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Managing Business Relationships

Prof.Dr. Vesselin Blagoev

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External Relationships: Introduction

Business organisations have many external relationships with

Suppliers Customers Distributors Service providers: IT, maintenance,

catering Many others

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External Relationships: Introduction

Some relationships are long-term, contractual other are ad-hoc when needed

It makes no sense for IBM to make its own stationary, others can do it better and cheaper

A key decision is whether to make in-house or to buy

Firms should concentrate on activities where they have expertise and are competitive

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External Relationships: Introduction

The simple view of the choice between “make” or “buy” rests on assumptions about markets:

Markets are competitive All information about products and

producers is easily available Price differences reflect quality differences All companies are honest and do not cheat

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External Relationships: Introduction

Is this true? Let’s look at the used car market:

It is difficult to know good from bad for inexperienced buyers

The seller knows much more about the car and may well be dishonest

“Caveat emptor!” (Buyer buys at his own risk)

There is very limited legal comeback

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External Relationships: Introduction

Markets can be risky places for buyers! Similarly, if companies cannot afford to

buy an inferior product or service they may decide to do one of two things:

Produce in-house even if this is expensive

Invest in a long-term relationship with a trusted supplier

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External Relationships: Introduction

What is needed to make such business relationships work?

A long-term perspective Mutual trust Common goal orientation

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External Relationships: Introduction

A long-term perspective: Both sides have to be committed.

The supplier often makes specific investments to produce exactly what the buyers needs.

The supplier must be sure that the buyer does not suddenly change to another supplier and this investment is lost

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External Relationships: Introduction

Mutual trust: The buyer must be confident that the

supplier will always do his/her best to meet the buyer’s requirements without the need to constantly check up on him/her

The supplier must be confident of the buyer’s loyalty

This will produce trust among both parties

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External Relationships: Introduction

A common goal orientation: Both parties need to be clear about

their commitment Common objectives and long-term

success are recognised as more important than short-term prize gains from switching supplier

Regular contact and co-management arrangements should be in place to align expectations and sort out conflicts

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External Relationships: Introduction

What are the advantages of such long-term business relationships:

Allows firms to concentrate on core activities

Allows firms to gain access to market-leading products/services which they could not develop themselves

Allows firms to economise on monitoring and control costs

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External Relationships: Introduction

Advantages continued …

Close relationships with other organisations facilitate access to new knowledge and can foster innovation

Close relationships with other firms can improve marketing knowledge

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External Relationships: Introduction

Trust-based business relationships offer significant advantages

Mutual trust and common goal orientation are key success factors

But remember: Trust can always be betrayed! Co-operation is never without risks