Centre for Internationalization and Enterprise Research
Glasgow G21 8QQ
London Business School
London NW1 4SA
Paper accepted for publication in California Management Review
July 4th 2008
INTRODUCTION In an increasingly flat and interconnected business world, large multinational corporations (MNCs) have emerged as the dominant actors on the global stage. Large MNCs inspire awe in some and attract derision from others, and they receive the lion’s share of attention during discussions about the impact of globalization on the business world. But MNCs represent only one part of the globalization story. National governments and non-governmental organizations (NGOs) have critical roles to play in shaping the global playing field. And in every developed and developing country there is an existing body of mostly small and medium sized enterprises that are affected – often in dramatic ways – by the increasing presence of MNCs in their home markets. It is these often-overlooked small and medium sized enterprises (hereafter “small enterprises”) that we focus on in this article.
Globalization is, of course, both a threat and an opportunity to a small enterprise. In some industries, poorly managed or inefficient local businesses are driven out by ruthless foreign entrants. And in other industries, local businesses discover they have a level of agility, market knowledge, and innovative capability that allows them to prosper in the shadow of their global competitors1. But for those small enterprises that are ambitious and growth-oriented, it is imperative that they learn to find ways of engaging with large MNCs who have the complementary resources and capabilities that can lead to, for instance, an innovative product offering being rolled out on a global scale, or a worldwide licensing agreement. In other words they must seriously consider, as C K Prahalad put it recently, learning to “dance with the gorillas”2.
Consider the case of Dhruva Interactive, a small Indian technology company based in Bangalore3. Dhruva grew from a one-man operation in 1995 to a five-person team in 1997, at which point it made the critical decision to seek out a global partner. Asfounder Rajesh Rao observed, “In March 1997, we partnered with Intel and began the process of reinventing ourselves into a game company”. This relationship allowed Dhruva to prosper – it won a major contract with Infogrames Entertainment, a French gaming company the following year, and then a string of further projects, including being enrolled by Microsoft in 2003 to work on an Xbox title, and having two of their offerings included in Vodafone’s Top 10 games listing.
But in contrast to Dhruva’s positive experience, many small enterprises end up getting their fingers burnt while trying to engage in joint activities with large MNCs. Managers of small enterprises we interviewed during our research spoke of the aggressive tactics pursued by some MNC partners, the lack of respect for their intellectual property, the wasted time and effort put into building one-sided relationships, and the loss of face when plans went awry.
Of course, MNCs too face risks in entering such partnerships – for instance, the prospect of wasting considerable time and resource if nothing comes of a relationship or if the partner is surreptitiously exploring in parallel a similar initiative with another MNC. However if a partnership goes wrong, the consequences are – on balance – far more likely to be debilitating for a small enterprise.
Small enterprises, in other words, often find themselves facing a very difficult set of choices as they consider whether and how they should engage with the MNCs in their local market. And there is surprisingly little advice available to them about how to make these choices. The purpose of this paper is to take the point of view of these smaller enterprises, and to evaluate the strategies they are adopting in a globalizing world. We suggest that a primary way for them to globalize successfully is through partnerships with local MNC subsidiaries – in their own backyard – which they can subsequently leverage to generate opportunities on a global scale. We develop a framework to help smaller enterprises think through the key steps that are needed to form, consolidate, and then extend their relationships with MNCs in the local market4.
The paper builds on five years of research in which we conducted interviews in more than 15 companies and collected questionnaire responses from over 100 individual managers (see box).
BACKGROUND: OPPORTUNITIES AND RISKS When confronted by the forces of globalization – including the threats and opportunities posed by MNC giants – small enterprises face certain generic options in their local market5. One is to retreat into a local niche, relying on their intricate knowledge of local conditions and the loyalty of their existing customers. This may work for some, but sooner or later an inevitable question that arises is how sustainable, in the absence of protection from competition through government policy, such an approach is. Another approach is to go it alone and expand internationally in a global niche. Some smaller firms have achieved this with great success, particularly when led by internationally minded entrepreneurs6. But this lonesome route is fraught with risk, and not every small firm pulls it off.
The third generic option, and the one we discuss here, is for small enterprises to actively seek out relationships with the MNCs in their backyard – to dance with the gorillas. As noted already, this form of collaboration offers great potential benefits but it also has potential costs. It is therefore worth evaluating these opportunities and risks in some detail.
Consider the nature of the opportunity first. For the small enterprise, the opportunity to collaborate with a large multinational is self-apparent: the MNC represents a potential source of sales revenue itself; it can provide access to a global marketplace and to its existing clients, and it offers enormous leverage through its brand and its deep technological competencies. But what are the benefits to the MNC in engaging with an unknown small enterprise? Our research identified three benefits:
Small enterprises often have significant complementary assets that the MNC will struggle to develop efficiently itself – chiefly local knowledge, and access to local distribution channels and markets. Accordingly, MNCs such as Microsoft and IBM often encourage local software companies to build cutting-edge software products using their proprietary technologies as a means of building presence in those local markets that they cannot easily access.
Most large MNCs actively seek out new ideas and innovations on a worldwide basis; indeed many believe their ability to do this is one of their key sources of competitive advantage7. Working with small enterprises in local markets represents an important mechanism for doing this8. For example, Sun Microsystems engaged with a number of small enterprises in Scotland on RFID projects in order to bolster its competitiveness in this emerging area.
MNCs want be seen as good corporate citizens, and building relationships with local partners goes a long way towards creating such an image. For instance, one American MNC executive with “a huge stake in India” talked about his company’s innovation-related programmes in conjunction with government and industry bodies, and how they hoped to create a stronger climate for innovation and growth in small enterprises. And potentially MNCs could feel a sense of responsibility toward any spinoffs created from local subsidiaries, such as Mitoken which was spun out of Motorola India and Wide Blue, spawned by Polaroid in Scotland.
The potential opportunity for partnering between small enterprises and MNCs is significant. But the barriers and risks, especially on the part of the small enterprise, are equally considerable. Our research revealed three particular sets of obstacles that make it difficult for smaller enterprises and MNCs to work together.
First, there is the lack of access and attention. Small enterprises have restricted access to the attention of key decision makers in the MNC, which is a very different to the situation in a MNC-MNC relationship where executives of equivalent stature will happily return each others calls. Despite the growing imperative for MNCs to absorb new ideas from across the world, they often struggle to overcome their ethnocentric and bureaucratic biases. Smaller enterprises therefore find it difficult to build the necessary relationships. Managers we spoke to commented that it is often very difficult to find the right individuals to approach within the MNC. One Bangalore-based entrepreneur commented that engaging with large MNCs was the “obvious thing to do”, but he did not know where to start. And a British entrepreneur noted that “the problem with big companies is getting attention at high levels where decisions are made”. These problems are compounded by skepticism on the part of some smaller enterprises about the ability of local MNC subsidiaries to behave autonomously. As one entrepreneur in India wondered aloud, “Do these MNC subsidiaries control their own destinies?” A British entrepreneur worried that while dealing with MNC subsidiaries “the plug may be pulled at any time”. Although research has found instances of relatively autonomous MNC subsidiaries, they tend to be the exception rather than the norm9.
A related problem the managers of smaller enterprises face when dealing with MNCs is that those individuals they have built a rapport with frequently get transferred elsewhere within the MNC’s global network. Managers in the smaller enterprises we interviewed commented that their interactions were episodic and fragmented. The cast of individuals attending meetings from the MNC side changed frequently. And plans and ideas developed during these meetings often failed to translate into changes in their everyday activities10.
Second, there are different long-term objectives for small enterprises compared to MNCs. Most MNCs have explicit strategic plans, established market positions, and well-oiled operating procedures. Small enterprises, in contrast, are opportunistic and agile; their planning horizon is measured in months not years; and the prospect of being acquired is often very real. Faced with such ambiguity over their long-term future, executives in small enterprises often take a very different approach to alliance management than executives in established MNCs. There is a latent fear that a predatory larger company will obtain the lion’s share of the jointly created value11. And the two parties will likely have different agendas and criteria for assessing outcomes, leading to further tension.
Third, there is a problem of asymmetry in resources. Small enterprises lack the reputation, financial muscle and human resources of their potential partners, which is in direct contrast to the situation in a MNC-MNC relationship where resource profiles are likely to be more balanced. Indeed, in many respects small enterprises and MNCs are entirely different species, which makes communication and procreation extremely difficult. MNCs typically have a clear separation between line and staff roles, many functional specialists, and explicit processes for every activity. Small enterprises are full of generalists, many of whom wear multiple hats, and they get things done through ad hoc and informal processes. As a result, there are rarely clear counterparts for the small enterprise manager to talk to in the MNC, and the joint execution of everyday activities can be problematic. Moreover, each is likely to have differing mindsets and organizational cultures which in turn create impediments to communication and joint activity.
STRATEGIES FOR ENGAGING WITH MULTINATIONAL CORPORATIONS
Faced with these points of difference, it is not uncommon for small enterprises to give up altogether on forging collaborative relationships with MNCs. But our research suggested there are practical and systematic approaches that can be taken to help small enterprises engage effectively with MNC partners.
A useful and thought-provoking analogy is the concept of strategic asymmetry developed in the field of military warfare. As with all analogies, this one should not be taken too literally: alliance partners see their primary mode of interaction as cooperative, though with a competitive element12, whereas the domain of warfare focuses primarily on competition. But there are some interesting parallels nonetheless in terms of understanding how small, flexible entities interact with large, well-organized ones.
Given these realities, and consistent with the wide usage of military ideas in the field of strategy, we introduce the notion of strategic asymmetryhere. Military theorists define strategic asymmetry as “the use of some sort of difference to gain advantage”13. In an asymmetric war where one army faces another with vastly greater resources,14 a conventional frontal attack is pointless. Instead, an indirect approach is more likely to be effective, as it enables the smaller army to play to its strengths. Military theory suggests the following four principles through which a smaller army can apply the concept of strategic asymmetry15: (1) Ensuring flexibility; efforts must be applied creatively; (2) Accepting uncertainty; initiatives need to be undertaken in a context of ambiguity; (3) Undertaking constant review; ineffective tactics must be discarded; and (4) Exploiting asymmetric advantages; activities must play to unique strengths.
We believe these principles can be applied quite readily to the situation facing small enterprises that are seeking to “dance with the gorillas.” In reviewing these principles of military theory, and then bringing them to bear on our empirical observations about how small enterprises engage with MNCs, we developed the following framework (see also table 1 which summarizes our arguments).
Figure 1: Key steps for the small enterprise in engaging with a multinational company
The traditional model of MNCs forming relationships with other MNCs differs markedly from the approach small enterprises require. Most MNCs wishing to engage with a partner of similar size will take a direct frontal approach to that relationship, perhaps through a dedicated alliance department, or through key individuals who have direct counterparts in the prospective partner company. In direct contrast, for the small enterprise seeking to partner with an MNC, the lack of access and attention, coupled with the asymmetry in resources, means that a direct frontal approach is likely to fail. Instead, the small enterprise will often use an indirect means of access. In particular, we observed two common tactics – working with local allies to create links with MNCs, and using the MNC’s reputational strength against it.
An important aspect of any collaborative activity is the initial identification of appropriate partners16. Rather than a direct frontal approach, the smaller enterprise will typically attempt to build “bridges” between itself and the potential MNC partner. One approach we observed was to coopt regional actors that have access to both sides and can act as honest brokers. A trade body or regional institution17 may be in a position to provide such assistance, especially in regional clusters18. Such mechanisms can be particularly helpful for small enterprises given their generally lower visibility within a local milieu. A striking example is provided by the Scottish Technology and Collaboration (STAC) initiative which sought to bring together small enterprises and MNC subsidiaries through alliance activities centered around architecting (of alliances), brokering and coaching19. One way in which value is added is through legal input to guide agreements concerning intellectual property ownership. This sort of “hand-holding” for smaller enterprises can go a long way in helping them to learn how to engage with MNCs.
In the absence of a suitable forum, another approach for the smaller enterprise is to use the MNC’s own partnering program initially. Nokia, for example, has a Forum Nokia which provides guidance on tools and channels for mobile applications, an Insight & Foresight unit through which small enterprises can engage in joint innovation, and Nokia Venture Partners which invests in mobile technology start-ups. In India, MNCs like IBM are actively working with smaller enterprises through partnering programs for independent software vendors. Another route is through interfacing with MNCs as clients. While this is not yet the norm, some MNCs are targeting small enterprises with tailored solutions in both advanced and emerging economies. IBM, for instance, is actively focusing on offering low cost technical services to UK based smaller enterprises, rather than purely focusing on large global companies.
Irrespective of the specific circumstances in which a tie is initiated, the vital principle is flexibility – and alertness – in the pursuit of an appropriate point of entry. These attributes were evident in Regio, an Estonian small enterprise that combines cartography and software skills, facilitating track-and-trace features in mobile telephony. It developed a successful relationship with the Estonian subsidiary of the Swedish multinational Ericsson which began through benign interactions when Ericsson, thanks to Regio’s excellent local networks, wanted to use Regio’s CD Atlas to demonstrate a radio network product to a prospective Estonian client. As Regio’s Chairman commented, “we were aware that these relatively low-key interactions were a potentially powerful foot in the door for a long-lasting relationship. So I think we were lucky, but we certainly helped to make our own luck here by turning an apparently casual initial exchange into a more concrete relationship”.
Building commitment: Using the MNC’s strength against it
A second key tactic we observed was securing the commitment of the MNC partner once an initial agreement had been reached. Of course, commitment from a partner is required in any sort of commercial relationship. But in this unbalanced context, the process of building commitment was subtly different to what would be observed in a partnership of equals. We observed that the costs of commitment, in terms of time and resources, are typically higher on the part of the smaller enterprise, but the costs of failing to honor the commitment, in terms of reputational risk, are typically higher for the MNC.
Interestingly, we observed cases of smaller enterprises making explicit use of the MNC’s own power and status to ensure commitment – similar to a guerilla force using a larger opponent’s strength to its advantage. As one executive observed, “social sanctions can be brought to bear if the MNC partner threatens to renege on any of its commitments. These companies thrive on their reputations for honesty and ethical business. So while we would never want to publicize any episodes of unethical behavior, both parties know that this possibility exists.”
Consider the case of the British venture Tarspan Technology (name disguised). It believed that it had the capability and opportunity to build a technology centre in conjunction with a local MNC subsidiary. Believing that the larger organization was committed to this piece of work, Tarspan devoted many man-hours worth thousands of dollars to the cause before the MNC walked away from the project citing a change in technological priorities. Not surprisingly, Tarspan managers referred to this experience as a “major waste of time”, and they believe that a major error on their part was a failure to obtain, in writing, the MNC’s commitment at the outset. With the commitment in hand, they believe the MNC would have been “shamed into seeing the project through”. By contrast, in its next project with an MNC, Tarspan entered into a written agreement early on. Tarspan’s executives also consciously identified a senior manager in the MNC with whom there was “a meeting of minds”. This individual was cultivated as an internal champion for Tarspan and a focal point for discussions to gain the MNC’s commitment to the joint activity.
Consider also the case of the Bangalore-based software venture Skelta which was recognized with an innovation award at Microsoft’s 2006 Worldwide Partner Conference in Boston. The accolade marked the culmination of sustained efforts by Skelta to engage with Microsoft, which had begun some three years earlier in its own backyard of Bangalore. Skelta was a small company that believed it could become a player on the world stage. It aligned its technologies early on with Microsoft, and this strategy caught the eye of Microsoft executives. Skelta CEO Sanjay Shah asserted that “Skelta shares a deep, symbiotic relationship with Microsoft”, and he appointed a senior manager to head up the company’s “Microsoft relationship function”. Skelta’s partnership worked, in part, because it leveraged Microsoft’s professed commitment to the local milieu and channeled it to its own relationship, as implied in the observation of Microsoft’s Rajiv Sodhi, who was instrumental in fostering the relationship: “Skelta fostered a very strong link with Microsoft India and this link is on multiple levels…What happens as a result is that the India subsidiary stands firmly behind the local company, and it’s not a very distant point in time when it starts getting elevated to regional levels, to global levels”.
In this case, the positive reputation effects – a source of major strength for large MNCs – associated with the publicized support for an indigenous small enterprise were leveraged by Skelta to strengthen commitment from Microsoft India. Although the MNC’s support was clearly wholehearted, any potential reluctance to continue to be supportive would likely be countered by the prospect of adverse publicity. In this way, small enterprises like Skelta are in effect utilizing principles of “judo strategy” which, although primarily concerned with small enterprises competing with large incumbents, can also be relevant in the present context of partnering20.
In the traditional model of alliances among MNCs, there are typically well established processes for consolidating a partnership and making it work – such aspects as how to structure the relationship, build appropriate governance systems, and appoint the right managers. By contrast, the asymmetry in the relationship between a smaller enterprise and an MNC, coupled with the different long-term objectives of the two parties, means that such processes do not apply to the same level. An unstated truth, for example, is that the small enterprise is often seen as dispensable by the MNC, and this means the smaller enterprise needs to think very carefully about how far, and how fast, to develop the relationship. As a general guideline, smaller enterprises should typically plan for the short term, though with an eye on the longer-term potential of the relationship. What this means in practice is a couple of things – one is for the smaller enterprise to capitalize on specific points of advantage as options for future growth, the other is to modularize its knowledge development activities.
Capitalizing on points of advantage: Building options for growth
The successful small enterprises we studied were very clear on the genuine points of advantage that they brought to their MNC partners. Typically these advantages were one of two types: a specific project that enabled the MNC to gain access to capabilities or technologies that were complementary to its own, or a peripheral non-core activity that the MNC outsourced to an external supplier. On the basis of these key points of leverage, the smaller enterprises we studied were proactive in seeking out possible options for further growth. The ability to respond to, and build upon, an initial mandate with great speed and flexibility is an inherent part of most small enterprises’ asymmetric advantage, relative to large MNCs where decision-making can be slower.
An illustration of non-core activities is provided by Bangalore firm, Ekomate Systems which undertook support activities for Lucent Technologies (now Alcatel-Lucent). On the back of an initial outsourcing stint, Ekomate succeeded in winning the multinational’s confidence and moved quickly into more extensive onsite activities. As for more specialist projects, consider for example Arnlea Systems, which specializes in electronic identification within the North Sea oil and gas cluster in Aberdeen. Arnlea’s initial assignment in conjunction with an oil and gas MNC and the American technology company EDS21 involved a nine-month pilot project to improve safety conditions and the management of material flows from the harbour to sea and back. Diligent efforts in this initial assignment meant that Arnlea was well placed for more high-value work with these and other MNCs. At the time of writing, Arnlea had the prospect of a follow-up project to jointly develop a process innovation in conjunction with another oil and gas major. By performing well with this initial opportunity, it was able to leveraging this success to quickly develop further opportunities.
In similar vein, the Estonian software firm Regio was able to develop new facets in its relationship with Ericsson. The success of its initial dealings, in connection with a product demonstration to a prospective Estonian client, led to a subsequent opportunity. Once again, Ericsson wanted to use Regio’s CD Atlas product to demonstrate technology that would allow Rescue Board dispatchers to locate mobile phones. Regio adopted a proactive stance and concluded, after examining Ericsson’s technology and its prospective clients’ needs, that rather more could be done – and that Regio could help deliver it. In so doing, Regio created a new opportunity for itself which resulted in the small enterprise being contracted by Ericsson to deliver a sophisticated tailor-made software system, funded in part by a Swedish Baltic IT fund. Regio also leveraged this opportunity to broaden its own technology offering, and in the process developed an algorithm for improving mobile positioning accuracy, which fed back into its burgeoning relationship with Ericsson which led to joint activities across the world in settings as diverse as Dubai, Morocco, Mexico, Romania and Slovakia22. In all of these cases, the small enterprises used their asymmetric advantage to act not only proactively but speedily to consolidate their relationships with multinationals.
Modularizing knowledge transfer to reduce vulnerability
Many alliances between smaller enterprises and MNCs are terminated for reasons beyond the smaller enterprise’s control. But when collaborative projects are structured to involve discrete knowledge transfers, there is the possibility of partial success even if the project gets shelved at some point down the road. This is especially relevant given the atmosphere of uncertainty and ambiguity within which small enterprises and multinationals engage, as has been argued. Several of the small enterprises we spoke to deliberately broke their joint projects down into specific knowledge transfer milestones for this reason. Pragmatic short-termism calls for ensuring that there are milestones within a project that ensure identifiable knowledge transfer outcomes. That way, even if the rug is pulled from under their feet, some good would have accrued for the small enterprise through the partnership.
For example, Edinburgh-based HMD Clinical created a venture to offer bespoke Web- and telephony-based solutions for the control of large clinical trials. Once this project had got off the ground, HMD then turned its attention to developing a new productized offering based on RFID technology to overcome human-error based inefficiencies. HMD believed that an effective way to take their idea to the next level would be to form a strategic partnership with a large established MNC. Around the same time Sun Microsystems, the press reported, was keen to set up an RFID testing centre on its Scottish premises. HMD succeeded in forging a link with Sun and, within six months, had developed a prototype of the new offering. At that stage, however, decisions beyond their control led to the termination of their collaboration with Sun. HMD’s modular approach to knowledge transfer, however, meant that it still ended up with a perfectly functioning prototype of its innovation using Sun’s hardware platform. And it required no further additional technological development going forward.
Successful small enterprises in India such as Skelta and Ekomate similarly adopted modular processes to gain learning outcomes. Those that failed to do so were less effective in capitalizing on their partnerships with MNCs. For example, Knasse (name disguised) failed to make the most of a promising relationship with Intel in Bangalore because it did not anticipate the uncertainties and ambiguity that may characterize such a relationship. As the Knasse executive who oversaw the joint activity with Intel commented, “We did not do justice to the potential to acquire knowledge through that association before it ended. We should have managed the process better. This was a missed opportunity”
Breaking up projects into sub-parts can also yield more manageable experiences to make sense of, and gain greater insight into, the “gorilla mindset” and alliancing process. In so doing, small enterprises can cope more readily with the markedly different character of their partnership compared with conventional alliances involving more evenly matched MNCs who are well-versed with the art of partnering. And it is all the more relevant given the pervading ambiguity and uncertainty as small enterprises ponder the future prospects of their relationships with MNCs.
The final part of the framework is concerned with how a successful relationship between a small enterprise and a MNC gets extended. Of course, alliances are unstable by nature, and even those between large and experienced partners will often end up being dissolved as the two parties evolve in different directions. However, there is still an important difference between partnerships between equally-matched firms and those between small enterprises and MNCs. The traditional equally-matched alliance typically unfolds in a somewhat predictable pattern, with both sides bringing their prior experience to bear, and both sides building in contingencies to the contract to allow for dissolution on mutually-acceptable terms. In contrast, the model for how smaller enterprises and MNCs work together is rarely so well specified, in large part because of the asymmetry in resources and the differences in long-term objectives. More specifically, the relationship is often vague by design: for the small enterprise it is presumptuous to push the bigger picture opportunities too early; for the MNC it is not worth the effort to think the options through – the smaller partner is typically viewed as a strategic option, and little more. This means, of course, that the opportunity to extend the relationship for the small enterprise is often wide open, but at the same time very hard to do, so it becomes a process of proactively building networks inside the MNC and seeking out ways of adding value across those networks, while also keeping an eye on the bigger prize. We observed two approaches in this regard – one involved utilizing the MNC’s network to enhance the scale and reach of the smaller enterprise, the other involved building options for future growth, perhaps including being acquired by the MNC partner.
Utilizing the MNC’s network to enhance scale and reach
The very characteristics that make MNCs so different from small enterprises – far greater scale and reach – can be especially attractive as a means of pursuing long term goals such as going global or becoming acquired by a major player. However the trajectories of opportunity generation through these relationships are unpredictable. Indeed, there may well be unintended consequences – as in asymmetric war – of certain activities and efforts. The key, then, is for a small enterprise to capitalize on its position as a non-threatening, low-risk partner, and identify how it can leverage the vast networks the MNC can give it access to. This calls for deliberately embracing uncertainty and ambiguity, and on occasion undertaking activities that may only indirectly advance the small enterprise’s cause.
For example, Mitoken, a software start-up in Bangalore, successfully transformed a technology-based relationship with Motorola in India into a valuable commercial one. Initial activities involving Motorola centered around product development in Bangalore. Subsequently, Mitoken’s product offering was, after rigorous evaluation by the Motorola Global Software Group based in Chicago23, installed in Motorola’s software development operations across 20 countries. This represented the start-up’s first major international business breakthrough. Key to achieving this broadening of the activity scope was the strong commitment to the venture from a Motorola executive in India who had acted as a mentor to the co-founders who had developed their ideas while working for Motorola in Bangalore. HMD, the Edinburgh start-up mentioned earlier, also provides an example of the potential for a broader scope of joint activity. When the prototype of its new offering was developed, HMD made a joint sales call with Sun which helped enormously in opening doors to prospective clients. Co-founder Ian Davison described how HMD “actually managed to demonstrate that prototype to one potential [international] customer, at the Sun facility in Linlithgow, Scotland”.
To increase the odds of greater joint activity, one way of extending the relationship with the MNC is for the small enterprise to build networks beyond the local MNC subsidiary and into other parts of its global organization. A key advantage of extending the partnership with an MNC in this way is that the small enterprise could enjoy disproportionate influence with the MNC, which in turn could yield valuable intra-organizational resources. This is especially so when managers in the small enterprise interact with MNC managers who have worked in other geographies and thus have personal knowledge of key individuals in other parts of the MNC24. In our research, the small enterprises that were most successful in collaborating effectively with MNC subsidiaries were those that built links with such boundary-spanning individuals who could, in turn, gain access to resources and knowledge elsewhere in the MNC network25. Thus one firm in Scotland dealt with an MNC technology specialist who himself was well connected with other European and North American subsidiaries and therefore could, potentially, obtain useful information. Wider networking within the MNC also helped to build interpersonal links that resulted in greater visibility for the small enterprise. For example, Skelta’s alignment with the Microsoft agenda went hand in hand with the development of a variety of linkages within Microsoft that allowed it to span boundaries, such as between Bangalore and Redmond, WA. Interestingly, the transfer of key personnel within the MNC’s global network can be a blessing in disguise for the smaller enterprises, because these managers become useful contacts and boundary-spanners as they rise up the ranks within the MNC.
Building options for future growth: Ambiguity by design
The other key aspect of extending the relationship with an MNC is for the smaller enterprise to develop a point of view about its long-term objectives, while deliberately keeping this point of view hidden from the partner company. Even if the executives running the small enterprise are interested in being acquired by its MNC partner, it is typically ill-advised for them to let this be known. A multinational partner is likely to be far more impressed by a small partner that is investing for its long-term growth than one that is positioning itself for sale. There is, in other words, a value in the small enterprise setting itself an oblique goal (e.g. build for the long term, with a view to getting acquired in the medium term), and for its executives to deliberately keep quiet about their long-term objectives26.
The small enterprise faces three generic options regarding its future: it can plan to pursue an independent future, it can attempt to build a long-term partnership with the MNC, or it can plan for the possibility of being bought by an MNC. Planning for an independent future involves the small (and growing) enterprise making some clear-cut decisions about the markets it wants to play in, and using its relationships with MNCs to help achieve its objectives. This approach requires vision and tenacity, and it is unlikely to offer an easy ride, but today’s gorillas – Microsoft, Cisco, SAP and so on – were all small enterprises in the 1980s that chose to take this path, and are testament to its potential. A contemporary example of this approach is Dhruva, the Bangalore-based game company mentioned earlier. Dhruva needed its partnership with Intel to transform itself into a serious international player, but it subsequently charted its own independent course.
A long-term partnership with one or several MNCs offers a certain amount of security but may constrain the small enterprise’s growth, and may also lead it into the low-margin world of subcontracting. But to the extent that the small enterprise is offering a distinctive product or service, this approach can still be highly successful. For example, the Scottish software company Arnlea is poised to engage with a range of MNCs in the North Sea oil and gas cluster in Scotland, on the basis of its highly-specialized offerings. Such long term development reflects a mutual sustained interest in the relationship on the part of the parties involved.
The prospect of being acquired by an MNC can be both daunting and alluring, and every successful small enterprise – particularly in the high technology world- has to take this option seriously. For some small enterprise managers, acquisition is the best way to leverage its ideas and capabilities. For example, Roslin Biomed, the UK start-up company behind animal cloning, actively courted the US biotechnology company Geron to help it leverage its platform technology, and this led to a full acquisition in 2001. For other small enterprise managers, acquisition is a Faustian bargain that would ideally be avoided, but often occurs anyway. The Economist recently reported of IBM that: “In the past four years it has spent about $16 billion on over 50 acquisitions, mostly small software firms that have thrived after being stitched into the company”27 (for some takeaways for multinationals, see the sidebar ‘Dance Lessons for Gorillas’).
Our research suggests that the small enterprise needs to be alert to all these options, and to invest in a way that keeps as many as possible open for as long as possible – in other words, the small enterprise needs to adopt a strategy of ambiguity by design. Consider i-flex, arguably India’s most successful software product company. It was formed as a spin-off from Citibank, so it relied in its early years on a long-term partnership with its former parent. But it gradually distanced itself from Citibank as it began selling its banking software products to competitors, and then built an enduring relationship with IBM alongside which it engaged in considerable international sales activity, including in Europe. And it was ultimately acquired by software giant Oracle with which it had had a long-standing technical association. Whatever the approach taken, the key is for the small enterprise to dance with the gorillas in a manner that furthers, not diminishes, its cause.
* * *
There are real opportunities for smaller firms to engage meaningfully with MNCs, especially if they do so proactively and with a view to the long-term evolution of the relationship. Of course, given the considerable challenge involved, it is conceivable that some small enterprises will wonder whether such collaborative relationships are really worth the trouble. Indeed for some, specifically those that are content to focus on relatively less knowledge-intensive offerings and pick the low-lying fruit, engaging with MNCs may not be truly beneficial. However for those that have cutting-edge technologies to offer, spurning the prospect of engaging with MNCs will result in missed opportunities. There may really be little option for innovative small enterprises with global ambitions but to learn to dance with the gorillas.
Financial support from The Carnegie Trust for the Universities of Scotland, and encouragement to pursue the research from the UK Advanced Institute of Management Research (AIM), is gratefully acknowledged.
About the Research This paper draws upon research conducted as part of a five-year investigation, comprising 70 interviews and a survey that elicited 102 responses, into the internationalization of small and medium sized enterprises (SMEs). The research focused on small software enterprises in India (particularly Bangalore) and the United Kingdom (notably Scotland). Scotland and Bangalore provide informative settings in which to explore the topic given the concentration of information technology companies – both indigenous SMEs and MNC subsidiaries – found there. Additionally, they jointly provide a range of perspectives covering both advanced and emerging economy contexts. 25 interviews were conducted between October 2005 and September 2006 among individuals associated with SMEs, MNCs, trade bodies and economic development agencies. Supplementary field interviews were conducted in Bangalore, Glasgow, Lahore and Tartu, Estonia. Multiple perspectives were elicited in order to explore the prevalence of, barriers to, and measures to facilitate, SME-MNC linkages. This built on previous research within our investigation that included a detailed case-study of a Scottish initiative to foster SME-MNC linkages, a set of case studies conducted in the Bangalore software industry and a survey of Indian small software enterprises, which were concerned with the role of social capital in SME internationalization. In particular, the issues explored included the differential effects of social capital types on SME internationalization, temporal effects (including decay) of networks and firm-level capabilities such as proactively leveraging network relationships. For the interested reader, some findings of the above studies from an academic perspective have been compiled in: S. Prashantham (2008), The Internationalization of Small Firms: A Strategic Entrepreneurship Perspective, London: Routledge.
Dance Lessons for Gorillas Although we were looking at joint activity between small enterprises and MNCs from the perspective of the former, our research indicates some useful lessons for the latter as well – who also stand to gain immensely from such partnerships.
Reach out. The message of proactive engagement applies equally to MNCs as it does to small enterprises. This may of course require some mediation given the various differences between these sets of organizations. In particular, the message that a gorilla interested in dancing with a small enterprise will have to be transmitted loud and clear because this could come as a (pleasant) surprise for some. Apart from an MNC’s own partnering schemes, it may be useful to tap into the networking efforts of regional associations. Thus many MNC subsidiaries in Scotland have found it useful to participate in an “open doors” event at a local science park that attracted some 150 young technology-based companies and featured one-to-one meetings with senior representatives from the likes of IBM, Microsoft, Nokia, Oracle and Sun Microsystems to discuss potential collaboration.
Engage nimbly. MNCs’ global partnering programs do not always do the job, often because of unique local conditions. These forums may then have to be innovatively tailored. An example of such an innovation, selected to be showcased at a recent company conference in Beijing, is seen in the efforts of a Microsoft executive in Pakistan. Vaqar Khamisani found that while he encountered promising small enterprises they needed rather more structured guidance than the partnering program allowed for. With entrepreneurial flair he modified the design of the partnering program into a sequenced set of activities. Along this “journey” the small enterprise would develop technical and market capabilities that would ultimately make it far more effective in leveraging the Microsoft partnership. This approach of adapting innovatively to local conditions is well worth emulating.
Incentivize parterning. Where we found MNC subsidiaries to exhibit proactiveness and flexibility in reaching out to small enterprises, we generally detected the efforts of a “do-gooder” manager with an altruistic interest in aiding the local economy. By contrast, a number of other MNC managers tend to adopt a myopic perspective in dealing with small enterprises as clients or partners. In particular, they may be unwilling to help extend a small enterprise’s dealings with other parts of its global network if they perceive that resultant benefits will be enjoyed elsewhere in the MNC. It may therefore be worthwhile introducing incentives so that middle managers, including those in a sales function (where middle managers often admit that myopia abounds), pass on partnering possibilities to other subsidiaries or at the very least to boundary-spanning managers within their own subsidiary.
Commit realistically. To address the concern that small enterprises often have about MNC subsidiaries lacking sufficient autonomy, it is important to be transparent about what can be realistically offered. A relatively modest commitment may be reassuring, not a turn-off, if a more substantial commitment of resources is not warranted due to constraints from headquarters. We found that MNCs with a track record of working closely with a range of small enterprises exhibit such realism, generally by adopting a case-by-case basis in dealing with these various companies. Different “deals” – for example, transfer of intellectual property in one case and joint sales activity in another – are struck depending on the specific situation, as well as the subsidiary’s limitations. Thus neither are blanket promises made nor false illusions created. Such behavior helps to establish credibility among local small enterprises and increases the odds of entering into valuable partnerships and engendering a trust-filled climate within which to engage.
Table 1. Strategies for Dancing with Gorillas
Stage of relationship
Traditional model: MNCs partnering with each other
New model: Small enterprises partnering locally with MNCs
Strategies for small enterprises partnering with MNCs
A direct frontal approach through a dedicated alliance department or key individuals who are direct counterparts
Given asymmetry of access and attention, the direct approach is likely to fail; so use indirect means of access
Use local allies such as regional institutions or partnering programs; “make your luck” by converting low-key interactions into concrete relationships
Use the MNC’s reputational strength to gain support through written commitment and bringing to bear social sanctions
Well established processes for structuring, governance and staffing alliances
Given asymmetry of resources and long term objectives, these processes don’t apply; so plan for the short term with an eye on the long term
Capitalize on points of technology by proactively demonstrating skills and creating opportunities
Ensure modular or discrete knowledge transfer to ensure tangible outcomes (e.g. a product prototype) if the partnership is prematurely terminated
A relatively predictable pattern for the further development of alliances, including built-in contingencies for instability and dissolution
Given asymmetry and therefore dispensability of small enterprises, there’s greater uncertainty vis-à-vis MNCs’ own plans and priorities; so be vague by design with an eye on the bigger prize
Proactively build networks within the MNC and add value e.g. extending from technological to commercial activities, and from local to international business
Adopt an ambiguous approach by design; pursue oblique goals without showing all cards initially, and keep options open for as long as possible
1 J. Hagel and M. Singer, “Unbundling the Corporation,” Harvard Business Review 77, no. 2 (March-April 1999): 133-141.
2 Professor Prahalad mentioned this during a question-answer session following the presentation of the 2006 Booz Allen Hamilton Distinguished Scholar Award at the Academy of Management meeting in Atlanta, USA.
3 T.L. Friedman, The World is Flat: A Brief History of the Globalized World in the Twenty-first Century”(London: Allen Lane, 2005).
4 J. Birkinshaw, J. Bessant and R. Delbridge, “Finding, Forming, and Performing: Creating Networks for Discontinuous Innovation”, California Management Review 49, no.3 (Spring 2007): 67-84.
5 Some of these ideas are discussed, in the context of emerging economy firms more generally, in N. Dawar and T. Frost, “Competing with Giants: Survival Strategies for Emerging Market Companies,”. Harvard Business Review 77, no. 2 (March-April 1999): 119-129.
6 W. Kuemmerle, “The Entrepreneur’s Path to Global Expansion,” MIT Sloan Management Review 46, no.2 (Winter 2005): 42-49.
7 Y.L. Doz, J. Santos and P. Williamson, “From Global to Metanational: How Companies Win in the Knowledge Economy” (Boston: HBS Press, 2001).
8 J. Birkinshaw and N. Hood, “Unleash Innovation in Foreign Subsidiaries,” Harvard Business Review 73, no.3 (March 2001): 131-137.
9 Y. Doz and M. Kosonen, “The New Deal at the Top,” Harvard Business Review 85, no.6 (June 2007): 98-104.
10 Ongoing research on strategy making episodes suggests that their ritualistic nature could paradoxically lead to creative ideas during a meeting but to little subsequent action thereafter; see G. Johnson, S. Prashantham and S.W. Floyd “Toward a mid-range theory of strategy workshops,” AIM Working Paper #35 (2006).
11 S.A. Alvarez and J.B. Barney, “How Entrepreneurial Firms can Benefit from Alliances with Large Partners,” Academy of Management Executive 15, no. 1 (2001): 139-148.
12 Y.L. Doz and G. Hamel, “Alliance Advantage: The Art of Creating Value through Partnering” (Boston: HBS Press, 1998).
13 Strategic asymmetry relates to irregular war, an issue of considerable contemporary interest in a geopolitical environment where the US and its allies face threats from unconventional nonstate entities. See, for example, C.S. Gray, “Irregular Warfare: One Nature, Many Characters,” Strategic Studies Quarterly 1, no. 2 (Winter 2007): 35-57. Also Metz ad D.V. Johnson II, “Asymmetry and U.S. Military Strategy: Definition, Background, And Strategic Concepts” (Carlisle, PA: Strategic Studies Institute, 2001).
14 Our use of the asymmetry war imagery reflects gorillas’ greater power vis-à-vis small enterprises. Our argument is that small entrepreneurs must therefore adeptly use various means (strategies that we identify here) to achieve their ends (e.g. growth). This is consistent with recent research on MNC power relative to other low-power actors; see C. Bouquet and J. Birkinshaw, “Managing Power in the Multinational Corporation: How Low-Power Actors Gain Influence,” Journal of Management 34, no.3 (2008): 477-508. For a more general treatment of power, see J. Pfeffer, “Managing with Power: Politics and Influence in Organizations” (Boston: HBS Press, 1992).
15 C.J. Ancker III and M.D. Burke, “Doctrine for Asymmetric War,” Military Review 83, (July-August 2003): 18-25.
16 P.S. Ring, Y.L. Doz and P.M. Olk, “Managing Formation Processes in R&D Consortia,” California Management Review 47, no.2 (Summer 2005): 137-156.
17 B. McEvily and A. Zaheer, “Bridging Ties: A Source of Firm Heterogeneity in Competitive Capabilities,” Strategic Management Journal 20, no. 12 (1999): 1133-1156.
18 P. H. Andersen, “Regional Clusters in a Global World: Production Relocation, Innovation and Industrial Decline”, California Management Review 49, no. 1 (2006): 101-122.
19 For more on this initiative, see S. Prashantham and R.B. McNaughton, “Facilitating Links between MNC Subsidiaries and SMEs: The Scottish Technology and Collaboration (STAC) Initiative,” International Business Review 15, no.5 (2006): 447-462.
20 Principles of judo strategy (somewhat akin to asymmetric war) include avoiding a frontal assault, as we emphasize in our framework, and are concerned with using a more powerful rival’s strength against it; see D.B. Yoffee and M.A. Cusumano, “Judo Strategy: The Competitive Dynamics of Internet Time”, Harvard Business Review 77, no. 1 (January-February 1999): 70-81; and D.B. Yoffee and M. Kwak, “Judo Strategy: Turning Your Competitors’ Strength to Your Advantage” (Boston: HBS Press, 2003).
21 STAC e-zine, “STAC Project Updates”, June (2006); Available at the following URL: http://www.thestac.org.uk/index.cfm/page/22/resourceid/44/
22 For a ‘partner profile’ of Regio, see a case study by Ericsson at http://www.ericsson.com/mobilityworld/sub/articles/case_studies/04dec01 [Accessed 7 May 2008]
23 As featured in the Nasscom publication titled “India is Innovation”.
24 A.C. Inkpen and E.W.K. Tsang, “Social Capital, Networks, and Knowledge Transfer,” Academy of Management Review 30, no. (2005): 146-165.
25 For an academic treatment of the notion of boundary-spanning within MNCs, see T. Kostova and K. Roth, “Social Capital in Multinational Corporations and a Micro-Macro Model of its Formation,” Academy of Management Review 28, no. 2 (2003): 297-317.
26 In an article in Fast Company (Built to Flip, Issue 32, 2000), Jim Collins discussed the relative merits of a “built to last” versus a “built to flip” mentality among start-up founders, and he observed that the start-ups most likely to be bought for a good price were paradoxically the ones that were seeking to become great companies themselves, and not the ones seeking to get acquired.
27 The Economist, “Hungry Tiger, Dancing Elephant”, April 7 (2007): 69-71.