Partnering with the Frenemy: When the Good Goes Bad
It was a match made in heaven. Google’s software division paired with Samsung’s smartphone group in 2009 and together they became number one in the world, with a global market share of 39.6%. The reasons for their success were many. They had clear-cut competencies, economies of scale, sophisticated executive teams, and outstanding engineers. Just as important, they were adaptable in a fast-moving technology space. Samsung’s stock price grew from $732 in 2009 to $1,243 by 2014, an appreciation of nearly 70%. When Samsung faced Apple’s copycat lawsuit, Google employees testified on Samsung’s behalf. Who could ask for more in a strategic partner?
Partners are an invaluable source of sustainable competitive advantage. In a 2014 survey/study, 85% of the respondents from the Chief Marketing Officer (CMO) Council viewed partnerships and alliances as essential to their business.1 This is likely because most firms do not possess the full range of capabilities to develop, make, and deliver value to customers, soup to nuts. One firm typically cannot develop a valued product, maintain the best technology, and operate all distribution functions efficiently in house. These capabilities require different organizational processes, resource allocations, and people. In most cases independent businesses working together can be more efficient and effective than a single vertically integrated firm.
An MBA student in my channel strategy class once asked me how her employer, the Boeing Corporation, could use the principles we discussed in class when its entire route to market was vertically integrated. Boeing’s salesforce won contracts, everything was manufactured in its facilities, and the company did everything else from product delivery to follow-up services. But even vertically integrated companies have the problem of transfer pricing within their own walls. They must develop and manage incentives to coordinate goods, activities, and services across internal units and functions. These subgroups can represent the equivalent of strategic partners within Boeing’s walls.
Partnerships work not only in business but in the nonprofit sector. Examples abound of how partnering plays a key role in improving the standard of living for individuals. The Boys and Girls Club of America is one organization with a long history of developing and leveraging partnering arrangements. In the late 1980s, it embarked on an aggressive growth plan to reach the unserved and underserved American youth, ultimately settling on a partnership with the Department of Housing and Urban Development (HUD). The goal was to establish 100 Boys and Girls Clubs in public housing. The actual result was 350 Clubs, providing a safe place to learn and grow for well over 150,000 young people.2
Another successful partnership is the Southside Worker Center, which was formed with the assistance of the Southside Presbyterian Church in Tucson, Arizona. The goal of the center is to provide a safe place for workers to wait for employment and negotiate a just daily wage with potential employers. Workers pay a nominal fee ($5 a month) to have their capabilities—as an electrician, plumber, painter—matched to potential employers. Records are kept regarding market value wages for various trades. The workers are offered English classes and educated on civil and workers’ rights. They are encouraged to register with the IRS as subcontractors and to pay taxes via an individual taxpayer identification number (ITIN). There is also an apprentice training system in place by which they train each other. Employers receive a worker whose capabilities have been vetted and verified. The church provides a safe and clean place to run the center. In the hostile border climate created by the Arizona Senate Bill 1070, this partnership helps to create fair and gainful employment for anywhere from 50 to 100 men daily.
Partnerships between nonprofits and businesses can also create great buzz for firms. In recent years, Nationwide Children’s Hospital in Columbus, Ohio, teamed up with Tween Brands, also headquartered in Columbus. Tween Brands is best-known for its Justice and Brothers retail stores. Each spring over two years the organizations ran a campaign in which Tween advertised the opportunity to donate to Children’s via its website and catalog, on register toppers, and on in-store signage. Employees were directed to ask every customer whether they would like to round up their purchase and give the difference to Children’s. Tween stores received great public relations mentions and more importantly raised more than $1 million for Children’s Hospital. This amount was entirely crowd sourced and involved the participation of nearly one million individuals in stores and online. Tween Brands’ efforts served as a role model for future partnerships with Children’s Hospital and with other nonprofit entities.
Procter and Gamble, together with the University of Cincinnati, developed a program called the Live Well Collaborative (http://livewellcollaborative.org/). The intent was to create a partnership model between industry and academia that together would identify breakthrough innovations for customers across their lifespan. A major initiative focuses on the design of products and services to meet the health and mobility needs of an aging population. One example is the redesign of a laundry detergent cap. This resulted in the development of software that models and ages a human hand using mesh wireframes and skin formed over it. Ultimately, together with the university’s engineering department, the initiative created a new cap that requires less hand control than the original—a solution that appeals to arthritis sufferers. To date, the effort has led to 20+ publications, 50 projects, 6 patents, 18 workshops, and 24 conferences involving more than 500 students, 9 colleges, and 15 partners. The partnership model is being duplicated in Singapore with Singapore Polytechnic. More than half (54%) of the older population in the world lives in Asia.
Enter the Frenemy
Such outcomes are the best of circumstances, the Holy Grail of partnering, organizational synergy at its finest. This is not the reality for most partnerships. A more common outcome is what happened to Google and Samsung. By 2013, their story arc took a nose dive. Google worried that Samsung had become too big and thus able to renegotiate at an advantage. The relationship took a complicated twist. In 2012, Motorola poached Samsung’s VP of strategic marketing, responsible for the company’s celebrated television ads for the Galaxy phone. Then Google acquired Motorola’s Mobility group and began work on an XPhone to compete with Apple’s iPhone and Samsung’s Galaxy. In response, Samsung began to develop devices with Microsoft and its Windows platform. Together they came up with Tizen, an operating system codeveloped with Intel.
The once great friendship between Google and Samsung became a competitive liaison in which both firms produced products that were in direct competition with each other. Google and Samsung became frenemies. A frenemy, again, is a person or group that is friendly toward another because the relationship brings benefits, but harbors feelings of resentment or rivalry. This typically stems from the opportunism and exploitation that arise over the course of the relationship. Frenemization typically runs one of two courses: Either the partners persist with clear resentment and rivalry between them or they dissolve after a messy divorce, their antics described in the media with phrases like “the alliance from hell.” There is likely to be no shortage of name-calling, accusations, recriminations, and high-profile lawyers. Frenemization can lead to millions in legal fees, lost sales, tarnished images, and major brand equity losses.
My favorite example involves Calvin Klein and the Warnaco Corporation. Remember “Nothing gets between me and my Calvins”? The quote made Brooke Shields famous, and together the firms grew Calvin Klein’s underwear sales sixfold through enhanced distribution and wider assortments over a five-year period. Both parties benefited in the multimillions. The relationship was deeply embedded; Calvin Klein represented 27% of Warnaco’s $3.2 billion in annual sales. It was a beautiful thing until, to Warnaco’s surprise, Calvin Klein filed suit, citing brand damage from overproduction and distribution through low-end channels such as club stores, unauthorized adaptation of designs, and a failure to follow branding guidelines. Warnaco struck back with a countersuit accusing Calvin Klein of bad-faith dealing and trade libel. The conflict grew horribly messy and dragged on in the press for more than half a year.
On the day of trial, the parties came to a last-minute settlement. They kissed for the cameras and smiled; then went back to business as usual. Warnaco was still allowed to sell to warehouse clubs, although at lower levels than before. It was even allowed to sell to JCPenney, a retailer that Calvin Klein feared would dilute the brand. In return, Calvin Klein was given more stringent stipulations regarding the approval, design, and distribution of its products as well as additional auditing provisions. In short, both parties resigned themselves to living with and working with each other, despite the bitterness of their conflicts. Phillips-Van Heusen bought Calvin Klein in 2002 and in 2012 bought Warnaco as well, so the final chapter of their story is that they were joined together through vertical integration.