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 / Fall 2005 / Issue 40(originally published by Booz & Company)


Virtual Scale: Alliances for Leverage

After determining the specific ways that Virtual Scale can benefit your company, compile a list of potential partners from organizations involved in businesses that in some fashion overlap the areas where scale is most needed. Some companies can be quickly eliminated; among them should be large organizations that already enjoy significant operational scale and small companies lacking enough volume to create any appreciable scale even in a partnership.

Whether to ally with a competitor is a trickier question. Companies need to make a clearheaded identification of their real hard-bitten predators and exclude them from Virtual Scale relationships. But at the same time, it’s essential to take a fluid approach to alliances. For example, it may make good business sense — and pose almost no risk — to share with a direct rival high-volume procurement of a commodity part when the component has no bearing on differentiating one product from another. In our experience, the failure to realistically analyze the competition and determine which companies are truly a threat to your business strategies and business model and which are prospective partners can significantly narrow the potential value from Virtual Scale.

Next, evaluate the relative merits of each potential partner by answering these questions:

  • What is the value in partnering? Will there be benefits in terms of improved margins and market share, increased return on investments, and enhanced capabilities?
  • Why is my company interested in forming this alliance?
  • What would be the other company’s gain from this alliance and what would the company bring to the partnership?
  • Can these two companies work together successfully? Is there a cultural and regional fit?
  • What other external factors need to be considered, including safety, regulatory, environmental, and sociopolitical issues?

The final implementation step involves negotiating the Virtual Scale partnership. Before contacting potential allies, companies should prepare draft contracts that include specific rules of engagement and working joint-venture guidelines, including production prioritization, intellectual capital usage, and performance targets.

Considering that Virtual Scale offers the hope of turning companies that are under competitive pressure into virtual giants, it’s surprising that more companies have not yet adopted this strategy. The hesitance seems to stem from the fear of losing control in an alliance. Small companies sharing trucks with midmarket ones, for instance, might be concerned that large retailers would blame them — and even cancel their orders — if a shipment were late, even though the small companies would have had little sway over the distribution center. Or a midsized company might be wary that confidential marketing data could be leaked to a competitor by its smaller partner.

These are certainly legitimate worries, but they imply that strategies like Virtual Scale require abdication of good business judgment. Issues of control, supervision, and oversight should be covered in detail in the working agreement, and none of the partners in a Virtual Scale arrangement should relinquish their responsibility to closely manage activities, including joint ventures that could affect the future of their organizations.

The larger reality is that before long, Virtual Scale may not be simply an option; it may be a requirement. Without it, many companies could fall further and further behind their larger scaled competitors — and risk being swallowed up by them. Indeed, for these companies, Virtual Scale’s true value could be as the sole criterion for prejudging the success of alliances. Those ventures that are specifically designed to close the distance between a midsized company and its larger competition will be the only ones that are strategically worth undertaking.

Author Profiles:

Doug Hardman ([email protected]) is a vice president in Booz Allen Hamilton’s Chicago office. He specializes in operations strategy, organization productivity, and supply chain management for consumer products and retail companies.
David Messinger ([email protected]) is a principal with Booz Allen Hamilton in New York. He focuses on supply chain and consumer channel strategies primarily for packaged-goods and retail companies.
Sara Bergson ([email protected]) is an associate with Booz Allen Hamilton in New York. She works with consumer products companies on value chain strategies.
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