Chapter 5: Relationship Marketing: Partnerships and Alliances.

Chapter 5: Relationship Marketing:

Partnerships and Alliances

©2010 Pearson Education, Inc. publishing as Prentice Hall

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?


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.Outsourcing2.Offshoring3.Global technology-enabled supply

chains4.Insourcing5.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)


Emergence

Growth Maturity

Decline

ProcessInnovation

ProductInnovation

StandardsLicensingTechnology

LicensingR&DMarketing

ManufacturingMarketingProcess R&D

AttackerIncumbent

High

Low

Rate ofMajor

Innovation

Stage of Product Life Cycle

Alliance Types


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 Imitation

Firm has Requisite Skills

Existence of Capable Competitors

Aggressive Sole Provider High Yes No

Passive Multiple Licensing

Low No Yes

Aggressive Positioning + Licensing

Low Yes Yes

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


India

Middle East and Africa

Latin America and Caribbean

Central and Eastern Europe

China and Southeast Asia


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


Success of Outsourcing:

- Cost savings

- New insights Contingency Factors:

- Criticality of business function - Nature of business process/ Degree of customization - Task Characteristics - Vendor capabilities - Governance

Outsourcing: - Whether to outsource - The degree of outsourcing - Type of outsourcing


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

StandardizedProcess Outsource

Captive offshoring, selective outsourcing

CustomizedProcess

Selective Outsourcing, Automation

In-house, selectively outsource some

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?◦ If not: don’t outsource

Clearly specified ownership of intellectual property rights/risks◦ Can intellectual rights/responsibilities be clearly

articulated?◦ If not: don’t outsource


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

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

Year 1 Year 2 Year 3 Year 4 Year 5

Profit from Referrals

Profit from IncreasedPurchases

Base Profit

Acquisition Cost


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

IdentifyHigh-potential

Customers

DevelopCustomer Acquisition

Strategy

MaximizeCustomer Equity

DevelopCustomer Portfolio

Management Strategy

•Past purchase history•Extent of cross-buying•Depth of buying

•Develop segment-focused offerings

•Share information•Acquisition pricing

•Differentiate between high and low profitcustomers

•Focus on creating trust with high profit customers

•Increase share of walletwith low profit 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 to Recoup Customer

Acquisition Costs

ShortPay as You Go

Full Throttle

LongDivest/

RestructureSlingshot

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


Butterflies:Good fitHigh profit potentialTransaction satisfactionMilk active accountsCease investing

Strangers:Little fitLowest profit potentialMake no investmentMax transaction profit

True Friends:Good fitBest profit potentialConsistent communicationAttitudinal & behavioral loyaltyDelight customers

Barnacles:Limited fitLow profit potentialMeasure size and share of walletLow share, up- and cross-sellSmall wallet, strict cost control

High Profit

Low Profit

Transaction Relationship



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



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.



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



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


Service provider 20%Grocery retail 15%Mail-order 19%Brokerage 18%




High Profit

Low Profit

Transaction Relationship


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


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Chapter 5: Relationship Marketing: Partnerships and Alliances.

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Transcript of Chapter 5: Relationship Marketing: Partnerships and Alliances.