Business partnership and partnership in general can be a good way to accelerate the gaining of market share by indirectly accessing niches such as distribution or warehousing companies.
The 4C framework (Brouthers et al, 1995) is a concise way to summarize key factors to consider in developing partnerships: complementarity, congruence, compatibility, and change.
The first factor is complementarity in resources. In general, partners complement for resources or capabilities that you do not have. This allows you to focus on doing the essentials, and potentially help bear some of the risks for your venture. For example, a channel partner gives you access to a part of your potential market that is inaccessible.
Depending on your business plan, you might find that each niche requires different partners. However, you might still be able to use earlier partners as references when targeting new niches or the mainstream.
You also need to think about what a partnership can bring to you and equally importantly how you can provide value to your partners too.
While you may not have much to offer initially, there are several ways that you can bring value to even large or established partners. Think about the following questions:
Does your product complement their portfolio?
Does it provide them with a distinctive advantage of any sort?
Can you afford to give them a significant profit margin?
This brings us to the second consideration, congruence of goals. Just because partners have complementarity in terms of resource capability, it doesn’t mean that your strategic goals are compatible, especially over time. A particularly salient issue in complementarity and goal congruence for newer ventures is the potential for asymmetry in terms of resources and power, especially when partnering with large or established partners. For example, if you are a small firm that has developed a drug and are considering licensing it to a big pharmaceutical company with resources to bring it to the market, the success of your drug will be your primary goal. For the pharmaceutical company it will only be a small part of its’ portfolio, and may even threaten the sales of another drug in its portfolio. The pharmaceutical company may choose to stop development when you want to continue.
It is important to be specific and clear up front about what each party wants to achieve in the partnership, and be aware of the potential challenges. This way, you can prepare for contingencies. However, you also need to be flexible while building options for future growth, both within the partnership, as well as leveraging the network of your partner to grow further.
The third factor is compatibility. Even if you have excellent complementarity and congruence, very willing partners might find it challenging to work together in the face of organizational or cultural incompatibilities. For example, smaller new ventures typically are more agile in terms of decision making and changes, while larger or more established organizations require more extensive planning and consensus for change. It is critical to identify these issues up front and develop strategies for how the firms can work together effectively.
Finally, it is important to consider how the above three factors may change over time. This is especially important in the case of entrepreneurial startups. Your value proposition, market, and other factors will shift over time, and this may change the nature of complementarity or congruence of goals between partners. Strategically considering how to grow or exit partnerships as your needs change over time is essential.
To illustrate how we can use this framework, lets consider the case if we were to partner with a large retailer as a distributor for E-Cigarette. By having a major retailer, E-Cigarette can reach a wider customer base, while the retailer can add to the diversity of their product. In general, it is in both your best interests to sell as many products as you can. Therefore, you have complementarity in resources and congruence in goals. Given that the relationship is a pretty simple arms-length transaction with E-Cigarette as a supplier, compatibility may not play a very strong role, note that it plays stronger role the more interaction you need with your partner. So far so good.
However, you also have asymmetry. While we may view distribution through a major retailer as a key partnership to the livelihood of your venture, for the major retailer we are just one of many potential products within their portfolio. The congruence in goals may change if the major retailer develops/obtains a competing product or simply changes their priorities for shelf-space. Ensuring that you anticipate these potential challenges and spelling out how to handle them is essential.