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Alfred Griffioen - The value of participating in a network 1

The value of participating in a network Alfred Griffioen Introduction Most alliance literature focuses on the collaboration between two companies, with a view to what this may be worth. Analogously, we can examine the value for a company of participating in a network. In a network, multiple parties collaborate and have more complex relations than in two-party alliances. The profit made by the company through the network should be compared against the profit that it would make on its own. Reasons for entering into a network One reason to collaborate with others in a network is the expectation that the participating companies can complement each other, for instance in research and product development, or in production or reaching customers. This synergy should ensure that the profit of the network exceeds the sum of individual profits. At times a network can achieve negative results for the participants, for example because the collaboration turns out to restrict one another's possibilities. In 2006, a number of Dutch companies active in the field of electronics, optical equipment, injection molding and metal working decided to start collaborating under the name of Mechatronics Partners. All are relatively small in size and turnover, but together they have around 600 employees, of which 100 engineers in the field of designing, engineering and constructing electronic equipment like DVD players, control cabinets and industrial machines. The basic rules for the partnership were set out on just three sheets of paper:

• Every company does acquisition through its own network. Joint sales and marketing activities are paid together.

• Every month representatives from the companies sit together to discuss the market opportunities and to decide in which combination a bid will be made. Each participating company will calculate its cost price, and the margin is decided jointly. External quotations are used to monitor the competitiveness of the prices.

• In case of a successful bid, one of the companies will provide a project leader, who coordinates the joint efforts and is contact person for the customer.

The expected extra turnover for 2009 as a result of this team approach was between 3 and 4 million dollars, which is relatively small on a total joint turnover of around 100 million, but most of it is annually recurrent revenue. Apart from that, the sharing of contacts and market information has helped the individual companies expand their own activities.

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Alfred Griffioen - The value of participating in a network 2

In practice it appears that participating in a network is mainly advantageous for companies that are relatively small in their market or industry, and thus benefit from the advantages of scale or scope offered by collaboration. Three factors cause certain companies to be less inclined to enter into alliances:

• Being a market leader: this provides sufficient scale size in itself. • Having a technological head start: this is a condition for supplying distinctive

products. • Being a supplier to a limited number of large customers: this diminishes the

need for distribution partners and customer knowledge. Other reasons to join a network could be the standardisation of products and technical interfaces or the protection of common interests. Value of participating in a network Aside from the absolute profit achieved by the network, a significant issue is the share that each of the participating companies will receive. The size of this share will often be a matter for negotiation, with a view to what each partner contributes. The more essential a partner's contribution in achieving synergy, the greater its negotiating power to claim a larger a share of the added revenue. Taking into account synergy and negotiating power, the profit that a company can make in a network can be expressed in a formula1:

The possible outcomes of this formula are given in Figure 1. With a synergy factor of 1 (neutral) and a negotiating power factor of 1 (equivalent), acting in a network yields a profit equal to what the company would make independently. At the upper right of the curve, network participation is attractive (a lot of synergy and/or negotiating power), at the lower left it is not.

Figure 1. Benefit of operating in a network based on synergy and negotiation power

Company’s profit in a network =

Company’s individual profit × Synergy

factor × Negotiating power factor

Profit equal to operating

independently

Area in which network participation is beneficial

0

1

1 Negotiating power factor

Syn

erg

y fa

ctor

Neutral (no synergy)

Neutral (no extra negotiating power)

Area in which network participation is detrimental

A

B

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Alfred Griffioen - The value of participating in a network 3

In Figure 1, Company A might contribute a small component of a compound product and thus not wield much negotiating power in the network, but the network is sufficiently effective for A to benefit from participating, rather than to operate on its own. Company B might be a relatively large player that shares his production capacity with others, and has therefore succeeded in negotiating a disproportionally large share of the network's profit. However, since they are all part of a network, the individual companies are less committed to marketing efforts. For that reason, it would better serve Company B to leave the network. Participating in a network also entails certain risks:

• Loss of control: the core of any partnership or alliance is sharing the control over activities undertaken in collaboration. Although that control may initially work fine, as more parties join in this is something to watch closely.

• Networks may start to lead a life of their own, for instance because the participants get to know each other and may launch new initiatives.

• The distribution of revenue may take a turn for the worse for a particular company. For example when one company sell a machine and the other companies sell the consumables, and the sales of one consumables is less than expected. In joint ventures this drawback is shared with the other parties, in the event of licensing it depends on the actual agreements whether this is compensated.

In all cases, it is important to carefully consider whether to join a network. Finding partners for collaborative offering Another case is when you see a project in the market and it makes sense to bid with a networks of partners. Obviously there are multiple players in the market. Some partners offer a better chance of winning the deal than others. Differences can exist in the relationship with the client, in technology, and even in experience with selling a combined offer. Last but not least: the potential to make a profit can differ per partner. What are their project management capabilities? Do they have experience with working with a partner? And how tough will you have to negotiate for your share of the profit? Your partner may even be cheating on you and leave you with nothing. Just as you will evaluate your potential partners, they will evaluate you against the others. The two things that you can influence in this process are:

• your own attractiveness, for example by investing in innovative solutions • your contacts in the market, to enhance your visibility for others and to get

more information. As soon as you have identified your ‘perfect’ partner you must aim for exclusivity. But often everyone waits to play his cards up to the last possible moment. A careful partner selection that starts even before the project is announced can help to make the added value of a specific network clear.

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Alfred Griffioen - The value of participating in a network 4

Gaining influence in a network The advantage of participating in a network is having additional opportunities in terms of turnover and profit, but the disadvantage is the loss of control. One of the best methods to increase your own influence is to limit the number of partners. This implies that, for each further partner, the benefit of admission to the network needs to be weighed against the loss of influence. When setting up a network it can therefore be a good strategy to choose a partner who is perhaps not the best there is, but who is able to contribute two or more different essential disciplines. Being the one to initiate a network would seem to be an effective way of maximising control over that network. Recent research using games theory supports that assumption2. Suppose that it would make sense for Company A to form a network with two other parties (B and C), and that there two important negotiating factors, namely the distribution of profit and the number of board members to be appointed per party. A now has the options of:

• concluding an agreement with one of the parties, and then to invite the third party to join;

• to enter negotiations with both parties at once; • to wait to be asked by B and C jointly.

Figure 2 schematically represents the negotiating process. Points A, B and C indicate the ideal outcomes for each of the parties in terms of the two negotiating factors (plotted horizontally and vertically). The circles indicate their negotiating room.

Figure 2. Different order of events in forming a network between companies A, B and C If A and B first negotiate together, they will arrive at point 1. If they then involve C, negotiations start from this point and end up at point 2. If all parties start negotiating from the start, equilibrium is reached at point 3. This is more advantageous for C than point 2. Therefore, it is to A and B's advantage to take the initiative. For more articles of Alfred Griffioen search on Slideshare or go to www.allianceexperts.com References                                                                                                                1 Benjamin Gomes-Casseres, Alliance Strategies of Small firms, 1997 2 Annelies de Ridder, The dynamics of alliances, A game theoretical approach, 2007 2 Annelies de Ridder, The dynamics of alliances, A game theoretical approach, 2007

A

B

C

A

B

C

First A and B, then C A, B and C simultaneously

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3