The thinking goes that you never want to grow too dependent on your business partners, particularly your suppliers. They would wield too much influence, and you wouldn't be able to quickly switch supply sources if you needed to. For instance, what would happen if the supplier threatened to end the relationship? It could leave the purchasing company stranded, or the supplier could renegotiate -- getting more money that would come at the purchasing company's expense.
But it's not necessarily bad to depend on another company. What the conventional wisdom overlooks is that two processes affect how companies fare in business partnerships. The first is the one more commonly thought of: the value that the partnership generates. But to capture value, companies first need to create it. Hence the second process: value creation. A company, when in a buyer-supplier relationship, should think not just about its share of the pie, but also how big the pie is.
Maxim Sytch, a doctoral candidate at Northwestern University's Kellogg School of Management, and Ranjay Gulati, a professor at the Harvard Business School, have done research suggesting that depending on a business partner can actually lead to more value creation. The relationship can boost the value of what gets distributed, they argue, which improves a company's performance. You don't want to avoid dependence, in other words. You want to harness it. However, badly managed dependence can also shrink value. This can happen when the more powerful company tries to gain more value at the expense of its partner. Here, the dominant partner does claim a bigger share of the pie -- but that pie is just growing smaller. Thus, the more powerful business can be left with a net loss.
The researchers first conducted 37 interviews with managers and purchasing agents who work in the automotive industry. They then analyzed survey data on 151 buyer-supplier relationships in the automotive industry, looking at manufacturers' and suppliers' dependence on one another.
Sytch and Gulati studied how strong and concentrated the relationships were, whether partners had alternative sources, and how much money would be lost if the partnership fell apart. They discovered that dependence varies along two dimensions. The first is dependence asymmetry, which reflects how much more or less a company depends on its business partner than vice versa. When one company depends more on its partner than the other, it has less power in the relationship. The greater the asymmetry, the greater the power imbalance.
The second dimension is joint dependence, which reflects how much two companies mutually depend on one another. Here asymmetry can exist at different levels. When it's low, the companies barely depend on one another. When it's high, the companies rely on one another extensively. The researchers discovered that joint dependence fosters more cohesive relationships. Both sides are more involved and exchange more information. The buyer-supplier relationships that displayed greater joint dependence were more involved in business activities and exchanged information with more detail, accuracy and timeliness. In short, these relationships work better and generate more value for both businesses.
Now what happens when it comes to claiming this value? That's where dependence asymmetry comes in: The less dependent company will have the edge, and will be in a better position to claim more value. But beware: If you squeeze a business partner, even if it's beneficial in the short run, you will hurt the overall relationship. On average, those manufacturers that had greater power in their relationships also performed less well. It does not pay, in short, to bully your suppliers.