Creating Value Together

Conventional wisdom suggests that companies should avoid growing dependent on their business partners. If one company, the thinking goes, grows too dependent on a counterpart by getting the entire input for a particular activity from it and is not able to switch quickly to alternative sources of supply, then the counterpart company gets powerful levers of influence. By threatening to exit the relationship, the supplier may then renegotiate the relationship toward more favorable terms and claim a bigger share of the economic pie. And this bigger share will come at the purchasing company's expense. What matters for a company's performance in a buyer-supplier relationship is not just the share of the pie it gets, but also how big the entire pie is. Research suggests that, if smartly managed, dependence on one's business partners brings significant benefits to value creation in interorganizational relations; it can boost the overall pool of value to be distributed and, subsequently, the performance of a company. Dependence, therefore, should not be avoided but actively harnessed. We also show that ineffective management of dependence may just as quickly shrink the value in the exchange, hurting all companies' performance in the relationship. In that respect, relying on a tug-of-war in which the more powerful company tries to squeeze out value at the expense of its more dependent partner is particularly detrimental. It results in the dominant partner claiming a bigger share of a rapidly shrinking pie. Remarkably, in such circumstances, a more powerful business can be left with a net loss.