© Entrepreneurial Insights based on the concept of Alex Osterwalder
In this section, you will learn about the next building block in the Business Model Canvas which is Key Partners (or Key Partnerships) that an entrepreneur needs to have to perform its key activities and ultimately provide its value proposition to its customer segment.
We will look at 1) key partnerships, 2) types of partners, 3) motivation behind partnerships, 4) key partners and value propositions, and 5) case studies.
A business partnership is when two commercial entities form an alliance, which may either be a really loose relationship where both entities retain their independence and are at liberty to form more partnerships or an exclusive contract which limits the two companies to only that one relationship.
The following factors are very important to keep in mind when forming partnerships:
- Right Partnership Agreements: Whether your partnership is with a business or an individual, it is important for all the relevant parties to have clear partnership agreements drafted along with legal counsel.
- Defining Expectations: Many times new businesses fail to establish their expectations from the outset leading to much confusion and conflict later. An entrepreneur needs to ensure that he has shared his expectations openly with his partner and vice versa from the beginning.
- Impact on your clients: When forming a partnership, it is important to evaluate your value proposition and your key resources and make sure your partner is filling any gaps in either. This can only be done by also evaluating how the partnership will translate to the customer.
- Win-Win situation: For a partnership to be healthy and sustainable, there need to be visible gains on both ends.
- Selecting partnerships: Some partnerships may seem lucrative in theory but fail to get off the ground practically. In addition, changes in the business context may also make some business partnerships irrelevant. In such cases, it is important to end these partnerships quickly to avoid further wastage of resources.
This building block refers to the network of suppliers and partners that make the business model effective. The reasons for a company opting for a partnership are myriad, but healthy partnerships are instrumental in making a business success or a failure. A company can optimize its resource utilization, create new resource streams or mitigate risks behind major business decisions by taking on a partner before starting a new course of action. It is important to note here that your organization maybe partnering with a number of organizations for various reasons, but not all their relationships will be key to your business.
Partnerships can change over the course of a business’ lifecycle. The types of partnerships that may be a necessity during year 1 of a start-up will differ significantly from the nature of the required partnership in year 3.
When evaluating the various key partnerships that your business requires, it is fruitful to analyze the nature of the partnership based on the following key questions;
- Which partnerships are critical to our business?
- Who are our critical suppliers?
- Which of our suppliers and partners are sourcing our key resources?
- What type of partnerships would suit our needs?
- What is the best cluster/ supply chain where I should be located?
TYPES OF PARTNERS
Partners and partnerships can be categorized into four different types;
- Strategic alliances: These types of alliances are between non-competitors. So if you are working through different channels, like a news agency can supply news to both online and offline channels.
- Co-opetition: There can also be strategic partnerships between partners. Such a partnership will help spread the risk both companies may take. It may also help when both partners are trying to do something new; additionally it could mean a confirmed supply stream. For example, there is a need for earth metals in mobile phones. So securing the supply of rare earth metals could be the reason for competitors to form a strategic partnership.
- Joint-Ventures: Another thing could be to develop a joint venture in a new business. Both partners could have a mutual interest in developing new business, possibly due to the emergence of a new market or access to a new geographic area. Both organizations will only opt for such an option if they both provide some inputs into the business. Hence, a Dutch company that specializes in producing cheese might choose to go into a joint venture with milk producing local company to start making cheese in the new region.
- Buyer-Supplier Relationships: These are the most common type of partnerships which assures that you have a reliable source of supplies coming in and for your supplier this means they have a steady confirmed buyer for their product.
MOTIVATIONS BEHIND PARTNERSHIPS
Partnerships are a tricky business involving a lot of negotiation and an element of trust. There can be a number of reasons why organizations would make the decision to take on a key partner rather than doing things themselves or taking on a partner but not considering them as key to the success or failure of their business. Primarily, one of the three kinds of motivations can be attributed when a business chooses to enter a partnership.
Optimization and economy of scale
Most organizations are heavily focused on the bottom-line. And many focus on cost-cutting or smart spending through optimizing the allocation of either their resources or activities. This is the most common motivation for people to enter into partnerships of different types.
When you are looking for efficiency in your company or optimizing your productions chains, key partners can help you achieve this goal. It is unrealistic to think, as an entrepreneur that you have the resources in place to conduct all your key activities in-house. Most partnerships give organizations the ability to share their infrastructures or outsource some activities to more cost-effective options.
Citroen, Peugeot and Toyota joined hands to create a small, cheap car for the masses that they tried to sell for 5000-6000 euros. These cars looked almost the same except for the chassis and a few internal and external details.
Reduction of risk and uncertainty
If you have a good relationship with a key partner, you reduce the inherent risk that comes with doing your own business. You also guarantee supply to your business rather than being dependent on suppliers who aren’t key partners and would therefore not give precedence to your business over others.
Many competitors may form strategic partnerships to share the risk of bringing something new into the market while still competing in various aspects in the industry. A classic example of this is the advent of blu-ray technology which was developed in collaboration by some of the world’s premier consumer electronics and computer technology firms. The development of this technology was expensive and several competitors had to get together and decide that they would all be selling their products based on blu-ray technology; hence they needed to collaborate to make blu-ray technology more mainstream. The group joined hands to bring the technology to the mass market but still competes on the basis of their various blu-ray based gadgets in the consumer market.
Acquisition of particular resources and activities
If there are certain things that you don’t have in-house and which would require a heavy investment of time, money or both, a key partner who already has these processes and the infrastructure developed would come in extremely handy.
Business models can be extensive maps of the myriad activities that a business needs to perform or the endless resources required to perform these activities successfully. However, it is rare for a new company to have the resources or capabilities in place to fulfill the mandate set down by the business model. Hence, many new companies are beginning their journeys by forming partnerships that give them access to the required resources or processes that they require, but are unable to own yet. Hence, many mobile operators partner with IT companies to develop the operating system their handsets require rather than bearing the heavy investment such an endeavor would require if done in-house. This also gives the IT company a steady source of revenue as well as the advantage of publicity if the mobile manufacturer’s brand is well recognized. Bicycle companies do not manufacture their bicycle accessories. Instead, they get into selective partnerships with bicycle parts manufacturers who customize the parts like the color or size of the bicycle seat according to the preferences of the manufacturer.
Heineken is one of the most popular producers and suppliers of beers in the world, and it is especially well-known in the Netherlands, where they have created very strong relationships with bar owners. In fact, Heineken frequently invests in new bars by providing not only equipment for free but also investing in the décor of the bar. In return, the bar provides Heineken beer exclusively. Hence, Heineken gets a repeat customer for their beer while the bar owner can minimize the cost of setting up the business. Conversely, however, the bar owner is limited to selling just Heineken, which means that if Heineken increases the prices of its beers, the bar owner has no choice but to abide by the new prices.
KEY PARTNERS AND VALUE PROPOSITIONS
For fast moving consumer goods, availability is key to the success of the company and a major value proposition. For supermarkets and retail chains, distribution partners are key if you want to provide your fast moving consumer goods to the market. Your advantage is that your products will be available to everyone, but the supermarket will drive down your price and resultantly your margins significantly.
Technologies are advancing at a very high rate that increases their risk factor is well. However, if the technology forms a significant value proposition for your business, then you can take on a partner to share the risk and cost associated with the technology in question.
Focus on where you are creating value but consider that the rest can be outsourced if needed. The activities that are adding value to your value proposition must be outsourced very carefully because they are the ones that are key partnerships for your business.
Starbucks has established several key partnerships worldwide such as with coffee growers worldwide to grow eco and farmer friendly coffee beans. This key partnership is a typical buyer-supplier relationship, motivated by a need to acquire key resources. Another key partnership is with specialized coffee machine makers who make specialized coffee makers for Starbucks. Again this helps Starbucks mitigate cost because it does not have to invest in infrastructure, R&D, and manpower to create these coffee machines in-house. Instead, it is much more cost effective to partner with an organization that already holds expertise in this area and has the infrastructure in place already to cater to Starbucks’ needs. Conversely, Starbucks provides them with a steady buyer for their product as well as the added boost that the Starbucks brand holds for the coffee machine manufacturer.
A Comparative Analysis of Facebook’s and Google’s Partner Networks
Though Facebook has a number of partners in its network, it isn’t entirely dependent on any of these partners. Most of Facebook’s partners provide valuable content for its users so Facebook partners with content providers such as Netflix, Washington Post, Hulu, etc. to provide movies, articles, music and other forms of content to its subscriber base.
Conversely, Google has Google Network members who are content companies that partner with Google to provide content on for its search engine. It provides Advertisers access to these content companies web pages through the Google AdSense program and in return shares revenues from the said program with the relevant companies, leading to a mutually beneficial partnership. Additionally Google also partners with Distribution companies to attract traffic to its websites. However, these are a group of Distributors and Google does not leave itself dependent on any one distributor.
At a time when the opioid addiction epidemic has received national attention and is at the forefront of new legislation and regulation, a collaborative and successful partnership has evolved in an effort to help curb some of the devastating repercussions.
Smith Medical Partners, a national specialty distributor, saw an opportunity to engage with Adapt Pharma, an emerging pharmaceutical company, which created an antidote for opioid overdoses. Adapt Pharma’s Narcan (naloxone) Nasal Spray is an FDA-approved opioid antagonist indicated for the emergency treatment of known or suspected opioid overdose. Adapt Pharma and the category management team at Smith Medical Partners’ parent company, H. D. Smith, began developing a standard agreement in late 2015 for retail distribution and subsequently, the partnership with Smith Medical Partners began.
Both parties saw an opportunity to partner and distribute Narcan to various groups outside the traditional hospital and pharmacy distribution setting. Adapt Pharma had an important product that needed to get into the hands of first responders and community organizations, while Smith Medical Partners had the experience and flexibility to identify specific markets and groups that would be well-suited to administer it.
Together, we agreed on the important fact that distribution should not be limited to pharmacies. Those on the front lines fighting this epidemic, such as first responders, police, firefighters, substance abuse clinics and schools, were the groups that needed straightforward access. In January 2016, we formalized our partnership and launched two notable programs. The first distributes Narcan to community first responders. The other program distributes Narcan to US high schools, with support from the Clinton Health Matters Initiative.
In the few months since we initiated our distribution agreement, we have experienced many successes and challenges, and we have leveraged the know-how of both organizations to find solutions. Smith Medical Partners and Adapt Pharma share the common goal of expanded Naloxone distribution. Yet, as with anything new and innovative, different challenges surfaced and needed to be adequately addressed. The distribution needs of a university, for instance, are often different from those of a substance abuse clinic, so a one-size-fits-all strategy was not always optimal.
As a result, this partnership required flexibility to adapt to nuances and approach each situation differently. Consistent and open communication with Adapt Pharma for proper alignment has been crucial, and is one of the many reasons this initiative has already been so successful.
Beyond flexibility and effective communication, we had to be open to taking risks and stepping out of our comfort zone. We had to find a way to distribute this drug to those outside the traditional pharmacy setting. We quickly strategized a new distribution protocol that carefully considered the end user. Several municipalities have already purchased Narcan. They are excited about the uniqueness of the product and its potential to stop an opioid overdose.
One issue that often arises with pharmaceuticals is liability. We addressed this by ensuring we put Narcan in the hands of those with the appropriate licensing of a medical professional. It is important for companies like ours to do our due diligence and ensure the medical directors purchasing products for their organization have the proper licensing and training.
Another issue we commonly face is related to cost, and access, across different classes of trades. If you walked into a retail pharmacy to purchase the drug today, the product has a certain cost and reimbursement structure. However, the different distribution channels made available for this product allows for pricing that supports the public interest, like that of first responders. Ultimately, this partnership has been a tremendous learning experience as we were able to foster a synergetic relationship with Adapt Pharma. Every day brings new challenges in getting the product out the door and into the hands of the people who need it most, but it also brings the satisfaction of seeing how quickly we have made a difference.
We attribute the success of this partnership to the fact that both companies are flexible and nimble innovators. This allowed us to address unique distribution challenges from the perspective of a small business, and ultimately make an impact at the community level. Working with Adapt Pharma has been rewarding and beneficial, and as they grow, we are excited to grow with them. We take pride in the fact that together we are proactively helping to address a national health crisis.
ABOUT THE AUTHOR
Bob Rash is Vice President of Smith Medical Partners, a wholly owned subsidiary of H. D. Smith. During his tenure at Smith Medical Partners, he has led the company to substantial growth and expansion of its specialty distribution and third party logistics business. Prior to Smith Medical Partners, Rash launched Health Market International, a software and consulting company, providing services in 20 countries. He earned a bachelor’s degree in mathematics from the College of William and Mary and a master’s in management from George Washington University.