Partnership Network (COMPONENTS OF AN EFFECTIVE BUSINESS MODEL)

                    A firm’s network of partnerships is the third component of a business model. New ventures, in particular, typically do not have the resources to perform all the tasks required to make their businesses work, so they rely on partners to perform key roles.25 In most cases, a business does not want to do everything itself because the majority of tasks needed to build a product or deliver a service are not core to a company’s competitive advantage.26 For example, Dell historically sought to differentiate itself from competitors through its expertise in assembling computers but buys chips from others, primarily Intel. Dell could manufacture its own chips, but it didn’t have a core competency in this area. Similarly, Dell relies on UPS and FedEx to deliver its products because it would be silly for Dell to build a nationwide system to deliver its computers. Firms also rely on partners to supply intellectual capital needed to produce complex products and services, as illustrated in the following observation from two authorities on business partnerships:
                    Neither Boeing nor Airbus has one-tenth of the intellectual capital or coordination capacity to cost-effectively mine metals, create alloys, make fasteners, cast and machine parts, design avionics, produce control systems, make engines, and so on. The complex systems we call airplanes come together through the voluntary agreements and collaborations of thousands of companies operating in the global marketplace.27
                    One thing that firms must often work hard at, particularly when they are in their start-up stage, is convincing other firms to partner with them. Partnering with a start-up is risky, particularly if its business model is new and untested in the marketplace. A firm’s partnership network includes suppliers and other partners. Let’s look at each of them.
Suppliers
                    A supplier (or vendor) is a company that provides parts or services to another company. A supply chain is the network of all the companies that participate in the production of a product, from the acquisition of raw materials to the final sale. Almost all firms have suppliers who play vital roles in the functioning of their business models.
                   Traditionally, firms maintained an arm’s-length relationship with their suppliers and viewed them almost as adversaries. Producers needing a component part would negotiate with several suppliers to find the best price. Today, however, firms want to move away from contentious relationships with their suppliers and seek to partner with them to achieve mutually beneficial goals.28 This shift resulted from competitive pressures that motivated managers to look up and down their value chains to find opportunities for cost savings, quality improvement, and improved speed to market. More and more, managers are focusing on supply chain management, which is the coordination of the flow of all information, money, and material that moves through a product’s supply chain. The more efficiently an organization can manage its supply chain, the more effectively its entire business model will perform.29
                    When collaborating with suppliers, firms seek to find ways to motivate them to perform at a higher level. Many firms are reducing the number of their suppliers and working more closely with a smaller group. Procter & Gamble (P&G), for example, maintains close relationships with its suppliers and uses sophisticated systems to enhance the performance of its supply chain. P&G has accomplished a level of rigor in its supply chain that supports its core strategy of offering technologically up-to-date computers at affordable prices. Additionally, P&G continues working with its suppliers for the purpose of developing “environmentally sustainable supply chain practices.”

Other Key Relationships 

                   Along with its suppliers, firms partner with other companies to make their business models work. As described in Table 6.4, strategic alliances, joint ventures, networks, consortia, and trade associations are common forms of these partnerships. A survey by PricewaterhouseCoopers found that more than half of America’s fastest-growing companies have formed multiple partnerships to support their business models. According to the research, these partnerships have “resulted in more innovative products, more profit opportunities, and significantly high growth rates” for the firms involved.31

                    There are also hybrid forms of business partnerships that allow companies to maximize their efficiencies. One relatively new approach, referred to as insourcing, takes place when a service provider comes inside a partner’s facilities and helps the partner both design and manage its supply chain. An example is a unique partnership between Papa John’s and UPS. Since 1996, UPS has managed, routed, and scheduled the delivery of tomatoes, pizza sauce, cheese, and other ingredients from Papa John’s food service centers across the United States to its more than 3,500 pizza delivery stores twice a week. The ingredients are delivered in UPS trailers marked with Papa John’s insignias.32

                    Partnerships do carry risks, particularly if a single partnership is a key component of a firm’s business model. For a number of reasons, many partnerships fall short of meeting participants’ expectations. When this happens, partnerships are thought to have failed. Many of the failures result from poor planning or the difficulties involved with meshing the cultures of two or more organizations to achieve a common goal. There are also potential disadvantages to participating in alliances, including loss of proprietary information,

management complexities, financial and organizational risks, risk of becoming dependent on a partner, and partial loss of decision autonomy.33 The percentage of alliances that fail remains an unresolved issue with some suggesting that the failure rate is around 50 percent34 while others suggest that the failure rate is as high as 70 percent. 35

                    Still, for the majority of start-ups, the ability to establish and effectively manage partnerships is a major component of their business models’ success. For some firms, the ability to manage partnerships is the essence of their competitive advantage and ultimate success. This is the case for 99designs, the company illustrated in this chapter’s “Partnering for Success” feature.