MKTG Chapter 7

Alternatives to collaboration

A common alternative to collaboration involves insourcing the activities performed by collaborators by creating new, company-controlled entities, orby acquiring (or merging with) an entity. Depending on the relative position of the entities in the value-creation process, there are 2 types of integration: vertical and horizontal.

Levels of collaboration

A company's relationship with its collaborators can vary in the extent to which it is formalized. Based on the nature of the relationships among collaborating entities, collaboration can be either explicit or implicit.

Switching costs

An entity is likely to have more power when the switching costs of its collaborators are high and its own switching costs are low. Such switching costs might stem from a variety of factors, including a high level of systems integration between a company and its collaborators, long-term contractual obligations, and the learning cue associated with collaborating with a new entity.

Strategic importance

An entity tends to have more power when it accounts for a significant portion of its collaborators' profits.

Collaborator conflicts

As with most business relationships, collaboration is not without conflicts. Tensions among collaborators are often caused by the differences in their profit-optimization strategies. Based on the nature of the collaborator relationship, there are two types of collaborator conflicts: vertical and horizontal.

Speed

Collaboration enables a company to achieve the desired results much faster than building in-house expertise. For example, a manufacturer can gain access to target markets virtually overnight using an existing distribution chain, whereas launching its own distribution channel would take considerable longer.

Offering differentiation

Companies with differentiated offerings in high demand are likely to have more power over their collaborators than companies with commoditized offerings.

Collaborator size

Consolidated entities — both manufacturers and distributors — are likely to have more power over fragmented ones.

Empowering the competition

Outsourcing key activities might also enable collaborating entities to develop a set of strategic competencies, thus becoming a company's potential competitor.

Loss of competencies

Outsourcing key activities tends to weaken a company's core competencies. For example, outsourcing research-and-development activities over time tends to diminish a company's ability to drive innovation.

Collaborator power

Refers to the ability of a given company to exert influence over another entity. Influence often leads to an imbalance in the value exchange in favor of the more powerful entity and to market outcomes such as higher prices, margins, discounts, and allowances; preferential access to scarce resources; and premier shelf space and product-delivery schedules. Is a function of a number of actors, including the differentiation of collaborator offerings, collaborator size, strategic importance of the collaboration for each entity, and their switching costs.

Conflicts in vertical collaboration

Vertical conflicts typically depict tensions among entities occupying different levels in the value-delivery chain. The most common type of vertical conflict is that between a manufacturer and a retailer. Depending on the nature of the tension, there are two types of channel conflicts: vertical and horizontal.

Loss of control

Delegating certain aspects of a company's activities to an external entity often leads to loss of control over the value-creation process. For example, outsourcing manufacturing operations frequently hinders the company's ability to monitor production processes and product quality. Outsourcing also diminishes the company's ability to monitor the financial aspects of the value-creation process.

Vertical channel conflict

Depicts tensions between entities in a single distribution channel (e.g. manufacturer and retailer). Might involve tensions regarding the size and composition of the manufacturer's product line carried by the retailer. The conflict stems from the gap between a manufacturer's desire that a retailer carry its entire product line and a retailer's desire to carry only the most profitable, noncompeting offerings from individual manufacturers. Can also occur when collaborating entities exercise their power in the relationship to achieve their strategic goals.

Managing Collaborator Relationships

Despite a company's efforts to optimize the value of its offerings for collaborators, company and collaborator goals are often not perfectly aligned. As a result, collaborator relationships can face tensions resulting from different goal-optimization strategies pursued by collaborating entities. Such tensions are often facilitated by the power imbalance of the collaborating entities and frequently lead to explicit conflicts.

Advantages of collaboration

Effectiveness, cost efficiency, flexibility, and speed

Effectiveness

Enables companies to specialize in a particular aspect of the value-delivery process (e.g. research and development, manufacturing, and distribution). Because collaboration enables each party to take advantage of the other's expertise, it can provide both entities with a competitive advantage.

Collaborators

Entities that work with the company to create value for target customers. Because they are business entities, this typically involves business-to-business relationships aimed at creating customer value. This aims to improve a company's ability to create value for target customers in a way that helps achieve its own strategic goals.

Conflicts in horizontal collaboration

Horizontal conflicts typically depict tensions between entities occupying the same level in the value-delivery chain. For example, they might occur between a manufacturer and a R&D company collaborating to develop a new product, between two entities collaborating to manufacture the product, and between a manufacturer and a service provider collaborating to offer post-purchase customer service. Tension is caused by issues such as profit sharing, access to proprietary tech, ownership of jointly developed intellectual property, and the sharing of core competencies and strategic assets.

Cost efficiency

In addition to facilitating the effectiveness of the value-creation process, collaboration can also make it more cost efficient because by specializing in a given function, each collaborator can achieve greater economies of scale and experience. Specialization might also encourage a company to invest in cost-efficient solutions (e.g. an inventory-management system) that it would not invest in if it lacked a scale of operations.

Value-communication collaboration

Including advertising, public relations, and social media

Value-design collaboration

Including product and service development, brand building, price setting, and incentive design

Value-delivery collaboration

Including the actual delivery of a company's products and services.

Horizontal integration

Involves acquiring a business entity at the same level of the value-delivery chain. For example, a retailer acquires another retailer, or a manufacturer merges with another manufacturer. Might occur among entities with similar core competencies — a common scenario for companies seeking economies of scale through consolidation, and for those seeking economies of scope through diversification. Tends to be favored by companies for a variety of reasons, including gaining access to new markets, acquiring the rights to proprietary tech or research, reducing the competition in strategically important markets, and gaining power over the other entities in the value-delivery chain.

Explicit collaboration

Involves contractual relationships, such as long-term contractual agreements, joint ventures, and franchise agreements. They key advantage of explicit collaboration is that it fosters a formal relationship among collaborating entities, which ultimately leads to greater effectiveness and cost efficiency. At the same time, explicit collaboration has certain drawbacks, such as lower flexibility, greater switching costs, and the strategic risk of creating a potential competitor by sharing proprietary information.

The Essence of Collaboration

Involves entering into a relationship with an external entity and delegating to it a subset of the company's activities. Value creation through collaboration reflects a fundamental shift away from the traditional business paradigm in which a company alone creates customer value to a new paradigm in which the value is jointly created. Fully integrated company has been replaced by outsourcing, which delegates many business functions to external entities. Shift toward collaborative business enterprise stems from the belief that greater effectiveness and cost efficiency can be achieved from greater expertise and scale of operations. Collaboration brings together different entities to create sustainable value exchange. Often viewed as business-to-business because business and consumer markets are very different on a variety of dimensions, but company activities are related because they represent different aspects of value-creation process.

Horizontal channel conflict

Involves tensions among entities in multiple distribution channels (e.g. a manufacturer and two retailers). Horizontal conflicts occur when a manufacturer targets the same customers utilizing multiple distribution channels with different cost structures and profit margins. Consider a manufacturer that makes a product available through a high-margin, full-service retail store as well as through a high-volume, low-margin retailer. This manufacturer is likely to create channel conflict when the two retailers start selling the same product at different price points to the same customers.

Key marketing principle and collaboration

Key marketing principle is creating superior value for target customers in a way that benefits the company and its collaborators; also a key principle for collaboration. Can be argued that there are few, if any, "pure" business-to-business relationships that can be considered independently from ability to create customer value. Consider vertical collaboration between a manufacturer and retailer; success depends by ability of the manufacturer to create value not only for the retailer but for the customer. Same holds for entities with horizontal collaboration; the sustainability of this collaboration is a function of the degree to which actions of the companies involved create value for target customers.

Drawbacks of collaboration

Loss of control, loss of competencies, and empowering the competition

Flexibility

Relative to developing the necessary in-house expertise, collaboration requires a lesser commitment of resources, and, hence, offers much greater flexibility in terms of switching technologies, entering new markets, and exiting existing ones. For example, the development of a new distribution channel requires substantial resources and hence calls for a long-term commitment, whereas using an already existing distribution channel allows a company's commitment to a project to be much more flexible.

Implicit collaboration

Typically does not involve contractual relationships and is much more flexible than explicit collaboration. This flexibility, however, comes at the cost of an inability to predict the behavior of various channel members. Another shortcoming of implicit coordination is the lower level of commitment, resulting in unwillingness to invest resources to customize the channel for a particular manufacturer. Implicit coordination is also likely to lead to lower cost efficiency resulting from a lower degree of coordination.

Vertical integration

Typically involves the acquisition of an entity occupying a different level in the value-delivery chain. Depending on the relative position of the entities, there are 2 types: forward and backward. Extending ownership upstream (toward suppliers) is referred to as backward integration, whereas extending ownership of activities downstream (toward buyers) is referred to as forward integration. Tends to be favored by companies seeking to control the key aspects of the value-delivery process.

3 domains of collaboration

Value-design collaboration, value-communication collaboration, and value-delivery collaboration. Even though they serve different functions of the value-creation process, collaborating entities can be involved in all three aspects of designing, communicating, and delivering value.