Business Model Canvas Block #8: Key Partnerships - Allianse

What Is a Business Model Key Partnership?

For many companies, key partnerships are the cornerstone of their business models. These partner companies are essential to creating, delivering, and capturing value.

Types of Key Partnerships

Generally, key partnerships in business models fall under three broad categories:

1. Strategic Alliances Between Non-competitors

A company can form partnerships with non-competing businesses. In most cases, these alliances are necessary to create value propositions.

Manufacturing companies, for example, do not produce all components of products. They may manufacture the product itself but have another company make the packaging.

Car manufacturers can choose to produce tires themselves. But the tires they make are likely to be more expensive than sourcing them from a tire manufacturer. In this case, they are better off forming a partnership with an established brand.

2. Strategic Alliances Between Competitors (Coopetition)

Companies can also form alliances with direct competitors. While it may sound strange, there are circumstances in which it is beneficial.

One rationale behind “coopetition” is protecting common interests. An example is oil and gas companies. Hydraulic fracturing (fracking) revolutionalized drilling. But critics cite its negative impact on groundwater, wild landscapes, and wildlife.

An oil and gas company has the choice of launching PR campaigns to debunk those claims. Or it could form alliances with competitors. Pooling their resources together, for sure, is much more cost-effective.

Pfizer and BioNTech are an example of coopetition. These two companies allied to create a COVID-19 vaccine in March 2020. By the end of 2020, they had already released their vaccines to the market.

3. Joint Ventures to Develop New Products or Businesses

Companies can form partnerships to develop a new business. An excellent example is Google and NASA. While Google has the IT infrastructure, NASA has a defense mapping database and images of our planet. Together, they developed Google Earth.

4. Buyer-Supplier Partnerships

The most common partnership involves buyers and suppliers. But here, a distinction needs to be made on the difference between a regular supplier and a key partner:

Suppliers. These are the companies you choose to buy products or services. You can replace them with another company at any given time as you see fit.
Partners. Unlike regular suppliers, partners have a greater interest in your business. They can be either upstream suppliers or downstream buyers. Regardless, these partners are more engaged in your business and processes. They would also help you produce better products or provide better services.

Benefits of Key Partnerships

The motivations for forming a strategic partnership are:

Optimization and Economy of Scale. A strategic alliance can help reduce costs. Outsourcing is one example, while sharing infrastructure is another. As the business scales up, the cost savings become more significant.
Risk and Uncertainty Reduction. In competitive markets, partnerships can help reduce risks. Even competitors can come together to develop new technologies. In doing so, they can spread the potential risks of bringing new products to the market.
Acquisition of Resources and Activities. Some value propositions may need licenses/knowledge or resources from other companies. Establishing strategic partnerships saves not only time but also reduces costs. It may also be necessary, such as in the case of proprietary technologies.

Criteria for Choosing Key Partners

Key partnerships can be loose. It means each party has no limitations on forming alliances with other companies. But some can be exclusive, in which case there are restrictions. In either case, these are the factors to consider when choosing key partners:

1. Value Proposition

Key partnerships on business models make value propositions possible. Usually, they are product suppliers and service providers. But they can also be companies that have infrastructures.

Partnerships with suppliers ensure a steady supply of goods. These could be materials needed to produce value propositions. But it could also be other materials required by the business to operate.

Service providers, meanwhile, are suppliers of key activities. For example, a business may not want to maintain a fleet of vehicles to deliver goods to their customers. In this case, they can partner with a reliable logistics company to handle deliveries.

However, key activities are not limited to outsourcing a part of a business to a third party. Suppose a company organizes concerts. Instead of investing in equipment, they may rent from a partner when needed.

Lastly, a key partner may be necessary to create value propositions. An example would be partnerships with license holder proprietary technology.

2. Selection Criteria

Defining selection criteria simplifies the process of identifying and choosing partners. It should not only optimize value but also be beneficial to both parties.

One of the advantages of forming partnerships is lower pricing. But it should not be a primary concern. Startups, in particular, should also consider hard factors such as quality. It makes no sense to choose a company that cannot provide reliable services. Even worse are those that cannot guarantee consistent quality levels.

At the same time, startups should also not neglect soft factors. Some companies, for instance, prefer partners that share the same culture. Others also consider vision, values, ambitions, and attitudes. These factors are essential not only because of brand image. It also ensures a smooth working relationship.

3. Partnership Agreements

During discussions, both parties usually focus on the finer details of the partnership. But more than that, they should also consider the impact of allying. In particular, they should consider financial, operational, and intellectual implications.

4. Terms and Conditions

After a successful negotiation, both companies should formalize their partnership. They can do this by defining the terms and conditions of their relationship.

This legal document should cover, among others, the administrative, operational, financial, and legal aspects of the partnership.

It also helps to include a summary and highlights of interactions. Instead of poring over the entire document, the most critical aspects of the partnership can be made available at a glance.

Pertinent information to include in the summary are parameters such as service levels. For example, a web hosting company might commit a guaranteed 99% or more uptime.

5. Developing a Mutually Beneficial Relationship

Discussing key partnerships is not unlike any business negotiation. Each party would look after its best interest. Even so, the one thing clear is that the agreed terms are beneficial to both companies.

A company, for example, may demand the lowest possible prices because of volume orders. Any fluctuation in market conditions that affect the slim profit margin of suppliers may result in losses. It is thus possible that some of them may try to cut corners.

Questions You Need to Ask to Define Key Partners

Whether it is a buyer-supplier relationship, joint venture, or coopetition, here are questions that you need to ask: