Making an effort is important in any relationship, but perhaps even more so in business relationships, according to a new study on relationship governance dynamics.
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Great suppliers can make great products, but in the end, many still have to rely on resellers to turn a profit.
Previous research has argued that initial investments made by a supplier when entering into business with a reseller creates a range of vulnerabilities. As a result, suppliers often face a difficult choice between continuing to make potentially valuable but vulnerable investments in reseller relationships and scaling back and cutting their losses.
What can suppliers do to increase the chances of reaping the returns from their investments and creating rewarding business relationships?
Aligning incentives with qualified partners
In a recent study, we set out to explore if companies’ partner selection efforts and incentive structures has the potential to suppress ongoing trading difficulties in relationships characterized by high risk, high-returns investments.
Using a longitudinal supplier-reseller dataset we found that initial partner investments can indeed prove valuable. This is partly because they promote further investments and because they, in combination with careful partner selection efforts can contribute to reduced friction between professional partners.
Our study shows that creating an appropriate incentive structure up-front, where the reseller is made dependent on the relationship though its own investments, serves to promote continuous investments in a reseller relationship.
While the initial investments in themselves do not serve to suppress the usual difficulties that otherwise follow from incremental investments, in combination with careful partner selection efforts they contribute to a valuable relationship between suppliers and resellers.
Carefully selecting your business partner
Firms like Toyota already use a carefully devised partner selection process as «scaffolding» for their investments, by slowly filtering in partners they deem to be capable, before making subsequent value-enhancing investments in specific assets.
Put differently, they reduce the risk of trouble later down the road by doing due diligence, making sure they are getting into a relationships with someone capable of delivering on their promise.
Our study shows that a supplier’s effort to purposely select a reseller directly promotes subsequent investments in the reseller relationship. Furthermore, it demonstrates how such selection efforts can serve to suppress the usual difficulties that otherwise follow from vulnerable incremental supplier investments. First, careful partner selection efforts have a direct dampening effect on the risk of a reseller exploiting a supplier’s incremental investments.
Second, in combination with an appropriate initial incentive structure, a carefully devised partner selection process serves to further reduce frictions and ensure high returns from valuable investments.
Valuable, but vulnerable
There is a case to be made that the incentives that reside in the trading partners’ initial investments have a more limited range of effects than partner selection efforts. Simply put, while initial partner investments promote further investments, they can also expose suppliers to increased exploitation unless combined with careful partner selection efforts.
Overall, our findings demonstrate the importance of deliberate efforts to manage reseller relationships, and should remind managers that productive relationships between suppliers and resellers never happen on their own.
“Valuable, but vulnerable” is a good way to describe investments in business relationships, and our results underscores the importance of paying attention to both when deciding on mechanisms to manage business relationships.
Both partner selection efforts and incentive structures have durable properties that can reduce ongoing trading difficulties and ensure returns from valuable investments years later in a relationship. However, managers should be aware of the limitations of solely relying on incentives.
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Wathne, Kenneth Henning; Heide, Jan B.; Mooi, Erik A.; Kumar, Alok: Relationship Governance Dynamics: The Role of Partner Selection Efforts and Mutual Investments. Journal of Marketing Research 2018
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