Partnering has become increasingly important in recent years. It is a collaborative process in which two or more parties work together to identify and jointly pursue both common and varying interests and objectives. Powerful forces are driving the formation of strategic partnerships between companies in the world economy. Its popularity has been accredited largely to its ability to reach global market shares at considerably lower cost, increasing factory production output and increasing the levels of customer satisfaction.
Partnering may be used as a dispute prevention tool for a single project, or it may be used on an ongoing basis. Organisations might use partnering to improve their ability to compete for a promising business opportunity, or to share the costs of an undertaking they could not afford to carry out alone.
This movement towards partnership has opened new opportunities to companies, triggering a race for the world markets by major manufacturers and suppliers. In the world economy where market share is fiercely fought over, manufacturers must identify their skills and competency gaps and fill them rapidly. Often they find that the fastest way to fill them is with the capabilities of local distributors. If a manufacturer cannot position itself quickly, it misses important opportunities.
Discovering the value
Winning races in the marketplace not only requires speed but also a strong sense of direction and dedication. Common knowledge would suggest that this is best achieved by a single organisation and not by way of partnerships. Few organisations, if any, however, have what it takes to run these races alone. The old saying: ‘Two heads are better than one’ seems appealing but it is natural to expect that partners will not be of one mind.
When a partnership goes in different directions, it may be too much to expect one to follow the other, or for there to be agreement or level-headed discussion. Running as a loose coalition will cost each partner the race and may not be worth the effort after all. This suggests that a strong commitment both from the manufacturer and the distributor is crucial for winning the race as a team.
Working as a team requires certain preconditions. Partnering firms must keep track in unstable conditions and uncharted territories. The key to succeeding is probably one’s motive for partnering. Each partner must want to win the same race, even if each has a different purpose for running. Partners must understand the value of working as a team and how each member contributes to the success of the partnership. Partners must share a common objective map that their partnership will lead them to cross.
Partnering companies must learn to appreciate all the benefits that they can expect by working as a team so as not to lose their sense of purpose when faced with unexpected setbacks. It is thus important to measure the progress of the partnership toward value creation and benefits. The map can be used to direct efforts in the race toward those benefits.
Distributor-principal partners
Most companies find themselves racing for both the world and the future. Since few companies have everything that they need to succeed on their own, strategic partnerships play a key role. Firms may need capital, specialised expertise, technology, products, facilities, talent, customers or distribution channels. Partnering is the joining of two or more organisations to exchange resources, share risks, or divide rewards from a joint enterprise.
Partnering can take any of a number of forms such as: a strong relationship with a major customer; a partnership with a source of distribution; a relationship with a supplier of innovation, or product; or an alliance in pursuit of a common goal. Sometimes partners form a new jointly owned company. In other instances, one partner purchases equity in the other. Most often the relationship is defined by one or more contracts. In the crane industry, partnership is usually in the form of a distributor-principal relationship.
In this, strategic partnerships have at least three distinct purposes: –
• Rational specialisation. Partners might combine resources, with each contributing unique and differentiated resources i.e. skills, brands, relationships, positions and assets to the success of the partnership. This becomes the focus of the partnership as companies concentrate on their core expertise, skills and activities.
• Rational learning. Core competencies of individual partners are not for sale in an open market, but these skills can be learned from a partner and exploited beyond the boundaries of the partnership itself. This becomes even more valuable.
• Rationalising foes to friends. Bringing potential competitors into your own camp as distributors of your products/services effectively neutralises them as potential foes.
Why principals form them
Most strategic partnerships serve one or more imperatives. If a company is attempting to make the best of global opportunities, it will form a partnership to do what it cannot do alone.
The most common reasons for the principals to form a strategic partnership are to:
• create critical mass and gain global reach of products/services through partnerships
• reach markets more quickly, since the selling process is shortened
• learn quickly about specific markets
• reduce the cost of market penetration.
• access skills concentrated in another geographic location
• boost customer satisfaction through quicker deliveries, after-sales service, maintenance, information providers, etc.
• improves the overall revenue and profitability of the company
• win repeat business.
Why distributors form them
On the other hand, what most distributors are looking for from partnerships is:
• the technical know-how of the principal i.e. design, experience, etc.
• marketing support in the form of price discounts, rebates, commission, etc.
• the ability to focus on core competencies i.e. market knowledge, fabrication, etc.
• to ride on a reputable brand
• to learn quickly about specific products
• exclusive dealings within a specific market territory
• to improve the overall revenue and profitability of the company.
The shared goals
While the reasons of the partnership appear much different on the surface, we find that the partners share a common set of underlying ‘logics’. The benefits to be gained from each of these logics is what managers should look for as they design their partnerships, set objectives and score-keeping procedures, and guide day-to-day activities.
The underlying value-creating logics are:
• gaining competitive capabilities through partnering
• leveraging on speciality
• gaining competence through learning
• reducing risks
• ability to focus on core competency
• credibility
• improving overall performances.
In the crane industry
So why is partnering needed in the crane industry? Over the last two decades prices of standard cranes have fallen steadily. This is largely due to the fact that the barrier of market entry is low and because of the current economic situation in Asia.
V. Edwin, former regional manager of Street Crane and now sales manager of Growa (F.E.) Pte Ltd, says: “There used to be only Demag, Kone and Munck 15 years ago [in Asia] and today, there are more than 20 brands in the market competing for the same market share. It is imperative that the prices are falling drastically.” The way forward to the future seems to be partnering with ‘committed’ principals who are keen in the business.
Tan Meng Moh of Unison Mechanical & Electrical Works, an independent crane builder in Singapore, agrees. For businesses to succeed in this competitive market place, distributors and principals must both play their part. Both must be equally interested in the market and must be committed in the long run.
Tan Kim Huat, managing director of Interlift Sales, a Munck distributor, expresses the concerns of most crane distributors. For him, the key issues are a commitment from the principal in areas of exclusive dealings and commercial issues, such as credit and payment terms, market driven pricing issues, product issues regarding current market needs, distribution/control issues and trust.
These sentiments seemed to be echoed by the principals. Peter Gorzen, sales manager of German manufacturer Abus Kransysteme, looks for distributors who stay focused, are committed and have the relevant experience. If awarding an exclusive distributorship, the prime concerns of principals are: commitment of stock, overall annual sales, experience of the distributor in the industry, loyalty and trustworthiness and value-add to the existing chain of supply.
While it seems that both parties have different agenda in the working relationship, a closer examination reveals they both are interested in making the partnership work. Several of these factors needed to be addressed. The earlier these issues are ironed out in the initial phase of negotiation, the faster the partnership takes off. The gap between the distributor and principal will be narrower as both parties move on as a single unit in the race for market share. Enhanced understanding of partners’ needs will enable businesses to compete more effectively.
Managing partnerships
So how can we manage the distributor-principal partnership? The short answer is that a partnership should be both conceived and managed according to its value creation logic. If this consistency is not maintained throughout the course of the partnership, disappointment is bound to follow. The logic of value creation should set the agenda.
We have observed that the expectations set by a partnership’s value creation logic drive several key aspects of its management agenda.
• Assessment of each partner’s contribution to the partnership.
Value creation expectations should drive the assessment of each partner’s contribution. What does each firm bring to the partnership and why? How clearly can the assessment be made in advance or retrospectively?
• Agreement of the scope of the partnership.
Value creation expectations should also determine the scope of the partnership: what to include in the tasks jointly performed by the partners, over what product markets, in what technological and operational domain to assess the economic and financial consequences of the partnership. This may include terms of exclusive dealings, payment terms, pricing structure, etc.
• Measurement of success.
Scorekeeping should also be defined against value creation expectations. Increased competitive strength, success in rational specialisation task, and learning effectiveness must be measured in very different ways, and none can be measured solely in terms of the partnership’s financial returns.
• Progress and duration of the partnership.
Value creation logic is the strongest indicator of likely duration of partnership.
• Points of tension.
Value creation expectations may also help to anticipate areas of tension. Tension tends to accumulate around key areas of value creation.
Who is the right one?
It could be summarised that the secret to finding a good partner lies in the acronym P A R T N E R. A good partner can be summarised as one who gives:
Priority to your business
Aids your access into the marketplace
Remains loyal even in bad times
Trains their staff to meet new challenges Negotiates effectively; constantly
Evaluates market situations; and
Reviews strategies to take into consideration the long term objectives.
Although it might not necessarily be easy to find the right partner, failure to take precautions during the selection process will set your business back.
