Cooperation between two companies to sell their products, which tend to be complementary.

Reprint: R0609E

Intel and Microsoft neither buy from nor sell to each other directly, but they are undeniably in business together. They are probably the world’s most widely known pair of complementors—companies that independently provide complementary products or services to mutual customers. Complementors increase the value of each other’s offerings and the size of the total market. So it’s not surprising that so many just assume that their interests are aligned. Nothing could be further from the truth.

Discord can develop in many areas, such as pricing, technology, standards, and control of the market—both in terms of which company has the most influence over customers and which one gets the biggest slice of the pie. The issue of pricing perfectly captures this tension. Ideally, you’d like to price your goods high while your complementors price theirs low. Airlines, for instance, would be happy to see vacation lodgings go for a song, while destination resorts could raise rates and still fill their rooms if customers could fly there for free.

The first step in managing relationships with complementors is to develop a deep understanding of their economics, their strategies and goals, their existing capabilities, their incentives for cooperation, and any potential areas of conflict. Then, to gain the upper hand, companies can use a variety of tools that fall into two main categories: hard power (inducements or coercion to get what you want) and soft power (persuasion through indirect means to get others to want what you want). The authors explain how to build both hard power and soft, illustrate the strengths and limits of each, and offer guidelines for choosing one over the other. Conflict among complementors is inevitable, but together, hard and soft power can help companies manage the dark side of complementor relationships and take full advantage of the opportunities that cooperation should create.

Most companies benefit from complementors—other firms independently making products or services that increase your offerings’ value to mutual customers. For example, digital-camera makers rely on manufacturers of affordable home photo printers to sell more cameras.

But as Yoffie and Kwak caution, complementor relationships can be troublesome—because complementors’ interests often conflict. Take Apple Computer. It needs Intuit to make software for its computers. But Intuit needs high-volume sales to underwrite its hefty R&D program—sales that only market-dominating Microsoft Windows–powered computers can provide. Intuit could lose money by investing in software for Apple, a company with such a small market share.

How to manage such potential conflicts? Understand what motivates your complementors. Then choose different kinds of power to get complementors working in your favor. When necessary, and when you have the upper hand, use hard power—threats or incentives. Bill Gates did when he threatened to halt development of Microsoft Office for the Macintosh unless Apple adopted Microsoft’s Web browser. But hard-power plays can trigger backlash, so consider also using soft power—persuasion through indirect means. Soft-power tactics include reducing your dependence on complementors. For instance, by fostering development of the open-software system Linux, Intel lessened its dependence on power-wielding proprietary software complementor Microsoft.

Choosing between hard and soft power isn’t always an either/or decision. Dip into both toolboxes, and you seize full advantage of the opportunities complementors create.

The Idea in Practice

Hard-Power Tactics

• Produce some or all strategically important complements in-house. You’ll constrain complementors’ power and possibly generate major profits. For example, Hewlett-Packard makes more money from selling ink cartridges for its printers than from selling the printers themselves.

• Threaten to withhold your support for a complementor’s offering. You’ll force them to make decisions in your favor.

Example: 

Chip maker Intel, a Microsoft complementor, invested heavily in MMX, a new multimedia technology, and wanted Microsoft to modify Windows to accommodate it. But other chip makers were also pressuring Microsoft to support their multimedia technologies. Microsoft wanted to avoid the cost of supplying different versions of software for different types of chips. It demanded that Intel license MMX to other chip makers at no charge in return for Microsoft’s cooperation. Intel had to accede, even though it lost competitive advantage and profits.

Soft-Power Tactics

• Reduce your complementors’ risk. Build industry support for your chosen platform to boost everyone’s chances of success.

Example: 

Intel helped make Wi-Fi the standard for wireless computing—and drove sales of its Wi-Fi-enabled Centrino laptop—by launching a $300 million marketing campaign touting its commitment to Wi-Fi. Complementors—T-Mobile, Starbucks, airports—profited by jumping on the Wi-Fi bandwagon.

• Articulate a compelling vision in which all players benefit.

Example: 

Apple’s Steve Jobs wanted major music companies to sell tracks to iPod users through its online music store, iTunes. Burned by illegal file-sharing services, most music-industry executives resisted. But Jobs’s passionate vision persuaded them to get on board: He convinced them that Apple’s technology would discourage users from sharing downloads, and that its service and marketing prowess would create a smash hit.

Combining Hard and Soft Power

To get the most out of your complementors, choose wisely—hard power, soft power, or both. Example: 

When Apple opened its iTunes store, it relied primarily on soft power—cajoling music companies into making their libraries available and reducing their risks by offering safeguards against piracy. But when Apple’s contracts with the music companies came up for renewal, it turned to hard power. The music companies wanted iTunes to increase the price per track from $.99 to $1.50–$2.00 so they could boost profits. But iTunes—commanding 80% of the market for legal downloads—had the upper hand. Steve Jobs kept the low price, knowing it was the only way to sell more iPods and therefore maintain Apple’s margins.

In business, as in war, “Know yourself” and “Know your enemy” have long been rules number one and two. But a third maxim—“Know your friends”—is steadily moving up the list. The focus on supply chain management in the past two decades is an example of this principle at work.

A version of this article appeared in the September 2006 issue of Harvard Business Review.

Alliances between companies, whether they are from different parts of the world or different ends of the supply chain, are a fact of life in business today. Some alliances are no more than fleeting encounters, lasting only as long as it takes one partner to establish a beachhead in a new market. Others are the prelude to a full merger of two or more companies’ technologies and capabilities. Whatever the duration and objectives of business alliances, being a good partner has become a key corporate asset. I call it a company’s collaborative advantage. In the global economy, a well-developed ability to create and sustain fruitful collaborations gives companies a significant competitive leg up.

A version of this article appeared in the July–August 1994 issue of Harvard Business Review.