Relationship Marketing: Partnerships and Alliances

Chapter 5:
Relationship Marketing:
Partnerships and Alliances
 What are the types of partnerships high-tech companies
form?
 What are the reasons for forming such partnerships?
 How can the risks of partnering arrangements be
mitigated?
 What are the key risks of and benefits from outsourcing?

 What factors affect high-tech companies’ successful use
of outsourcing?
©2010 Pearson Education, Inc. publishing as Prentice Hall

 Why do some customers cost more than
others to serve?
 Are loyal customers more profitable than

others?
 What is the process companies use to

manage customer relationships?

 Intangible resources are the source of
competitive advantage
 Information and knowledge can be shared

◦ These resources grow through use and application
 Communication is fundamental to knowledge

flows.
◦ Factors influencing social relations are of
fundamental importance.

 The effect of geographic location varies:
◦ Diminished when using technology, say,

virtual marketplaces and virtual
organizations
◦ Reinforced by the creation of industry

clusters to achieve world-wide excellence.

 Knowledge and information "leak" to
where demand is highest and the
barriers are lowest.
 The value of knowledge is higher

embedded in systems or processes
◦ Don’t let it "walk out of the door" in people's
heads

 Products/services with embedded knowledge
command price premiums.
 Pricing and value depends heavily on context.

◦ The same information or knowledge can have vastly
different value depending on the person and the time.
 Human capital (competencies) are a key

component of value
◦ Yet downsizing is often seen as a positive "cost cutting"
measure.

 “Flattening” of the world
◦ Computer networking
◦ Communications technologies
◦ The Internet
◦ Enhanced transportation
 Globalization + Knowledge based economy =
COLLABORATION

 “Flatteners” with specific implications for
high-tech partnerships:
1. Outsourcing
2. Offshoring
3. Global technology-enabled supply chains
4. Insourcing
5. Open source innovation
Thomas Friedman

Complementors
Suppliers Focal Firm Distribution Customers
Competitors

 Vertical partnerships:
formed between different levels of the
supply chain
◦ Buyer-supplier relationships
◦ Supplier – OEM customers
 Efficiencies in accessing materials
 Collaborate to innovate, differentiating end product
◦ Outsource service providers – business

customers

 Manufacturers – distribution channel members
◦ Access to downstream markets
◦ Relay market information
 Companies – customers (end-users)

◦ Relationship marketing
◦ Long-term revenue stream
◦ Source of market information

 Horizontal partnerships
formed between firms that operate at the
same level of the supply chain
◦ Complementors
◦ Competitors

 Complementary Alliances
◦ Form with companies offering different components
of the end-to-end solution
◦ Allows each to maintain focus on own core
competencies
◦ Stimulates demand through greater customer value
 Competitive Alliances
◦ “Competitive collaboration;” “co-opetition”
◦ Compete in some market domains,
collaborate in others

Horizontal Partnerships and
Financial Performance
 Higher financial performance from

competitive alliance activity when:
◦ Moderate level of competitive alliance activity
(versus low or high)
◦ More sophisticated competitor
strategies/knowledge
◦ Win/win approach (versus win/lose)

◦ Industry consortium: industry-wide
coalition typically comprised of
competitors who have a shared interest
 Set industry standards

 Influence government regulations
 Pursue international markets
 Develop metrics for sustainability

 Gain access to resources and skills in a
timely, more cost-efficient manner
 Reasons vary over the product life cycle

(next slide)

Product
High
Innovation
Rate of
Major Process
Innovation Innovation
Low
Stage of Product Life Cycle

Emergence Growth Maturity Decline
Alliance Types
Standards Licensing Manufacturing Attacker
Licensing R&D Marketing Incumbent
Technology Marketing Process R&D

 Uncertainty surrounds product
 Purchasers are innovators and technology

enthusiasts
◦ Willing to take risks
◦ Require accurate portrayal of benefits and
liabilities of the innovation
◦ Require technically knowledgeable support
◦ Want new technology early and at a low cost

 Why Partner?
◦ Alliances are valuable among potential

competitors to establish industry standards with:
 Licensing agreements
 Strategic alliances
 Diversification into complementary products
 Aggressive product positioning
(details on following slides)

 Advantages of licensing strategy
◦ Ensures a wide supply base for the technology

◦ Limits the number of technologically incompatible
product choices for customers
 Hastens market acceptance
◦ Signals the possibility of a larger installed base
 Provides incentives for suppliers of complementary
products to pursue development

 Drawbacks of licensing strategy
◦ May attempt to alter the technology to avoid paying

licensing fees or royalties
◦ Original developer loses a possible monopoly
position
◦ Competition may lead to lower prices in the market

 Strategic Alliance: cooperative agreement with
actual/potential competitor(s) to jointly sponsor
development of a technological standard
Advantages:
◦ Help ensure a wide supply base for the technology
◦ Build positive expectations for market demand
◦ Co-opt competitors
◦ Reduce confusion in marketplace
◦ Combined knowledge may produce superior product

 Strategic Alliance
Drawbacks:
◦ Partner may appropriate the firm’s know-how in an
opportunistic fashion

“Go it alone” strategies for
standard-setting
 Diversification
◦ Company offers multiple elements of the whole
product solution
◦ Ex: iPod/iTunes
 Aggressive Product Positioning

◦ Company maximizes size of installed base by
penetration pricing, wide distribution, and many
models/versions of product
Both strategies have pros/cons

Barriers to Firm has Requisite Existence of Capable
Imitation Skills Competitors
Aggressive Sole Provider High Yes No
Passive Multiple Licensing Low No Yes
Aggressive Positioning + Low Yes Yes

Licensing
Selective Partnering High No Yes

 Dominant design becomes industry standard
◦ License to competitors
◦ Form R&D alliances to develop product extensions
◦ Form marketing alliances to access new markets
 Early adopters
◦ Needs increasingly clear
◦ Can envision the potential of the new technology
 Least price sensitive
 In a hurry to reap rewards
 Process technology replaces innovation in
importance

 High sales volume and revenue but
slower growth
 Mass-market adopters
 Process innovation dominates to achieve
cost controls
 Outsourced relationships
 Marketing alliances

 Product replaced by new technologies
 License disruptive technology from a new

competitor
 Cycle begins again

 Access resources and skills
 Gain cost efficiencies
 Speed time-to-market
 Access new markets
 Define industry standards

 Develop innovations and new products
 Develop complementary products
 Gain market clout
 Maintain focus on core competencies
 Learn from partners

 Increase project complexity
 Loss of autonomy and control
◦ Decisions must be made jointly
◦ Success dependent on another’s efforts
 Loss of trade secrets

◦ Attempts to “disarm” competition
 Dilution of competitive advantage/ “de-skilling”

 Legal issues and antitrust concerns
◦ Collaboration is necessary to compete globally
 Therefore, antitrust laws may encourage
partnering
◦ Collaboration may decrease domestic

competition
 Partnerships may come under scrutiny,

 Especially if they have an indirect impact on
pricing

 Failure to achieve objectives
◦ Incompatible cultures
◦ Lack of attention/resources in managing the
relationship
◦ Trust issues

 Interdependence
◦ Shared mutual dependencies provide motivation
for partnership success
◦ Asymmetrical dependence leads to vulnerability

and possible exploitation
 Caution warranted with partners of unequal size
◦ Low levels of interdependence provide no motivation

to relationship

 Governance Structure
◦ Terms, conditions, systems, and processes used to
manage the alliance
 Unilateral: one party has authority to make decisions
 Bilateral: governance based on mutual expectations
regarding behaviors and activities
 Commitment
 Trust
 Communication
◦ Governance structure should match the

partnership’s risk level

 Commitment
◦ Desire to continue the relationship
◦ Committed members are less likely to
 take advantage
 make decisions that sabotage viability of
relationship
◦ Demonstrated by
 Investments dedicated solely to the relationship

 Types of Commitment
◦ Economic need (“have to be committed”)
 Does not lead to partnership success
◦ Voluntary desire (“want to be committed”)

 Based on positive feeling and regard for partner’s
contributions
 Associated with partnership success
◦ Moral obligation (“ought to be committed”)

 Trust
◦ Belief that partner’s decisions will serve best
interest of the partnership
◦ Partner will act honestly and benevolently
◦ Trust in the partner’s motives and intents
 Trust contributes to
◦ Effective information sharing
◦ Willingness to share scarce/sensitive resources
◦ Sense of mutual benefit

 Effective Communication
◦ Frequent sharing
◦ Includes proprietary information
◦ Bidirectional (two-way) communication
◦ Credible and reliable
◦ Both structured and ad hoc communication

 Perceived relationship fairness
3 Types of fairness
◦ Distributive: fairness in the distribution of awards
◦ Procedural: fairness of the process to determine

distribution of rewards
◦ Interactional: fairness of the nuances of interpersonal

treatment
Procedural fairness more important than
distributive fairness for long-term
relationship success.

 Compatible Corporate Cultures
◦ Different values and beliefs about how things are
done
◦ Some companies have reputations as being hard

to partner with
◦ If corporate cultures clash, hard to realize partnership

benefits.

 Integrative
conflict resolution and
negotiation techniques
◦ Conflict resolution technique more important than
the level of conflict per se.
◦ Integrative resolution based on:
 Both parties have a shared stake in the outcome
 Addressing needs of both parties
 Identifying mutually beneficial solution (win/win)
◦ Escalate conflict beyond the operational level to senior
level
◦ Negotiation is cheaper than legal recourse

 Judicious Use of Legal Contracts
◦ Contracts may violate the spirit of cooperation, but
◦ Contracts may also clarify obligations and

expectations
◦ Contracts should be used in combination with

bilateral governance

 “Spirit of cooperation” is key
 Develop competency in partnering

◦ “cooperative competency;” “alliance competence;”
“partnering orientation”

 High Risk/High Opportunity Vertical
Partnerships
 Transfer an entire business function to a partner
 Types of Outsourcing
◦ Contract manufacturing
◦ BPO: Business Process Outsourcing
◦ ITO: Information Technology Outsourcing
◦ Innovation Outsourcing
 R&D, Product development, Design
 ODM Model: Original design manufacturer

 Benefits: Gain access to expert performance
◦ Provider has refined knowledge in a specific

function
 Scale economies
◦ Cost efficiencies
 Maintain focus on true core competencies

Middle East
and Africa
Latin America
and Caribbean
China and
Southeast Asia
India
Central and
Eastern Europe

 Offshoring
◦ Performing functions outside of client’s home
country
 Captive Offshoring
◦ Company-owned facilities in another country
 Reverse outsourcing
◦ An outsourced company opens an office in
original country

 Nearshore outsourcing
◦ Outsource provider is near company’s own
boundaries, same time zone
 Home shoring
◦ Domestic outsourcing, or
◦ Hiring domestic workers in their own home
 Farm Shoring
◦ Outsourcing to domestic, rural areas

 Cost Savings
◦ Contract manufacturing in particular
◦ Driven by economies of scale
◦ Volume discounts
◦ Supply chain efficiency
 Hone core competencies

◦ Outsource non-essential tasks

 Capabilities of Outsource Providers
◦ Skilled, low-cost talent pool
 Technology Developments
◦ Easier for companies to communicate with remote
outsource providers
 Mitigate HR Management Issues

◦ Overhead- pension plans, insurance, etc.

 Other general trends
◦ Globalization
◦ Competitive intensity
◦ Time/Cost pressures

 Cost Savings Don’t Materialize
◦ Difficult to calculate true cost in advance
 Quality Concerns
◦ 1-800 numbers: endless transfers, confusion
◦ Suppliers don’t understand customer’s business
 Dependence on Vendor
◦ “Switching costs”

 Dilution of Competitive Advantage
◦ Less differentiation from competitor
◦ “hollowed out”
 Risk of Fostering New Competition

◦ Sharing trade secrets
 Public Backlash
◦ Political issue

Outsourcing:
- Whether to outsource Success of Outsourcing:
- The degree of outsourcing - Cost savings
- Type of outsourcing - New insights
Contingency Factors:
- Criticality of business function
- Nature of business process/
Degree of customization
- Task Characteristics
- Vendor capabilities
- Governance

 Define mission-critical business processes;
break-through innovations
◦ Core intellectual property and skills
◦  Keep in-house
 For incremental innovation and non-critical

processes
◦ Commodity knowledge and skills
◦  Outsource

PROCESS COMPLEXITY
Simple Complex
Standardized Captive offshoring,
Process
Outsource
selective outsourcing
Selective In-house, selectively
Customized
Process
Outsourcing, outsource some
Automation components

 Economies of scale
◦ Can the function be aggregated across customer/OEM
businesses?
◦ If not: don’t outsource
 Transfer of explicit, codified knowledge
◦ Can the function be clearly mapped and communicated
to outsource provider?
 Clearly specified ownership of intellectual
property rights/risks
◦ Can intellectual rights/responsibilities be clearly
articulated?

 Vendor Capabilities
◦ What are the specific capabilities to perform the
task?
◦ Does the provider have the requisite capabilities to
perform them?
 Governance
◦ Particularly important for R&D alliances
◦ Controls can limit innovation but are necessary
◦ Controls should be “ex ante” (before the work)
rather than “ex post” (during the work)

 Have clear reasons to outsource
◦ Not: “my competitors are”
 Don’t outsource a mess
◦ Map workflow/process carefully
 Set up the right type of outsource
relationship
◦ Maybe captive offshoring, etc.
 Be ready for possible backlash
 Invest time and effort to make it work
 Treat partners as equals

 Continued evolution
◦ Globally
 Migration to low-cost areas
◦ Politically
 Rhetoric of lost jobs
 Mitigate with educated work force
◦ Managerially
 Balance in-house, strategic alliances, outsourcing

 Breakthrough innovations developed by an
“innovation ecosystem”
◦ A global network of partners – suppliers, customers,
competitors
◦ Innovation based on collaboration and sharing of expertise
and knowledge between partners
◦ Innovation processes transcend local industry clusters and
national boundaries
 Driving Factors
◦ Complexity and uncertainty of R&D
◦ Globalization of industries
◦ Convergence of technologies
◦ Resource constraints

 Unique form of strategic alliance to generate
innovation
 Paradox:
◦ “Logic of innovation”
 Spontaneous, serendipitous insights
◦ “Logic of alliances”
 Detail roles and responsibilities
 Formalized collaborative arrangements
 Sharing of knowledge and expertise requires trust,

but:
◦ Many strategic alliances lack trust

 Success:
◦ Spirit of cooperation
◦ Governance
 Horizontal (competitive) partners reluctant to
share knowledge, but their innovations exhibit:
◦ High levels of product creativity

◦ Fast development speed
 Geographic proximity does not inhibit
information sharing as long as:
◦ Partners have close, relational ties

Industry Clusters
 Geographic concentrations of companies in a
particular industry
◦ Silicon Valley in California
◦ Often highly innovative, due to:
 Enhanced knowledge sharing
 Economies in infrastructure, talent, and social
relationships

Learning from Partners
 Knowledge sharing key to success of open
innovation model
 Learning can contribute to positive
relationship outcomes, but:

◦ Can also result in “de-skilling” of partner with loss
of proprietary information.
 To learn “tacit knowledge,” firms must have
close partnering relationships—
◦ Which increases the risk of those partnerships
Use caution and appropriate governance structures.

 Marketing is used to develop close, long-
term relationships with customers
 Win-win solutions
 Customers as investments
◦ Acquisition cost/customer=
(total cost of marketing campaign) /
(# of prospects who become customers)

 Customer equity:
◦ net present value of the cash flows associated with
a customer
 Lifetime value = customer equity
 Net present value cash inflows > present

value of cash outflows
(illustration on following slide)

Computing Customer Equity
60
50
40 Profit from Referrals
30
20 Profit from Increased
10 Purchases
0 Base Profit
-10 Year 1 Year 2 Year 3 Year 4 Year 5
-20 Acquisition Cost
-30
-40
-50

1. Total marketing cost to acquire new customers
2. Number of prospects reached during the

campaign
3. Number of prospects who became customers
4. Revenue from a new customer’s initial purchase



5. Expected retention duration for a customer
6. Annual revenues expected from the

customer
7. Costs to serve a customer
8. Firm’s cost of capital
9. Present value chart

The Customer Equity Management Process
•Past purchase history Identify

•Extent of cross-buying High-potential
•Depth of buying Customers
Develop •Develop segment-

Customer Acquisition focused offerings
Strategy •Share information
•Acquisition pricing
•Differentiate between Develop

high and low profit Customer Portfolio
customers Management Strategy
•Focus on creating trust
with high profit
customers
•Increase share of wallet Maximize
with low profit Customer Equity
customers

Identify “high potential” customers
 Generate profitable revenue stream over time,

NPV > 0
 Identify the key characteristics among loyal,

profitable customers
◦ Target others who share similar characteristics

Identify “high potential” customers
 Predictors of Potential:
◦ Customer share of wallet: % of business in a specific

category that a customer does with a particular vendor
 Large share of wallet = prospect
◦ Cross-buying: purchasing products from multiple

categories

Develop a Customer Acquisition Strategy
 How much money should be spent pursuing a
customer?
◦ Depends on likelihood of realizing cash flows
◦ Balance time horizon to recoup customer acquisition
costs against lifetime value
 Four generic strategies (see next slide)

Retention
Profitability (LTV)
Low High
Time Horizon Pay as
Short Full Throttle
to Recoup You Go
Customer
Acquisition Divest/
Long Slingshot
Costs Restructure
These strategies are also affected by differentiation and pricing.

 Differentiation
◦ Service support, personal interaction, expertise,
efficiency
 More important than quality and delivery performance in
B2B settings.
 Price
◦ Pricing tactics a double-edged sword in customer
acquisition
◦ Risk of acquiring bargain hunters

 Clearly articulate superiority of non-price
elements in value proposition
 Offer modest price inducement

◦ Encourages trial and switching

Develop the Customer Portfolio
Management Strategy
 Assess customer profitability & projected

duration of relationship
◦ Not all customers are equally valuable
◦ Some loyal customers may be more costly to serve
 See loyalty strategies on following slide

Transaction Relationship
Butterflies: True Friends:

Good fit Good fit
High profit potential Best profit potential
High Profit
Transaction satisfaction Consistent communication
Milk active accounts Attitudinal & behavioral loyalty
Cease investing Delight customers
Barnacles:
Strangers:
Limited fit
Little fit
Low Profit Low profit potential
Lowest profit potential
Measure size and share of wallet
Make no investment
Low share, up- and cross-sell
Max transaction profit
Small wallet, strict cost control

Management Strategy
TRUE FRIENDS
 The most valuable customer group
 Highly profitable and loyal
 Relationship-oriented
◦ Seek social, economic, and technical ties
 Risk: Overkill
 Keep relationship fresh with open, frequent
communication

Management Strategy
BUTTERFLIES
 2nd most valuable customer group
 Transient, and highly profitable
 Shoppers
◦ Seek the best value
 Risk: continued investment after they’ve “flown”

 Capture as much of their business as possible in
the short time.

Management Strategy
BARNACLES
 Loyal, desire long-term relationship
 Not very profitable
◦ Low size/volume of transactions

◦ Cost to serve them may be high
 Risk: create drag

 Renegotiation may be required

Management Strategy
STRANGERS
 Lowest Profit Potential
 Transaction-oriented
◦ Focus on price instead of value

 Limited buyer-seller communication
 Risk: wasted resources
◦ company should not invest by marketing to strangers
 Ever transaction must produce a profit

Transaction Relationship
High Profit Service provider 20% Service provider 30%

Grocery retail 15% Grocery retail 36%
Mail-order 19% Mail-order 31%
Brokerage 18% Brokerage 32%
Service provider 29% Service provider 21%

Low Profit Grocery retail 34% Grocery retail 15%
Mail-order 29% Mail-order 21%
Brokerage 33% Brokerage 17%

 Used to capture data about customers from
any contact within the enterprise
 Provide the ability to:
◦ Track profitability
◦ Detect dissatisfaction before customer is lost
◦ Improve
 Product selling
 Retention
 Loyalty
 Revenue

 Software includes
◦ Sales force automation
◦ Call-center automation
◦ Marketing automation
◦ Web sales
◦ Web configurators
◦ Web analysis and marketing
 CRM software revenue is projected to surpass

$7.8 billion worldwide in 2008.

Despite all that…
 Nearly 1/3 of CRM deployments fail*

 Sale representatives may reject CRM
◦ Lack of training and understanding

 Top management goals must be aligned with
CRM goals
 Relationship marketing philosophy must
come before CRM system

*according to AMR Research

Chapter Features
 Opening Vignette: Apple iPhone
 Technology Expert: REI (Developing
Industry-Wide Eco Metrics)

 Technology Tidbit: Slingshot water purifier
 End-of-Book Case: Xerox; Boeing

All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

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Chapter 5:

 What are the key risks of and benefits from outsourcing?

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Are loyal customers more profitable than

 What is the process companies use to

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Information and knowledge can be shared

 Communication is fundamental to knowledge

©2010 Pearson Education, Inc. publishing as Prentice Hall

◦ Diminished when using technology, say,

◦ Reinforced by the creation of industry

©2010 Pearson Education, Inc. publishing as Prentice Hall

 The value of knowledge is higher

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Pricing and value depends heavily on context.

 Human capital (competencies) are a key

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Globalization + Knowledge based economy =

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

Suppliers Focal Firm Distribution Customers

©2010 Pearson Education, Inc. publishing as Prentice Hall

◦ Outsource service providers – business

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Companies – customers (end-users)

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Higher financial performance from

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Set industry standards

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Reasons vary over the product life cycle

©2010 Pearson Education, Inc. publishing as Prentice Hall

Stage of Product Life Cycle

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Purchasers are innovators and technology

©2010 Pearson Education, Inc. publishing as Prentice Hall

◦ Alliances are valuable among potential

©2010 Pearson Education, Inc. publishing as Prentice Hall

◦ Ensures a wide supply base for the technology

©2010 Pearson Education, Inc. publishing as Prentice Hall

◦ May attempt to alter the technology to avoid paying

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Aggressive Product Positioning

Both strategies have pros/cons

©2010 Pearson Education, Inc. publishing as Prentice Hall

Aggressive Sole Provider High Yes No

Passive Multiple Licensing Low No Yes

Aggressive Positioning + Low Yes Yes

Selective Partnering High No Yes

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

 License disruptive technology from a new

 Cycle begins again

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

©2010 Pearson Education, Inc. publishing as Prentice Hall

 Loss of trade secrets

 Dilution of competitive advantage/ “de-skilling”