Guarding SMEs against opportunism when partnering with a large company

Contributed by Jill Sawers*, Tinus Pretorius and Leon Oerlemans** Department of Management of Engineering, University of Pretoria, South Africa; *also the Maxum business incubator, The Innovation Hub (Pty) Ltd, Pretoria, South Africa; ** also Department of Organisation Studies, University of Tilburg, The Netherlands

Today's business environment is characterised by rapid change and uncertainty, creating a landscape where companies must differentiate themselves to remain viable and competitive. No single company has all the knowledge, competences, expertise or resources to bring about innovation.

It is an environment where the onus is on leaders to acquire, use and manage knowledge effectively and to understand, develop and optimise organisational capabilities and competences.

Strategic alliances between small and medium enterprises (SMEs) and large corporates have become a common occurrence, specifically in the IT and biotech industries. One of the main reasons for this is that large companies can provide smaller enterprises with much needed resources and access to markets, while SMEs often are agile innovators - something that is often lacking in larger organisations.

Despite the business logic and mutual benefit from such partnerships - between SMEs and large corporates - many of these partnerships fail. According to Park and Russo (1996), seven out of every 10 joint ventures or strategic alliances fail, and this can mainly be attributed to a lack of cooperation and opportunistic behaviour, to the extent that acquisition becomes a real threat to SMEs and they find themselves often worse off as a result of the partnership with a large corporate.

The relationship between knowledge and competence involves the entire process of applying knowledge in an environment supported by infrastructure, facilities, skills, technologies to develop capabilities (skills and technologies) and processes to grow capabilities into competence and eventually core competence.

Knowledge, both tacit and explicit, is a commodity that is easily transferable, whether by intent or not. It is the unintended spill over of knowledge that is dangerous for the SME that partners with a large organisation, as the smaller company is not well positioned to defend its case where its knowledge/skills have been appropriated by the large company without its (the small company's) consent. The challenge in the SME-large company partnership is to ensure that sufficient skills are transferred to honour the intent of the partnership, while the SME retains the core skills that gives its raison de etre and made it an attractive partner for the large company in the first place.

Successful partnerships with large corporates require of SMEs to have both ability and awareness capabilities. The first consists of understanding the different types of innovation and innovative environments as well as market segmentation strategies for innovation technologies, how to develop and patent IP derived from expertise or a technology, and what encompasses establishing new technology trends.

Awareness capabilities require a SME to being aware of its complementarity with the core business, strengths, weaknesses, opportunities and threats of its large corporate partner and understanding the internal politics of the organisation. It also requires an understanding of the opportunities the SME presents to its partner, as well as the organisation type from which technologies are sourced and the preferred technology partnership form of the LCO.

SME competences that are attractive to large corporates include innovation, product development and developing networks and relationships. Formal safeguards for entering into partnerships with a large company include a formalisation of the partnership and quantitative measures for determining the success of the partnership. It requires a large company to have a technology strategy and see expansionist opportunities from its partnership with the SME. The SME on the other hand should understand what sparked the large company's interest in it, have documented processes for monitoring product quality and ensure that, before entering a partnership with a large company, that a substantial equity stake in the SME is held by another entity.

Informal safeguards would include a high level of trust in the large company before and after entering into the partnership, knowing that it was not known to be opportunistic. There should also be a cultural fit between the partners, while the SME should have a good reputation in the industry. There should be sufficient motivation for the SME to partner with the LCO and for the latter it should not be prohibitively expensive to switch technologies. There should be a joint decision making process and the SME should be well positioned in its industrial cluster.

From a survey of 43 SMEs based largely in Gauteng a trend has emerged indicating that the more capabilities an SME has (in the absence of safeguards) the less successful the partnership. On the other hand, the more safeguards that are put in place around the partnership, the more successful the partnership is perceived to be. SMEs considering partnerships with large companies should therefore have core ability capabilities, develop awareness capabilities and ensure that safeguards are in place.

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