredviathe alliances,these fouralliancesinvolvedeither

"new

but

somewhat

familiar"or

"new

and unfamiliar" technologies

from

HP's

perspective.

The

alliances appearto be mostlyoperational innature, with thegoal offilling aproduct ora

•

The

three alliances for

which

themarket factor

was

new

familiaror

new

unfamiliar to

HP

(Everypath,

Nokia

and 12) involved eitherindividual orcorporate mobile telecommunications

users or online trading communities.

These

three alliancesalso helped

HP

gain accessto

deploy

new

familiaror

new

unfamiliar technologies.

Although

we

did notanalyze

HP's

partners, the ideal situation here

would

have

been

thecase

where

the partner

was

engaged

in

its

own

baseareaof market competence.

•

As

mentioned

earlier

HP

hasusedits allianceswithother e-service providersto gain rapid

entry into thee-services market. Regardless ofthe leveloffamiliaritywiththe marketand/or

technologies involved,

HP's

preferred

way

ofgaining access to

new

markets/technologies

seems

tobe alliances,as

opposed

toacquisitions orventurecapitalinvestments. Alliances

do

not force

HP

to

make

long-term

more

permanent commitments

to partnersortechnologies

thatmight

end up

being unsuccessfulinthe future. Finally, as

shown

on

the Familiarity

Matrix,

none

ofthe

HP

alliances involves its

own

currentbase technologies. It isclear that

HP

is positioningitselfas thepreferredproviderofe-services infrastructure inthese

alliances.

By

forging partnerships across

many

applications

and

a large

number

ofplayers

HP's

goal is tospeedthe

advancement and

adoption ofitsinfrastructuretechnology.

5 E-services at

IBM

Unlike Hewlett Packard,

which

isa relatively

new

entrantintoInternet-based technologies

and

services,

IBM

has participated inthe

development

ofthee-business

economy

from

its inception.

Innovative technologies,hardware, software, services

and

global reach

have

firmly established

IBM

as a leaderguiding theevolutionofthe e-business"ecosystem" thatis transforming

business.

Today

IBM

is involved inall aspects ofe-business, including incubationof

new

companies, tools development,

web

hosting, wireless e-services

and

outsourcing.

Much

of

what

IBM

has learned aboute-business

comes

directly

from

the

company's

own

experience intransforming itselfinto

one

ofthe world'slargeste-businesses. Intheyear

2000

IBM

generatedU.S. $23.3 billion in

e-commerce

revenueout ofitstotal revenues ofU.S. $88.4

billion. In addition

IBM

purchased $43 billion in

goods and

servicesoverthe

Web,

claiming

savingsof

$377

millionthrough implementation of e-procurementprocesseswithsuppliers. [11]

5./

Why

is

IBM

in this business?

As

the

economy

migrates

away

from

the"pure product" era cited

by HP's

Fiorinatoward a focus

on thedelivery ofservices,

IBM

hastransformeditselfheavily intoa "solutions provider".

Ratherthan simply sellcustomersstand-alone products,

IBM

has insteadfocused

on

identifying

its customers' "business issues"

and

thendevelopingintegrated solutions tothoseproblems.

These

"business issues" increasinglyconcerne-business and, hence,

IBM

has broughttogether

itsbroad range ofcapabilities(including skillsinbusiness strategy,hardware, software,customer

relationship

management,

supplychain

management,

operations

and

other areas)todevelop

solutions thatenable

companies

torealize the fullpotentialofe-business.

Given

the higher value(andhigherprice) customersplace

on

integrated solutions,

IBM

is not

alone inits pursuitto

become

a solutions provider. Firms suchasHewlett Packard,

Xerox and

othershave also started tofocus

on

solutionsdevelopment.

However,

IBM,

withits rich history

in

computer

technologies, its unparalleled intellectual propertyportfolio,

and

the global reach of

its sales

and

servicenetwork, isuniquelypositioned todeliverintegrated e-business solutions to

increasingly global customers.

Much

ofthis e-business activity flows throughthe

IBM

Global

Services organization,

which

signed U.S. $55 billionin

new

services contracts

worldwide

inthe

year2000, theworld's largest informationtechnologyservices provider

and

the fastest

growing

partof

IBM.

[11] Continued

development

ofe-business products

and

services isclearlythe

highestpriorityareaofstrategic focus for

IBM.

As

ane-business solutions provider

IBM

must

be able toprovide products

and

servicesthat

meet

customers'

"end

to end"needs, both intermsoftheirvaluechain and theirbusiness

lifecycle.

By

leveragingits core

competency

in "datahandling",

IBM

would

like to"control"

ever>'phase inthe lifecycleofdata,

from

input via a

PDA

through

management

ofthedata ina

DB2

database residing

on

an

IBM

mainframe.

However,

IBM

has neither the resourcesnorthe

time todeliverevery

component

ofa complete solution in-house

and

therefore seeks

industry-leadingalliance partnersthatcan providethe parts that are missing.

William

Etherington, an

IBM

SeniorVice President,

commented, "Our

commitment

tobringcustomers e-business

solutions doesnot

end

at

IBM's

borders.

We're

reachingoutto

combine

the industry's best

software applicationswith

IBM

technologies, services,

and knowledge

of our customers'

businessissues to create powerful

new

solutionsthat

no

otherIT

company

can match." [12] In

part becauseofthisreliance

on

partners forelementsofits solutions,

IBM

has

emphasized

the

development

ofcross-platform solutions.

While

IBM

would

obviouslypreferthat its solutions

bedeployedusing

IBM

products, it recognizesthat forvariousreasons (including legacy

equipment

and

infrastructures) notevery customerwill migrate to

IBM

equipment.

Consequently,

IBM

ispositioning itsGlobal Services organization, not necessarily its

technology, tobe atthe centerofthe"e-services ecosystem".

A

secondpartof

IBM's

e-servicesstrategycenters

on

the establishmentof

open

technology

standards inthe industry. Recognizingthe advantage inhelping to developnascent technology

standards,

IBM

has

been

proactiveinentering intoallianceswiththe intent thatitcaninfluence

which

standardsemerge.

6

IBM's

e-services alliances

We

studied eightdifferent

IBM

e-servicealliances forthispaper(Table 3), using

web

and

generalbusiness sources

complemented by

interviews withsenior

members

of

IBM's

corporate

strategy office. In 1996

IBM

issued its "BusinessPartner Charter" thatsignaled

IBM's

commitment

to

work

with "Business Partners"as theprimary

way

to

expand

IBM's

reach. Since

1996, the percentageof

IBM's

revenues going through alliances has

more

than doubled. [13]

Unlike

some

companies

IBM

doesnot havea central "alliance group" to initiate

and

coordinate

the firm's alliances. Insteadalliancesare initiated

by

boththecorporateheadquarters

and

in

individual divisionsbased

on

business need. For

most

alliancestheinitiating partyhas oversight

responsibility.

However,

ifthe alliance is"big

enough"

(interms offuturerevenuesorin

strategic importance),an alliance

manager

is assignedtocoordinate multiple agreements with

thatpartner (such aswiththe

IBM-Cisco

partnership

we

studied).

IBM

has

no

"generic" alliance

model

orhurdlerate, preferring insteadto structureeachalliance tobest

meet

thebusiness need.

Nor

does

IBM

enterintoalliances withthe intentof"tryingout"the

company

as aprecursorto

anacquisition.

As was

truewith ourassessment of

HP, most

ofthe

IBM

alliances

we

studied

were

"operational" inthat

no

one alliance

moved

IBM

into a

new

industry, provided significant

diversification, or

was

crucial to thesurvivalof

IBM

asa goingconcern. Rather,

most

ofthe

alliances

were

undertakento

complement

IBM's

existingproduct line

and

enable

IBM

to deliver

more

completesolutions to itscustomers.

Also

similarto

HP,

analysisofthe portfolio of

alliancesdoes infact indicate thatcombined, theirgoal is clearlythe transformationof

IBM

into

a

new

type ofbusiness (namely, to

become

a services

and

solutions provideras

opposed

to a

stand-aloneproductdeveloper)

and

assuch, the alliances asa

whole

are "strategic"

from

the

corporate perspective.

6. 1

Common

characteristics

among

IBM's

alliances

IBM's

alliances ine-services

have

many

common

characteristics. Insevenofthe eight alliances

studied

IBM

selectedthe industry-leading firm as apartner, regardlessoffirm size. (Merceris

the exception,

which

while being a well-respected consulting firm isnot one ofthe "big three".)

[INSERT

Table

3:

IBM's

e-services alliances]

IBM

has repeatedly stated thatleaders ine-services,each with itsunique offerings,

must

collaborate inordertoacceleratethe adoptionofe-business

and

Internettechnologies. Its

alliances

conform

tothisphilosophyand

do

not appearas haphazardasthe frequencyof

alliances

must

suggest. Rather

IBM

appearstobecareftilly placing its bets

on

the

most

likely

"winners",ratherthanally withsmall playersthat itcouldeventually take overorcut outofthe

market onceit developed its

own

technology.

Correspondingly,

IBM

does notappeartobeusing alliancesprimarilyas a

window

to

new

technologiesthat it

would

eventually liketo developin house.

Both

its

push

for

open

standards

(e.g., its relationship withNokia)

and

its sheddingofintellectual property(e.g., theCisco

example) indicatethatalliances will bea long-term strategyfor

IBM.

Furtherevidence of

IBM's commitment

to its alliancesisthat thefirm willbe theprimary

customer fortheoutputof

two

ofthe alliances

(Qwest and

Ariba/i2)

and

ithas alsotaken a U.S.

$630M

combined

equity stake in Aribaand 12.

Consistentwith

IBM's

transformation into a "solutions provider",

IBM

has alliedwithfirms

that can

complement

its goalto bea

company's

preferred supplierofall e-business services.

The

IBM-customer

relationship beginsatthe inceptionofthefirm (seethe

Mercer

alliance)

and

carries throughtoall aspectsofa firm'sinfrastructureneeds (seeQwest, Cisco,

and

Dell)

Similarly,

IBM

canparticipate inacustomer'sentirevalue chain

from

data entry (Nokia)todata

management

(Siebel, Ariba/i2).

Also

consistentwith

IBM's

role as a"solutions provider", five ofthealliances studiedare

best classified as a

new

form ofintegrated"Distribution/Development"alliance. In the short

term

IBM

and its partnersare merely marryingtheirseparate product offerings and bundling

them

togetherforcustomers ("distributional"). Ultimately, however,the firmswill

work

togetherto develop

new

integrated solutions that

would

notexist without the alliance

("developmental").

Many

ofthe alliancescitethe breadth and geographic reach of

IBM's

GlobalServices group

asone of

IBM's

primary contributionsto thepartnership (Table 3). Thisindicatesthat

IBM

has

been

successful inleveragingone ofits

key

assets togive it competitive advantagein

establishingalliances inthe

"new"

economy.

Lastly,

none

ofthe

IBM

alliances

we

studiedappears tobe anexclusiveagreement.

IBM

is

willing to allynot only withitspartner'scompetitors butalso withits

own.

For example,the

Nokia

agreement ispartof

IBM's

larger participation in the

"Symbian"

alliance,

which

includes

Motorola

and

Ericsson

among

others.

6.2 FamiliarityMatrixanalysis

of

the

IBM

alliances

We

analyzed

IBM's

e-services strategyusing the Familiarity Matrix(see Figure 2). Forthe

analysis

we

considered

IBM's

"basetechnologies"to include itsservices group, itsdatabase

software, and itsnetworking

and

Web

hostingexpertise.

"Base

market"

was

defined as the

marketsin

which

IBM

was

currently participating(includinge-business markets).

(INSERT

Figure

2: Familiarity

matrix

for

IBM's

e-service alliances]

From

the

IBM

alliancesFamiliarityMatrix,

we

learned:

• Fiveoftheeight alliances that

we

studied(Mercer, Qwest, Ariba/i2, Dell,

and

Cisco)

were

primarily extensionsof

IBM's

existingtechnology baseto

new

markets. Unlike

HP,

which

soughtto use

new

technologies inexisting markets,

IBM's

objective

seems

tobe focused

on

leveraging its existing technology portfolio and finding

complementary

productsthat

open

up

new

markets viacompletesolutions offerings.

•

According

tothe Familiarity Matrix

IBM's

alliancewith

Nokia

mightwell bequite risky

and

perhaps should have instead takenthe

form

ofa lowerstakes

venmre

capital investment.

However,

giventhat

IBM

is

committed

to

bemg

a player inthetotal e-services value chain

and

thatwireless

communications

appearspoisedto take offinthe next

few

years,

IBM

did

not

have

theluxury of

moving more

conservativelyinthismarket/technology.

As

this

industryhas increasingly

become

"winner

takesall",

IBM

needed

to stake aclaimearly toits

position inwireless. Note, however,

by

selecting the industry leader asan alliance partner,

IBM

effectively mitigated

some

ofthe risk thatnormally

accompanies

moving

so quickly

into the"new/unfamiliar" market/technologysector.

7

Comparison

of

Hewlett

Packard

and

IBM

alliance strategies

HP

and

IBM

areboth seekingto leverage alliances as a

way

to develop integrated e-service

solutions

and

become

partofthee-business "ecosystem".

Both companies

have

even

partnered

with

some

ofthe

same

firms (i.e.,Nokia, Ariba and 12).

But

despite these similarities significant

differencesremain

between

the alliance strategies ofthe

two

firms.

•

Both

firms

want

to beat the centerofe-business, but they areapproachingthis objective

differently.

HP

wantsto establish itstechnology infrastructure,e-speak, asthe standard

servicesinfrastructure

on

the Internet. Conversely,

IBM

wantsto positionits

IBM

Global

Services, ratherthan itstechnology, atthecenterofthis domain.

As

aresult

IBM

is

more

proactiveinenteringalliances that are cross-platform

and

open

standards-based.

•

While

both firms areusingalliances todevelop "solutions",

HP

is using its alliance strategy

to fill gapsin its product line, speed acceptance ofe-speak,

and

make

up

for its late start in

e-services.

IBM,

on

the other hand, is usingits alliances to

enhance

(not establish) its existing

offerings across thevaluechain. This difference

may

reflect

IBM's

desireto participate in

the

whole

e-business value chain, while

HP

appearstobe concentrating

on

specific segments

(i.e. e-commerce).

• Similarly,

HP's

alliancesappearto be

more

temporary (effective until

HP

develops its

own

offerings)

and

"new

technology" focused, while

IBM's

areclearly partofa

permanent

development

strategy

and

a

means

to access

new

markets.

•

IBM

seems

more

focused

on

partneringonly withindustry leaders,while

HP

has alliances

withsmaller firmsthatdeliveronly specific applications, nota portfolio ofofferings.

Potential issues that

may

undermine

the potentialsuccess of each firm's alliancesinclude:

•

A

lack offocus, pooralliance

management

and

under-allocationofresourcesto specific

alliances

may

resuU

from

the frequency with

which

IBM

and

HP

arepursuing alliances.

• Coordinationofalliance activitieswith the restoftheparent organizationcan be especially

difficult ine-services,

where

thespeedat

which

themarket evolves isquite different

from

the

speed at

which

therestoftheorganization operates

("impedance matching"

issues). This

affectsthe firms' abilities to leveragetheirexistingbusinessesinthe e-services space.

•

No

clear "exit strategies"

were

identified for

any

ofthe alliances. This isparticularly

troublesome for

HP,

since it tendstoenterinto

more

short-term alliances.

A

corollary

problem

to this surrounds appropriationrights to intellectualproperty followingthe

dissolution ofthe alliance.

Our

research suggests that

IBM

and

HP

could

improve

theirchances ofalliance success

by

assuring that each firm involved hasa

good

culturalfit, clearalignmentofbusinessobjectives,

and anorganizational structure/work process that

promotes

information sharing, conflict

resolution, and accountability.

8

Conclusions

As

the

economy

becomes

increasinglyfocused

on

theInternet

and

the possibilities ofe-business

"old

economy"

hightech firms

have

had to reinventthemselvesinordertoremainviable

competitors inthe

new

solutions-based

Net

Economy.

As

technological uncertainty has

increased

and

thepaceoftechnological

change

has accelerated, these firms

have

increasingly

turnedto alliances asatool toremain intouchwiththe leading

edge

of

technologies

and

to offer

customers completee-service offerings.

By

studying thealliance strategies

of

two

ofthese "old

economy"

firms,Hewlett Packard and

IBM,

aswell asrecent research

on

alliances ingeneral,

we

have

been

able to conclude the following:

•

The

recentflurryofalliance activity in thee-servicesarena represents astrategic shift in

how

the business will operate inthe future.

HP

has signaledthat itwill continue touse alliances

for"catching

up"

with

more

nimble competitors

who

are aheadinthe technologyrace.

IBM

has signaled its

commitment

to continued use ofalliancesvia its "BusinessPartner Charter",

equity stakes insmallerpartners,

and

intellectual property sharing

and

considers alliancesnot

as a

means

of"catching up"but rather as anecessarypart ofdeliveringtotal "solutions"to

customers.

•

Although

differentbothfirmsareusingdeliberate

and

consistentalliance strategies.

At

the

core of

HP's

strategyis the use ofalliances as a

means

ofestablishing its "e-speak" product

as the standard

on

the Internet to facilitate

e-commerce.

At

the centerof

IBM's

strategy is its

desire tobe a solutions provider overits customers' entire valuechain (not just

e-commerce)

and to

have

a part inestablishingthe standardsthatwillgovern thenext

wave

of technology

development.

•

Note

that

even

ifthealliances

do

notsucceed individuallyintheirtotalitytheyare likely to

succeedat the strategic level ofrepositioning

IBM

and

HP

asplayersinthe

Net

Economy

in

the

minds

of customers

and

other industryparticipants. Gettingthis "invitation"tojoin the

"e-business club"

may

be

even

more

importantthanthe operational successof

any

ofthe

individualalliances, particularly for

HP

(IBM

isalready inthe "club", butis not necessarily

viewed

as the

most

proactive

member).

•

While

alliances will deliver valuetothe firms, with

few

exceptions, it is unlikelythatthese

alliances will deliverlasting competitive advantage.

Most

of

them

are"non-exclusive" and

therefore firmswillnot beable to fully appropriate any sourceof long term competitive

advantage. Competitive advantagein thismarketis

and

willremaina function

of

a firm's

speed and responsivenessto shifts in customers'

demand.

•

A

primary risk thatboth

HP

and

IBM

must

address inorderto

enhance

the probability of

success oftheiralliance strategies is

"impedance

matching" ofthespeed at

which

they

traditionally

do

business versusthe speedat

which

theircustomers

do

business. Other issues

concern resource

over-commitment and

thelack ofclearlydefinedexit strategies.

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"The

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Management

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"Benchmarking

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W.

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HP's

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Based on

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corporate

web

site (

www.hp.com

)

and

inrecent

speeches

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CEO

Carly Fiorina.

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HP's

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and

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Annual

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IBM

Press Release (2000)

"IBM,

Anba

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12

form

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e-commerce" (March

8).

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IBM

PressRelease (1999)

"IBM

to

team

withsoftware firms to offerleading e-business

applications"

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"IBM,

i2,

and

Ariba signpact", Journal

of

Commerce

(March

10), p. 12.

BE

A

Systems

Press Release (1999)

"HP

makes

SlOO-million

commitment

to

BEA

fordelivery

ofmission-critical

E-commerce

and application-integration solutions" (April 7).

Bleeke,J.

and

Ernst, D. (1995) "Isyourstrategic alliance reallya sale?"

Harvard

Business

Review

(January), pp. 97-105.

Bleeke,J.

and

Ernst, D. (1991)

"The

way

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win

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pp. 127-155.

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IBM

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p. B8.

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"HP

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(March

3).

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homepage

(

www.dell.com

).

Franse,K. (2000)

"IBM,

Cisco

announce

collaborativeE-business enhancements",

VARBusiness

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"IBM,

12, Ariba forgestrategic pact",

VARBusiness

(March

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"IBM,

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9).

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(March), pp. 40-43.

Gerdes, S. (1999)

"The

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way

tocreate alliances",Inc., (October), pp. 74-75.

Gray, D. (2000)

"IBM, Qwest

to build

e-commerce

datacenters",

IDG

News

Ser\'ice

(March

27).

HP

PressRelease (2000)

"HP

and

Everypath

announce

mobilee-services alliance" (April 5).

HP

Press Release (1999)

"HP

and

12 create the firstintelligent ebusiness trading

community

for electronic distributors" (July 20).

HP

PressRelease (1999) "Oracle and

HP

announce model

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e-commerce"

(September21).

IBM

PressRelease (1999) "Cisco

and

IBM

announce

technology,networking

and

strategic

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IBM

PressRelease (1999)"Dell and

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announce

IT services

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27).

IBM

PressRelease (1999)

"IBM

and

Nokia

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on

speech technology researchand

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IBM

Press Release (1998)

"IBM

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and

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"IBM

announces

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network

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(November

15).

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PressRelease (2000)

"IBM

opens the wireless

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13).

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PressRelease (2000)

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Appendix:

Brief descriptions oftlie

HP

and

IBM

alliances studied

Al

Hewlett

Packard

Ariba

Technologies,

March

1999

Objective:

A

partnership forbusiness-to-business

commerce

where

HP

will use Ariba's

procurement software, and the

two

will createandhost a

Web

site

and procurement

service for

business suppliers

and

buyerscalled the

Ariba.com Network.

HP

willprovide hardware,

application hostingservices, operations infrastructure,

deployment

support,

and

co-marketing for the site. Partnership

marks

Ariba's firstforay into services.

Buyers

can

view

suppliers' catalogs

online, but transactions will run

on

Ariba's operating resource

management

system

(ORMS)

software.

BE

A

Systems,April

1999

Objective: Alliancewill provide customers with acompletesoftware infrastructure for

developing and integrating robust

e-commerce

applications thatsupport e-services.

The

alliance

representsa

$100

million

commitment

from

HP

and

BEA

overnext three years fordevelopment,

sales and marketing support ofintegrated cross-platfonn productsand solutions for enterprise

customers. Alliance provides for

HP

and

BEA

to jointly staff

e-commerce

solution centers

throughouttheworld.

i2 Technologies, July

1999

Objective: Alliance willprovide an intelligente-business portal solutionforelectronics

distributors that facilitatestimely sharingofinformation withina trading

community.

This

alliance extends

HP's

e-servicesto supply chain

management.

The

portal leverages i2's

RHYTHM

exchange

Services, a portfolioofapplications thatallowparticipants tosharecrucial

trading information,

and

HP's

e-speaktechnology.

Yahoo,

August

1999

Objective:

Agreement

to help corporationsset

up

portals (Corporate

My

Yahoo)

that will

combine

customized information

and

services

from

the Internetwithcorporateintranets.

The

portals willprovide corporate

employees

witha secure singlepointofaccessto internal

information- likecustomerrecords

and

order tracking- as well asexternal servicessuch as

customizedfinancialnews, stock tracking

and

travel reservations. Corporate

My

Yahoo

combines

functionalityof

Yahoo

interface

and

HP's

Internettechnology, including e-speak.

Nokia,

September 1999

Objective: Joint

development and

promotion ofbusiness-critical mobile Internetsolutions for

enterprises. This alliance willenable customersto access e-servicesoverthe Internet withmobile

handhelddevices, suchas

Nokia media

phones.

Under

the agreement

HP

will resell the

Nokia

WAP

Server software forboth

HP-UX(l)

and

Windows

NT

operating systems worldwide. Also

Nokia

and

HP

will

work

togetherto optimize the

Nokia

WAP

Server

on

all

HP

9000

and

HP

NetServerplatforms, allowingeasier

deployment

of

WAP-based

e-service solutions in

business-critical environments.

Oracle,

September 1999

Objective: Joint

development and deployment

ofOracle's

Web-based

enterprise software

on

the

HP

platform. Oracle will

move

its core

development

platform forall Internet software, including

its customerrelationship

management

(CRM)

software suite, enterprise resource plarming, E-business, Business

OnLine

and database software, to the

HP-UX

platform. Oracle also will

install

HP

serversto

power

itsInternetapplications internally, with

HP

servers accountingfor

up

to 50percent ofOracle's installed base. For itspart

HP

will adoptthe sales

component

of

Oracle's

CRM

software within its Enterprise

Computing

group,

which

has a salesforceof

more

than 6,000 people.

The

companies

will link their sales forcesthroughOracle's Field Sales

Automation

software, allowingthe

two

organizationsto collaborate

on

sales to

CRM

customers.

Everypath, April

2000

Objective:

Co-development and

co-marketingofa

new

wireless Internet service that will

make

it

easy for

companies

to deliverpersonalized e-servicesto mobile-deviceusers.

The

new

service

will allow users ofmobile devices, suchas smart

phones

and

the

Palm

VII organizer, toconnect

at any timeto their

most

important

Web

services, including e-banking, stock trading

and

online auctions,

and

to complete

e-commerce

transactionsdirectly

from

the device.

HP

will integrate

Everypath technologies intoa hostingenvironment, providing a turnkeywireless e-services solution that features

HP's network

services,

HP-UX(l)

and

NT

computing

systems,

and

firewall

and intrusion protection.

A2

IBM

SiebelSystems,Inc. (I),

September 1998

Objective:

A

development

partnership that willbring Siebel's Enterprise Relationship

Management

(ERM)

solutionsto

IBM's

DB2*

Universal Database. Partof

ongoing

setof

initiatives

between

Siebel

and

IBM.

Cisco,

August

1999

Objective:

A

global alliance

composed

ofa $2-billiontechnology agreement, a strategic

relationship with

IBM

Global Services,

and

theacquisition

by

Cisco ofportions of

IBM's

networking intellectualproperty.

Because

the firms

had been

competitors, thisalliance

was

investigated(and approved)

by

the U.S.

Department

ofJustice foranti-competitive effects. Part

ofongoing alliance

aimed

at

making

IBM

and

Ciscobetter"corporate buddies"

-

approximately

one

announcement

per month.

Dell,

September 1999

Objective: Deal

makes

IBM

Global Services a strategicproviderof computer-relatedservices

(installation,warranty)toDell customers.

Expands

thescope

and

formalizes existing services

agreement

between

the firms. Projectedrevenue- _S6 billion oversevenyears.

The

firmsare also competitors -_both firms manufacture

and

sell personal computers

and

servers.

The

finns

have

also signeda

$16

billiontechnology sharingagreement togive Dell access to

IBM's

technology.

Nokia,

October 1999

Objective: Acceleratethe

growth

ofthe wireless Internet.

The

companies

will

work

togetherto

develop enterprise

WAP

solutions to enable customers to immediately begin extending eBusiness

beyond

the

PC

toa varietyofmobile devices. Helps establish

WAP

as de facto

standard. Part oflargergroup ofalliances with

Symbian

licensees.

IBM

has statedan initiative todrive

open

standards

and

make

speecha

conmion

interface formobiledevices.

SiebelSystems,Inc. (II),

October

1999

Objective:

A

global strategic alliance to integrate SiebelSystems' multi-charmel

CRM

software applicationswith

IBM's

e-business capabilities. Partof

ongoing

setofinitiatives

between

Siebel

and

IBM

that indicate alliance

must

be

working

well.

Ariba/i2,

March

2000

Objective:

Development

ofindustry'sfirst

end

to

end

open

solutions for

B2B

eCommerce

and

collaboration.

The

integrated solution isexpectedto automate all business interactions

between

trading partners,delivering greater costsavings, efficiencies and competitive advantage toglobal corporations

and

marketplaces.

As

part ofthis effort,

IBM

istaking a

S630

million

combined

equity stake inAribaand 12. It also includes apatent cross-licensing agreement.

IBM

isthe first

main

customer ofthe alliance solution.

Qwest,

March

2000

Objective:

A

3-yearinitiative to delivernext generation e-business services

and

applications

tliroughthe creationand

deployment

of

new

Qwest

CyberCenters. Jointrevenuesof $5 billion

overseven years.

IBM

will be "anchortenant",occupying

up

to

25%

oftheCyberCenters.

Mercer

Management

Consulting, April

2000

Objective:

A

global alliance that will help both large

and

small

companies

design, incubate,

and

build

new

e-businesses.

Goal

is to incubate20-30

new

e-Corrmierce

companies and

assist

startup firms

from

the initialplanningstage throughfinancing, recruiting,

and

technology

implementation. Similarto a

new

venture fund.

Figure 1: Familiarity

matrix

for

HP's

e-service alliances

r

New

Unfamiliar

Market

Factors

<

New

Familiar

V

Base Joint Venture Internal Development Acquisition/ JointVenture Interna! Development Acquisition Venture Capital Educational Acquisition

EV

JointVenture, Acquisition, License

NO

Internal Development/ Acquisition/ -icense

BE

OR

VentureCapital;' Educational Acquisition Venture Capital Educational Acquisition 12 JointVenture/ Strategic Alliance

AR

YH

Base

New

Familiar

New

Unfamiliar

Technologies

and

Services

y

Explanationof

symbols

used:

AR

-

Ariba,

BE

-

BEA,

EV

-

Everypath, 12

-

12Technologies,

NO

-

Nokia,

OR

-

Oracle,

YH

- Yahoo

Figure

2: Familiarity

matrix

for

IBM's

e-service alliances

New

Unfamiliar

Market

Factors

<

New

Familiar Base Joint Venture

MR

Internal Development/ Acquisition/ JointVenture

AR

InttmaT Development/ Acquisit ion

cs

Venture CapilaL Educational Acquisition SI andS2 JointVenture/ Acquisition/ License Internal Development/' Acquisition/' License VentureCapital/ Educational Acquisition

NO

VentureCapital/ Educational Acquisition JointVenture/ Strategic Alliance Base

New

Familiar

New

Unfamiliar

Technologies

and

Services

Explanationof

symbols

used:

AR

-

Ariba/i2,

CS

-

Cisco,

DL

-

Dell,

MR

-

Mercer,

NO

-

Nokia,

SI

-

Siebel I,

S2

-

SiebelII,

QW

-

Qwest

Table

1:

Other

rationales for

pursuing

alliances |4]

Reason

Description

Follow

the

Herd

Prestige

Speed

Regulatory

Barriers "Trial

Marriages"

Thereissomuchuncertaintyandturbulenceinhigh-techmarketsthat no oneknows

wherethemarket isheading. Companiesthatdonotwanttomissouton market

trends seekalhances(manytimes conflicting ones)inordertohedgetheir bets.

Many

firms,especiallystart-ups,usealliancesasawayto achieverecognition/ visibility intoday'sclutteredmarket. Havingapartnershipwith an industry leader earnsafirmcredibility inthe market.

Speedtomarket or "first-mover-advantage" isimportantintheneweconomy. Companieswith enoughresourcestodevelopcapabilitiesin-housestill choose alliancesas ameanstoaccelerate development.

.Alliancescan be usedas awaytosidestepregulatorybarriers,suchasanti-t rust rules, thatpre\

em

amergerbetw eenfirms thatwanttocooperate.

In lightof highmergerfailurerates,companiessometimespursuealliancestolearn

moreaboutthe other party beforecommittingforthe longer term.

s

H

Distribution/ Development Alliance Distribution

5

iS « 3 i/v £ C 2 § -a ° .2 .o c o a. "O

1^1

-Si

NOV

Ml

Date

Due

OCT

2 7

2003

ILioruAnico