dancing with gorillas

8/12/2019 Dancing with Gorillas

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Dancing with Gorillas: How Small Companies can Partner Effectively

with Multinational Corporations

Shameen Prashantham

University of Glasgow

Department of Management

Centre for Internationalization and Enterprise Research

Glasgow G21 8QQ

UK

[email protected]

Julian Birkinshaw

London Business School

Regents Park

London NW1 4SA

UK

[email protected]

Paper accepted for publication in California Management Review

July 4th2008
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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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 lions

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 indramatic 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 gorillas2.

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


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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 Vodafones Top 10 games listing.

But in contrast to Dhruvas 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).


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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. Anotherapproach 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 willstruggle to develop efficiently itself chiefly local knowledge, and access to local

distribution channels and markets. Accordingly, MNCs such as Microsoft and


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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 worldwidebasis; 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 withlocal 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

companys 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


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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. Althoughresearch 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 MNCs 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 objectivesfor 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 lions share of the jointly created value11. And the two parties will likely

have different agendas and criteria for assessing outcomes, leading to further tension.


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Third, there is a problem of asymmetryin 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 activitiescan 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 ofstrategic asymmetrydeveloped

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


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strategic asymmetry as the use of some sort of difference to gain advantage13

. 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

Forming

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

FORMING

Creating links toMNCs through local

allies

Building commitment:Using the MNCs

strength against it.

CONSOLIDATING

Capitalizing on pointsof advantage: Building

options for growth

Modularizingknowledge transfer to

reduce vulnerability

EXTENDING

Utilizing the MNCsnetwork to enhance

scale and reach.

Building options forfuture growth:

Ambiguity by design


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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

MNCs reputational strength against it.

Creating links to MNCs through local allies

An important aspect of any collaborative activity is the initial identification of

appropriate partners16

. Rather than a direct frontal approach, the smaller enterprise willtypically 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 institution17may 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 MNCs 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


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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 Regiosexcellent local networks, wanted to use Regios CD Atlas to demonstrate a radio network

product to a prospective Estonian client. As Regios 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 MNCs 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 MNCs

own power and status to ensure commitment similar to a guerilla force using a larger

opponents 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


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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 toobtain, in writing, the MNCs 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. Tarspans 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 MNCs commitment

to the joint activity.

Consider also the case of the Bangalore-based software venture Skelta which was

recognized with an innovation award at Microsofts 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 companys Microsoft relationship function. Skeltas partnership worked, in part,

because it leveraged Microsofts professed commitment to the local milieu and channeled

it to its own relationship, as implied in the observation of Microsofts Rajiv Sodhi, who

was instrumental in fostering the relationship: Skelta fostered a very strong link with

Microsoft India and this link is on multiple levelsWhat happens as a result is that the


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India subsidiary stands firmly behind the local company, and its 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 MNCs 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 competingwith large incumbents, can also be relevantin the present context ofpartnering

20.

Consolidating

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 enterpriseand 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


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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 multinationalsconfidence 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. Arnleas 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 Regios 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 Ericssons 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


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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 beyondthe smaller enterprises 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. HMDs modular


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approach to knowledge transfer, however, meant that it still ended up with a perfectly

functioning prototype of its innovation using Suns 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 Intelcommented, 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.

Extending

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-


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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 twoapproaches in this regard one involved utilizing the MNCs 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 MNCs 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 enterprises 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, Mitokens product offering was, after rigorous evaluation by the Motorola

Global Software Group based in Chicago23

, installed in Motorolas software development


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operations across 20 countries. This represented the start-ups 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, Skeltas 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 MNCs global network can be a blessing in disguise for the


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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 onethat 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 todays 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 enterprises 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,


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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 Geronto 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 Economistrecently 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 company27

(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 Indias 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.

* * *


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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.


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Acknowledgements

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.


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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 toexplore 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.


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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 MNCs 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 enterprisesthey 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.


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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 enterprises 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 partneringpossibilities 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 subsidiarys 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.


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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

Forming A direct frontalapproach througha dedicatedalliancedepartment or keyindividuals whoare directcounterparts

Given asymmetryof access andattention, thedirect approach islikely to fail; souse indirect means

of access

Use local allies such asregional institutions orpartnering programs; makeyour luck by convertinglow-key interactions intoconcrete relationships

Use the MNCs reputationalstrength to gain supportthrough written commitmentand bringing to bear socialsanctions

Consolidating Well establishedprocesses forstructuring,governance andstaffing alliances

Given asymmetryof resources andlong termobjectives, theseprocesses dontapply; soplan forthe short term withan eye on the longterm

Capitalize on points oftechnology by proactivelydemonstrating skills andcreating opportunities

Ensure modular or discreteknowledge transfer to ensuretangible outcomes (e.g. aproduct prototype) if thepartnership is prematurelyterminated

Extending A relativelypredictable patternfor the furtherdevelopment ofalliances,

including built-incontingencies forinstability anddissolution

Given asymmetryand thereforedispensability ofsmall enterprises,theres greater

uncertainty vis-

-vis MNCs ownplans andpriorities; so bevague by designwith an eye on thebigger prize

Proactively build networkswithin the MNC and addvalue e.g. extending fromtechnological to commercialactivities, and from local to

international business Adopt an ambiguous

approach by design; pursueoblique goals withoutshowing all cards initially,and keep options open for aslong as possible


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References

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2Professor Prahalad mentioned this during a question-answer session following the presentation of the2006 Booz Allen Hamilton Distinguished Scholar Award at the Academy of Management meeting inAtlanta, USA.

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5Some of these ideas are discussed, in the context of emerging economy firms more generally, in N. Dawarand T. Frost, Competing with Giants: Survival Strategies for Emerging Market Companies,. HarvardBusiness Review 77, no. 2 (March-April 1999): 119-129.

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10Ongoing research on strategy making episodes suggests that their ritualistic nature could paradoxicallylead 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).

11S.A. Alvarez and J.B. Barney, How Entrepreneurial Firms can Benefit from Alliances with LargePartners, Academy of Management Executive 15, no. 1 (2001): 139-148.

12Y.L. Doz and G. Hamel, Alliance Advantage: The Art of Creating Value through Partnering (Boston:HBS Press, 1998).

13Strategic asymmetry relates to irregular war, an issue of considerable contemporary interest in ageopolitical 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 StudiesQuarterly 1, no. 2 (Winter 2007): 35-57. Also Metz ad D.V. Johnson II, Asymmetry and U.S. MilitaryStrategy: Definition, Background, And Strategic Concepts (Carlisle, PA: Strategic Studies Institute, 2001).

14

Our use of the asymmetry war imagery reflects gorillas greater power vis--vis small enterprises. Ourargument 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 toother low-power actors; see C. Bouquet and J. Birkinshaw, Managing Power in the MultinationalCorporation: 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 inOrganizations (Boston: HBS Press, 1992).

15C.J. Ancker III and M.D. Burke, Doctrine for Asymmetric War, Military Review 83, (July-August2003): 18-25.

16P.S. Ring, Y.L. Doz and P.M. Olk, Managing Formation Processes in R&D Consortia, CaliforniaManagement Review 47, no.2 (Summer 2005): 137-156.


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17B. McEvily and A. Zaheer, Bridging Ties: A Source of Firm Heterogeneity in CompetitiveCapabilities, Strategic Management Journal 20, no. 12 (1999): 1133-1156.

18P. H. Andersen, Regional Clusters in a Global World: Production Relocation, Innovation and IndustrialDecline, California Management Review 49, no. 1 (2006): 101-122.

19For more on this initiative, see S. Prashantham and R.B. McNaughton, Facilitating Links between MNCSubsidiaries and SMEs: The Scottish Technology and Collaboration (STAC) Initiative, InternationalBusiness Review 15, no.5 (2006): 447-462.

20Principles of judo strategy (somewhat akin to asymmetric war) include avoiding a frontal assault, as weemphasize in our framework, and are concerned with using a more powerful rivals strength against it; seeD.B. Yoffee and M.A. Cusumano, Judo Strategy: The Competitive Dynamics of Internet Time, HarvardBusiness Review 77, no. 1 (January-February 1999): 70-81; and D.B. Yoffee and M. Kwak, JudoStrategy: Turning Your Competitors Strength to Your Advantage (Boston: HBS Press, 2003).21STAC e-zine, STAC Project Updates, June (2006); Available at the following URL:http://www.thestac.org.uk/index.cfm/page/22/resourceid/44/

22For a partner profile of Regio, see a case study by Ericsson athttp://www.ericsson.com/mobilityworld/sub/articles/case_studies/04dec01[Accessed 7 May 2008]

23As featured in the Nasscom publication titled India is Innovation.

24A.C. Inkpen and E.W.K. Tsang, Social Capital, Networks, and Knowledge Transfer, Academy ofManagement Review 30, no. (2005): 146-165.

25For 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, Academyof Management Review 28, no. 2 (2003): 297-317.

26In an article in Fast Company (Built to Flip, Issue 32, 2000), Jim Collins discussed the relative merits ofa 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 greatcompanies themselves, and not the ones seeking to get acquired.

27The Economist, Hungry Tiger, Dancing Elephant, April 7 (2007): 69-71.
http://www.thestac.org.uk/index.cfm/page/22/resourceid/44/http://www.ericsson.com/mobilityworld/sub/articles/case_studies/04dec01http://www.ericsson.com/mobilityworld/sub/articles/case_studies/04dec01http://www.thestac.org.uk/index.cfm/page/22/resourceid/44/

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