Managing the Collaborative Relationship of Partners in Business Ecosystems

Collaboration is a key feature of a growing ecosystem today. Collaborative Partners of an ecosystem are mostly business enterprises that collaborate with the company to create customer value. There are two aspects of collaboration: (1) Creating customer value and (2) Building collaborative relationships with ecosystem partners to enhance company value and sustain relationships. In this regard, corporate management’s responsibility is to design the value exchange and exploit the linkages between the firm and the collaborative partners to achieve the benefits of transferring and sharing resources and capabilities to create customer value. Collaborative relationships are linkages that involve forming and maintaining relationships within a firm’s ecosystem and between ecosystems’ business partners.

A collaborative relationship is a subset of a strategic alliance. Strategic alliances are cooperative arrangements between firms designed to achieve strategically important and mutually agreed-upon goals. Because of the disastrous consequences of mergers and acquisitions science the great recession of 2008, strategic alliances have emerged as the dominant way to implement firms’ strategies to achieve similar benefits provided by mergers and acquisitions. There are distinct types of collaborative arrangements, such as collaborative partnerships, joint ventures, licensing arrangements, and value-chain partnerships. These cooperative arrangements can be placed along a continuum from weak and far to strong and close, to depict their strengths and importance. A collaborative relationship can be formal or informal, is considered weak and distant, and can last for a brief term, while a value-chain partnership is a strong and close form of collaboration. For example, a spot contract is an informal collaborative relationship with no documentation, brief communication, and an informal buyer-seller agreement. In contrast, a long-term contract is a formal collaborative relationship and includes arbitration clauses.

The Importance of Collaborative Relationships in an Ecosystem

During the 20^th century, big companies were increasingly using collaborative relationships to gain the benefits of vertical, horizontal, and international integration. During this time, vertical integration was considered useful because it permitted good coordination and reduced business risk. However, it imposed administrative costs. Vertical integration can be forward (or downstream) or backward (or upstream). Vertical integration enjoys a neutral status in terms of benefits, and its use mainly depends on circumstances and the context in which it is used.

However, in the 21^st century, due to the evolution of ecosystems and the complexity of business systems, outsourcing is partially or fully replacing vertical integration. For example, Tesla, the electric car maker, makes its own batteries and power trains and produces 80% of its components, which means it is not fully vertically integrated. In contrast, Fords Electric Focus is substantially outsourced as its drive train is supplied by Magna and the batteries by LG. Outsourcing can give many of the same benefits vertical integration provides by collaborating with buyers and suppliers. Moreover, when a firm outsources all its activities, it becomes a virtual corporation. The sole function of this type of organization is to coordinate the activities of a network of collaborative partners. However, in practice, virtual organizations rarely exist. Outsourcing can reduce costs, provide flexibility, and allow the firm to focus on strengths and outsource those activities in which it is weak. Therefore, the ecosystem of companies today also incorporates substantial collaborative external partners such as suppliers, manufacturers, distributors, R&D companies, service providers marketing research companies to create an appropriate and stable value exchange. And the collaborative relationship between the company and its collaborative partners should only be considered in the context of creating customer value. For example, consider a situation of vertical collaboration between a company and a retailer. If the company’s offering cannot create customer value, then the retailer will find difficulty in selling the product, which will eventually obstruct the collaborative relationship between the two. The same principle applies to horizontal collaboration, in which entities at the same level in the value chain, such as product design, manufacturing, and marketing, collaborate to create customer value. Therefore, to become successful in this collaborative setup, the company must first consider the entire value chain, and then design the offering to create value for the customers and collaborative partners.

Types of Collaborative Relationship

There are three types of collaborative relationships: (1) Vertical collaboration, (2) Horizontal collaboration, and (3) Network collaboration.

Vertical Collaboration

An alternative to vertical integration is outsourcing, as described above, in which several benefits of vertical integration can be achieved through collaboration with external partners. In vertical collaboration or relationships, the adjacent stages of the value chain can be linked through distinct types of relationships. These relationships can be categorized based on two characteristics: (1) resource commitment and (2) formality of the relationship. Formal vertical collaborations include contractual relationships, such as joint ventures, long-time contracts, and franchising agreements. The primary benefit of formal vertical collaboration is that it promotes formal relationships among partners, which can generate cost efficiency and effectiveness. However, this collaboration has a few disadvantages, such as high switching costs, less flexibility, and the risk of creating more competitors. Vertical collaborations that involve informal contractual relationships are more flexible than formal collaborations and are purely based on trust. Spot contracts are informal contracts that involve no resource commitment and documentation. However, the disadvantage is that it is difficult to understand and predict the behavior of channel partners. Additionally, in these informal relationships, there is a lack of explicit coordination, which results in the company’s reluctance to invest resources to customize a specific channel partner. Poor coordination can also lead to lower-cost efficiency.

Horizontal Collaboration

In horizontal collaboration, two or more business enterprises within the same sector with separate ecosystems operating at the same level (providing related products or services) in the value-delivery chain collaborate to create value for customers and jointly improve their competitive position in the marketplace. For example, a retailer collaborating with another retailer or a manufacturer collaborating with another manufacturer to benefit each other. The same benefits of horizontal integration and collaboration can also be accomplished through mergers and acquisitions. The motives for horizontal collaboration can be to gain economies of scale and scope, access to new markets, reduce competition and gain power over other businesses.

Network Collaboration

A collaborative network in the firms’ ecosystem and between ecosystems is a network of various business organizations geographically dispersed that collaborates to achieve mutual goals and objectives. Collaborative networks are mostly part of virtual enterprises, large firms, and ecosystem firms. Collaborative networks can be local (national) or international. For example, Toyota’s supplier network consists of hundreds of enterprises. GM has extensively used an international network of strategic alliances to compete internationally. Some of these firms include Fiat, Isuzu, and Nissan.

International Collaboration

Competing in the international market requires specialized resources and capabilities that the firm may not possess. Therefore, to access these resources and capabilities, it becomes necessary to collaborate with external local partners in another country. Zurich-based ABB Asea Brown Boveri AG builds power plants, electrical equipment, and industrial factories around the globe. To remain competitive and implement its international strategy–it draws expertise from around the world through external collaboration.

Managing the Collaborative Relationship

Conflict is a natural phenomenon in any kind of business relationship caused due to association or connection. Most often, conflicts occur when the company and its collaborator’s goals are not aligned. This means when collaborating, partners pursue different goal-optimization strategies that can lead to tension between them. These tensions often create a power imbalance between the collaborating partners.

Collaborative Power

In the firm’s ecosystem, collaborative power refers to the ability of any company to influence the decisions of other companies. Thus, a powerful collaborative partner can influence other partners by controlling marketing parameters, such as allowances, prices, and margins. The term power in a collaborative relationship depends on many factors, including collaborator uniqueness, collaborator size, switching costs, and the value creation potential of a collaborative partner.

Offering Unique Products

A firm offering differentiated products that are high in demand will command more power over its collaborative partners than a firm with undifferentiated product offerings. For example, established firms such as Apple, Samsung, and Coca-Cola have the advantage of brand recognition and customer loyalty. As a result, they have more controlling power over their distribution partners than firms with unknown brands.

Value Creation Potential of a Collaborative Partner

An entity can command more power in the firm’s ecosystem of partners when it captures a large amount of value and, therefore, becomes more profitable. In the personal computers business, HP’s declining profitability can be attributed to the powerful supplier of important components, and operating system software Microsoft, which captures a large amount of value.

Switching Cost

An entity in the firm’s ecosystem will command more power when the switching costs of any collaborative partner are high with respect to itself. The factors that generate these switching costs can be attributed to the level of integration between the firm and its collaborative partners, contractual obligations, and the learning curve for collaborating with a new partner.

Collaborating Partner Size

Large companies (i.e., consolidated firms) in the firm’s ecosystem will command more power due to their size over small companies (i.e., fragmented firms). For example, large retail stores such as Walmart, Aldi, and Kroger receive many forms of benefits from manufacturers, including high-volume discounts, marketing promotional allowances, and better delivery schedules.

Conflicts in Collaborative Relationship

The primary cause of tension among collaborative partners in the firm’s ecosystem is due to the differences in their value capturing and profit optimization strategies. There are three types of conflicts: vertical and horizontal relationship conflicts, and collaborative network conflicts, related to the types of collaborative relationships described above.

Conflicts in Vertical Relationship

Vertical relationship conflicts show tensions among firms when they own distinct stages in the firm’s ecosystem value chain. For example, a conflict between the company and a distributor or an outsourced manufacturer. Based on the nature of tension, vertical relationship conflicts can be disaggregated into two types: vertical and horizontal channel conflict.

Vertical Channel Conflict

Vertical Channel Conflict shows tension between the firm and the distributor or retailer in a single distribution channel. For example, between a company and its retailer, the disagreement might be due to the size and product mix of the company’s product line held by the retailer for sale. In this situation, the company wants that the retailer should carry its entire product line, while the retailer wants to only carry the most profitable items of the company. Vertical conflict can also take place when collaborating partners use their power over other partners to achieve their strategic goals and objectives. For example, if the component supplier is more powerful, then it can raise prices that can negatively affect the firm’s or manufacturer’s profit margin.

Horizontal Channel Conflict

In this type of conflict, tension can take place among collaborative partners when a firm uses multiple distribution channels, for example, a company using several retail channels in parallel. Horizontal conflict takes place when the firm uses different cost structures and margins to target its customers using different distribution channels. For example, when a firm sells the same product through a high-margin and a low-margin retailer, it will give rise to channel conflict among the entities involved. For example, Walmart earns a lower margin over its grocery products compared to high-margin retailers such as Publix.

Conflicts in Horizontal Relationship

Horizontal collaboration conflict involves a tension between partners belonging to firms from different ecosystems, which occupy the same level in the value chain. Horizontal conflict can take place, for example, between two R&D companies from two different ecosystems competing in the same market to jointly develop a new product, between two partners collaborating to manufacture a product, and between a company and service provider collaborating to provide after-sales customer service for the same product. The cause of disagreements between collaborative partners can be attributed to several reasons, such as joint ownership of intellectual property, profit sharing, and sharing of resources and capabilities.

Conflicts in Network Relationship

Conflicts in collaborative networks can occur due to several reasons, including value distribution, lack of skills in managing strategic alliances, and differences in language, cultural, and geographical separation. Managing strategic alliances requires developing skills in relational capabilities, and coordination and integration capabilities.

Recent Trends in Collaborative Relationship

The growing trend in the past three decades is that firms are reducing their ownership of the stages they own in the value chain and outsourcing more activities through collaborative arrangements. Firms are increasingly using various forms of hybrid vertical relationships to generate an advantage in which they combine the flexibility and benefits offered by outsourcing (market transaction) and the knowledge-sharing and coordination benefits provided by vertical integration. These collaborative vertical arrangements are also called value-adding partnerships. For example, in Apple’s ecosystem, Apple designs its products in-house but integrates the innovation and capabilities of many vertically networked collaborative firms, including component suppliers, contract manufacturers, and software developers. Moreover, after 1980, developments in collaborative vertical partnerships have permitted to extend the scope of outsourcing to incorporate the complete product value chain. For example, electronic contract manufacturers such as Flextronics, Foxconn, and Jabil design and manufacture complete products.

However, there are limits to the extent a company can outsource activities and collaborate with other firms while still keeping the resources and capabilities that are required to develop and grow. But moving towards becoming a total virtual organization will still require human resources and skills in coordination and systems integration, architectural capabilities, and component capabilities. Boeing had difficulties in managing the extensive network of suppliers when it was developing its 787 Dreamliner.

References and Suggest Further Reading

1. Collaborative Partnership-Wikipedia.
2. Chernev, Strategic Marketing Management (USA: Cerebellum Press, 2014), Chapter 7.
3. Ashok N., Important Elements of Value Creation in an Ecosystem, A&N Strategy Consulting (May 29, 2021).
4. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 3, 4, 10, 13 and 14.
5. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice-Hall, 2000), Chapters 4 and 5.
6. Collaborative Network – Wikipedia.