Common Types of Business Relationships
When acquiring goods or services there are many types of business relationships. Which relationship to use can be driven by many factors:
- Cost
- Number of suppliers
- Your company’s willingness to invest time and resources in the relationship
- The level of information exchange needed to effectively use the good or service
- The level of risk your company and the supplier is willing to take
- Competitors need and/or access to the good or service
- The strategic importance of the good or service
Supplier Relationships can be simple or very complex depending on the nature of the level of collaboration and the complexity of the service or materials being supplied. The typical categories of relationships are:
- Buy the Market
- Ongoing Relationship or Preferred Supplier
- Partnership
- Collaboration or Strategic Alliance
- Merger or Acquisition
Buy the Market
This relationship is characterized by an arms-length relationship between the two companies. Neither company is particularly concerned about the strategy or culture of the other. This is a purely transactional relationship typified by purchase orders for specific items. Companies looking to buy commonplace items or commodities would favor this relationship. There is no vendor preference implied and subsequent purchases could very well go to alternate vendors. On the part of the vendor, there is no preference implied. The vendor will likely also be selling goods or services to your competitors. As such, there is no exchange of key data such as trade secret information or business plans or intents. The interaction is typically limited to requests for quotations and bid, and purchase orders, shipping documents & invoices. Neither company invests very much in the relationship beyond basic contact between sales staff and purchasing staff.
Ongoing Relationship / Preferred Vendor
This type of relationship is one level up in data sharing and contact but it still is a relationship with a limited connection between the two companies. Here the supplier may give the customer preferred pricing or some other priority perk in exchange for a larger share of the business. There is some data sharing, annual forecasts for the goods, and/or services the vendor supplies, commitments to buy some quantity in exchange for favorable pricing. The supplier and customer have designated contact points, typically an Account Representative and Purchasing Agent. Each will be expected to know the nature of the relationship and the current status of any purchasing volumes and eligible discounts. Alignment between the two company’s strategy is not really necessary however some communication and operating style alignment may be present. This is typically viewed by the customer as an “ease of working with the vendor” issue. This can be responsiveness, quality of communication, or some other “ease of working with” characteristic. Purchasing is typically driven by purchase orders however the RFP / Bid sequence for each transaction does not generally occur. Preferred vendor arrangements are medium-term arrangement, generally renewed based upon periodic (i.e. annual) vendor performance reviews. An annual term is common although shorter term (i.e. quarterly) performance reviews can also happen.
Partnership
A partnership between two firms is a long term relationship that entails a high degree of trust, extensive data sharing, and a complex communication structure that includes ongoing communications at the departmental or functional level. Here the two supply chain teams interact directly as do the financial, sales, marketing, and other groups within the two organizations. There is generally a senior executive from each firm assigned as relationship managers. The contract between the two firms will have provisions for mutual investments and shared risk. The contract will also have provisions for performance as well as a mechanism for change management and dispute resolution.
Partners will be expected to have limited contact and other business with the other firm’s competitors. They will also be expected to maintain a high degree of confidentiality. It is not unusual for individual employees involved in the partnership to be barred from working with partner firms’ competitors.
Partnerships can be formed to exploit each firm’s strengths in the interest of both firm’s benefit. Some examples are:
Sherwin Williams & Pottery Barn
One of the largest advantages of doing a co-branding campaign is having the opportunity to showcase a service or product to a new audience. That’s what Sherwin-Williams and Pottery Barn did when they got together in 2013. They created an exclusive line of paints together, and then put a new section up on Pottery Barn’s website to allow customers to easily pick which paint colors they wanted so it would go with their furniture choices. This was mutually beneficial for both brands, and they wrote articles to show how customers could decorate and paint on their own.
Starbucks’ in-store coffee shops at Barnes & Nobles bookstores,
This long-standing partnership is designed to attract customers to the store and keep people in the store to encourage buying more coffee and books. Barnes and Noble created comfortable seating areas for reading and selecting materials and the Starbucks offering encourages extended time in the store.
Red Bull & GoPro
One example of a partnership business is the relationship between Red Bull and GoPro. GoPro sells more than portable cameras, while Red Bull sells more than energy drinks. They are both lifestyle brands that have similar goals. They have the following in common:
- Fearless
- Adventurous
- Extreme
- Action-packed
These make them the perfect fit to pair up for campaigns, particularly when it comes to action sports. GoPro gives adventurers and athletes the tools they need to capture their stunts, sports events, and races from the athlete’s perspective. In turn, RedBull puts on and sponsors the events.
These companies have done many projects and events together, with the biggest being “Stratos.” In this campaign, Felix Baumgartner had a GoPro strapped to him and jumped from a space pod that was 24 miles above the surface of the Earth. He set three world records but also showed the potential humans have that defines Red Bull and GoPro.
These partnerships are mutually beneficial but do not extend to the next level, strategic alliance.
Strategic Alliance / Collaboration
In a strategic alliance, two firms join forces to pursue an opportunity. Each brings unique strengths that the other needs to be successful. While this can be viewed as a partnership the level of mutual dependency, alignment, and intimacy is typically much higher than in a standard partnership. Neither party would be successful without the other as such there is a strong interdependency. In these arrangements, there is extensive information sharing, a very high degree of trust, and extensive communication and collaboration between departments. It is very common that companies develop a joint business plan for the opportunity. A strategic alliance is a very long term arrangement which may go on indefinitely. Like the partnership, each company will have a senior executive responsible for the operation of the alliance. The agreements will include shared risks, expected levels of investment, and expected levels of resource commitments. Licensing of intellectual property is also commonplace in these arrangements as is the development of common business processes. Strategic Alliance partners will generally have no business relationships with either party’s competitors. If there is any interaction it is very limited.
One key difference between the strategic alliance and a typical partnership is the level of interdependence. The examples in the partnership section (above) the companies expanded sales but could operate on their own. They agreed to co-market and co-locate to create an opportunity for more sales. The companies did not intertwine their organizations. In the following examples you’ll see the level of interdependency is very high, in fact, neither company on its own would be successful.
Pfizer / Warner-Lambert
In the 1990’s Warner-Lambert Corporation developed a drug product, Lipitor. This was for the treatment of cholesterol and was marketed principally through cardiologists. Warner-Lambert did not have a significant presence in the cardiology community. Pfizer had an extensive presence in the cariology community but lacked new products to sell to the market. By creating a strategic alliance the two firms benefitted for many years. Between Warner-Lambert on the supply side and Pfizer on the commercial side, the two firms saw Lipitor become the number one prescribed drug in the world. Sales eclipsed $12 billion a year.
Celgene / Technopharm
In 2008 Celgene Corporation had completed its product launches in the US and the EU. Celgene had extensive experience in the development and manufacturing of their products. The company also had developed and marketing and operational expertise for the US and EU markets. The next area of expansion was to be South America. While analysis showed that this could be a profitable market for Celgene the company lacked the skills and resources needed to gain a foothold and grow in the region. To address the cultural, regulatory, logistics, and marketing skills gaps, Celgene wanted to take on a strategic partner to handle the region. Technopharm had an impeccable reputation in the region, had an extensive logistics network in all 14 South American countries, had regulatory resources to help gain government licenses to sell the product in each country, and also had resources to market and sell throughout the region. Technopharm lacked products in the space that Celgene could serve. From 2008 to 2010 the firms collaborated to build their market share. Sales grew from nothing to $1.2 billion over that 24 month period.
Merger/Acquisition
In these arrangements, the two firms become one. For Mergers the two firms generally join forces as two equals. In an acquisition, one firm literally buys the other firm. In either arrangement, the resulting entity has a single culture, set of operating rules, and one set of information. It is not unusual for a merger or acquisition to occur after a period of strategic alliance.
