Industrial Marketing Management 35 (2006) 72 82

Successful and sustainable business partnerships:

How to select the right partners
Mario Rese *
Marketing Department, Faculty of Economics and Business Administration, Ruhr-University Bochum, Universitaetsstrasse 150, D- 44780 Bochum, Germany

Received 1 March 2005; received in revised form 2 July 2005; accepted 10 August 2005
Available online 7 October 2005

Abstract

In more and more industries it becomes true that value creating networks compete against each other with relatively stable relations between
suppliers inside the network. Managers all over the world are searching for the most efficient and effective coordinative forms for their relations
with OEMs or suppliers within such a value-creating networks. This paper gives a normative guideline to decide if or if not a partnership is the
right coordinative form for OEM-supplier relations within a value-creating network. Based on the existing mainly positivistic research in this field,
two aspects are highlighted as the main drivers for the suitability of a partnership as a well working governance mechanism for value-creating
networks: (i) individualization vs. standardization of the delivered components combined with the potential of the end customers to identify
quality differences or not and (ii) the possibilities to allocate the revenues made by the value-creating network on the several Fpartners_ within the
network. All aspects were integrated in a decision model for managers to find out if partnership as the coordinative form is really the best choice in
a given situation.
D 2005 Elsevier Inc. All rights reserved.

Keywords: Network competition; OEM-supplier-partnership; Governance mechanisms; Revenue distribution among the partners; Decision model

1. Introduction ing competition between standards and the successful

The formation of partnerships with the aim of improving
competitiveness for all partners is currently the subject of
intense debate. In any marketing related journal, one constantly
encounters hymns about partnerships as the ideal coordina-
tion mechanism for suppliers in a value-creating network. Two
reasons above all, are likely to be responsible for the
renaissance of this not necessarily new idea (e.g., Axelsson
& Easton, 1992; Hakansson, 1989; Johanson & Hallen, 1989;
IMP conference proceedings between 1990 and 1999):
(i) The first reason derives from an observation in the sector
of goods with network effects, of which there are
progressively more over time. Due to interface incom-
patibilities between products in different networks, the
very powerful binding effect on the customer means that
it is no longer products, but complete systems that
compete with one another. We are experiencing increas-
* Tel.: +49 234 32 26 596.
E-mail address: mario.rese@ruhr-uni-bochum.de.
0019-8501/$ - see front matter D 2005 Elsevier Inc. All rights reserved.
doi:10.1016/j.indmarman.2005.08.009
implementation of such standards determines market
success. For example, someone who already owns a
camera with a Sony memory stick, will also consider
buying a mobile phone from Sony Ericsson or a laptop
from Sony in order to use the memory stick for these
other appliances as well (Katz & Shapiro, 1994).
(ii) The second reason lies in the development of relation-
ships between OEMs and their suppliers. In order to
evade the rising pressure from OEMs for greater
efficiency, suppliers have developed very effective
strategies which, in some cases, impact negatively on
the quality and reliability of future products of OEMs.
Reversing this trend, while at the same time maintaining
the pressure to be efficient, currently ties up substantial
resources in monitoring and controlling enterprises by
both suppliers and OEMs. Against this background, a
partnership among peers without massive monitoring
activities on both sides seems to constitute an insur-
mountable obstacle. A value-creating network can only
be mutually successful where likeminded interests
prevail for all parties (Jap, 1999). That is, it is necessary
 M. Rese / Industrial Marketing Management 35 (2006) 72 82
to achieve joint success in competing against rival value-
creating chains or networks. In such a situation, it would
indeed be possible to eliminate the bulk of monitoring
costs (Gadde, Huemer, & Hakansson, 2003).
In fact, in several industries, the idea of a partnership in
business relationships between companies within a value-
creating network is becoming progressively more important
(Dietl & Royer, 2003, Hunt & Morgan, 1994). Yet, within
these networks, the entire range of potential relationships can
be found: trustful partnerships (with relatively low levels of
transaction costs because of less monitoring etc.) on the one
hand and highly governed relationships embedded in a
complex of contracts and monitoring activities the Fclassical
style_ on the other.
Against the background of these developments, a number of
questions arise:
1. How exactly should one understand a partnership in a value-
creating network? As a very special so-called hybrid governance
mechanism, how can it be differentiated from the Fordinary_
forms of coordination according to Williamson (1985): market,
hierarchy, Fclassical style_ business relationship?
2. Is partner-based coordination suitable for any business
relationship? When and under what circumstances is this
special form of coordination or governance advantageous?
3. What requirements must potential partners fulfill so that a
partnership based coordination mechanism functions effec-
tively? What are the drivers of stability for this form of
coordination in the long run?
In this article, we intend to focus on the third group of
questions. However, before proceeding to do so, we wish to
reveal the underlying basis and general understanding of
partner-based coordination. In contrast to most current posi-
tivistic research papers, this should be carried out with a
normative impetus. As long as we are striving towards the most
efficient and effective management solutions for OEM-supplier
relations, a positivistic view what is really done in the
markets is not sufficient. What can be learned from the
available empirical investigations is that the degree of specific
investments on the buyer and/or supplier side, is the most
important driver for the choice of appropriate governance
mechanism (Cannon & Perreault, 1999; Jap & Genesan, 2000)
that is, the suitable coordinative form and viable relationship
form.
Accordingly, in the following section, partnership, as a
special type of relationship seen as a governance mechanism,
with its responsibilities and potential benefits, is differentiated
briefly from other forms of coordination with respect to the
buyer seller relationship in general and the degree of specific
investments in particular. The third section then deals with the
characteristics of suitable suppliers for a partnership. The issue
will be addressed as to what sort of supplier is likely to provide
substantial advantages for this special form of coordination.
This is the second aspect which differentiates this paper from
many others. The problem of coordinating OEM-supplier
73
relations is frequently seen from only one side that of the
OEM or the supplier (Cannon & Perreault, 1999; Jap, 1999).
Here, we discuss the choice of coordination mechanism as a
two-sided problem. Both parties must agree. Therefore, while
considering a partnership as a suitable coordination mecha-
nism, an OEM must take into account the situation of the
supplier and vice versa. The fourth section turns to the issue of
how the potential profits derived from a value-creating network
should to be divided internally. This is an important stability
factor within coordination mechanisms and therefore of
considerable significance in terms of its sustainability. This
aspect has largely been ignored in the literature up to the
present. One of the few papers dealing directly with this
problem is from Kulmala, Paranko, and Uusi-Rauva (2002). In
contrast to our argumentation here and as a representative of
the opinion in the literature up to now they see the cost
management as the key for the revenue or profit distribution.
The final fifth section integrates and transfers the results of the
analysis into a decision model which tests supplier suitability
for a partnership. Thus, the theoretical considerations can be
converted into a normative decision tool for managers.
2. On the fundamentals of partnership-based coordination
within a value-creating network
The discussion at issue is only really justified if the
phenomenon is in fact new. Therefore, the new aspects need
to be extracted and analyzed. The existence of different forms
of governance between market and hierarchy is certainly not
new (Anderson & Weitz, 1992; Heide & John, 1992; Lal,
1990; Lusch & Brown, 1996). These governance structures,
referred to as hybrids by Williamson (1975, 1985) and
Williamson (1991), have been debated intensely. According to
the various investigations, several influential factors the
degree of specific investments, symmetry of investments on
the side of OEM and supplier, phase of relationship life cycle,
etc. influence the choice of a special governance
mechanism. Consequently, relationships are arguably the most
prominent governance mechanism (Gronroos, 1999; Hakans-
son & Snehota, 1995; Heide & John, 1990). However, it is
also true that the term relationship subsumes many different
forms of explicit coordination. Therefore, when we talk about
partnership, we mean a very special type of coordinative form
under the banner of a broad understanding of the term
relationship, which is defined in the following section (see
Fig. 1).
The reason that partnerships constitute something special,
lies more in the implications associated with the notion of
competition between value-creating networks, than in the
novelty of the monitoring problem (Farrell, Monroe, &
Saloner, 1998). Competition between different networks will
only work if the suppliers integrated into such a network,
always operate in one market at a time and within one network.
Acting on the assumption that each partner makes a contribu-
tion to the competitive advantage of the entire network,
supplying other networks simultaneously would be counter-
productive. The contribution to competitive advantage would
74 M. Rese / Industrial Marketing Management 35 (2006) 72 82

Partnership as a special hybrid form

Market: Hybrids: Hierarchy:

price mechanism contracts, trust, rules and
as the co-ordinative commitment as the instructions as the
force co-ordinative force co-ordinative force

Low Level of Investment Specificity High

Fig. 1. Partnership as a special hybrid coordination form between market and hierarchy.

then also accrue to the competitor. The outcome is a reduction
in potential differentiation.
As a consequence, there would barely be any competition
between suppliers of a specific component, for example. Each
supplier would always belong to a network operating within
one market segment. A supplier who does not belong to any
network at all, will be forced to leave the market in the long
run. If the partners within a traditional supplier relationship
have won a bid for a project in a situation of economic
competition, they will now as a partner in a value-creating
network almost automatically be the supplier of a specific
component from one product generation to the next. In this
sense, partnership converges more with the coordination form
of hierarchy, than with the classic business relationship often
discussed in transaction-cost related literature (Menard, 2004;
Sollner, 1999).
Changing the composition of partners is, strictly speaking,
only possible through radical innovation (Schumpeter, 1939) in
a situation in which completely new capabilities are required,
which no partner possesses and simultaneously, capabilities
already existing in the network are no longer of use. Precisely
this concept of the value-creating partnership can currently be
observed in the Japanese Automobile Industry (Hunt &
Morgan, 1994).
Against this background, Fbusiness partnership_ is referred
to below as a form of cooperation (and not only in terms of
coordination and governance) in which all participating
partners act in the interest of the network. The reason is that
all partners depend heavily on the success of the community.
Consequently, monitoring activities are evidently necessary on
a smaller scale than in other relationship-oriented governance
forms, where each actor focuses on his own individual
advantage, because he has several alternative OEMs and/or
suppliers with whom he can interact.
This description sounds somewhat economically paradoxi-
cal. The principle of competition is breached internally in order
to achieve greater external competitive advantage. The
question arises, however, as to whether a partnership-oriented
form of coordination is generally possible in Western Europe or
North America. After all, the industrial landscape in both
regions has developed entirely differently to that of Japan, for
example. Here, suppliers are generally far less dependent on
single OEMs (Head, Ries, & Spencer, 2004). Normally, a
supplier has more OEM-customers within the same industry
than in Japan. In consequence, the distribution of power
between OEM and supplier and the closeness of the relations
with the OEMs differ significantly. Furthermore, the stability
of such value-creating networks must also be questioned,
because only a stable network promises lasting success. These
aspects will be considered below.
3. On the suitability of suppliers for a partnership
As a starting point, it is necessary to note that in reality,
several industry sectors are indeed developing along the lines
of competition between value-creating networks (e.g., Dietl &
Royer, 2003). Nonetheless, there are also converse examples,
where suppliers do not perceive signs of a partnership long
term cooperation with OEMs. Moreover, they complain
about rising pressure from OEMs. For example, suppliers are
forced to participate in online auctions to win always the next
delivery to the OEM. The manufacturer uses the market
mechanism. Partnership is not desired at all. For instance, this
is true for many German automotive suppliers (Mercer
Management Consulting, 2001).
In fact, it is important to consider under which conditions
firms will search for partnership-based coordination in reality.
This is equivalent to the question of when it is advantageous to
establish a partnership-based form of coordination within a
value-creating network. Mutual advantageousness is a precon-
dition for sustainability, which, in turn, is a condition for the
long-term survival of partnership-based coordination forms in
the real world.
The focus of our observation is a comparison of different
coordination forms within a value-creating network. How are
these internal relations structured? What are the drivers for
choosing one particular form of coordination as opposed to
other alternatives?
From a strictly economic perspective, it is to be expected
that the OEM, as the integrative force in a value-creating
 M. Rese / Industrial Marketing Management 35 (2006) 72 82
network, would select the alternative which would yield the
greatest profit, whether through increasing revenue and/or
reducing costs. As a supplementary condition, it is necessary
that no single supplier becomes worse off by joining the
partnership. Otherwise, these actors would not agree to
partnership-based coordination, as long as they have a choice
as to the prevailing form of cooperation (Johnson, 1982).
If one considers more carefully where the advantages of a
partnership-oriented network lie, two points are ultimately quite
evident. Firstly, where there is trust and commitment (Sollner,
1999), coordination costs can be reduced, in contrast to the
competitive cat and mouse game which often prevails between
OEMs and suppliers. Secondly, the productivity of the value-
creating network can be raised in comparison to other networks
(Dietl & Royer, 2003). The condition is that, within a network,
the most efficient and/or effective actors which include both
suppliers and OEMs, must be united and the supplier must offer
its positive contribution exclusively to only one network in one
market. In such a case, the network as a whole can create a
superior market offering and accordingly gain market share and/
or demand a price premium (Hunt & Morgan, 1997; Porter,
1980).
Precisely what settings offer an advantage to the OEM,
depends on the situation of the supplier. For the following
observation of different situations, the relationship between the
OEM and the various suppliers must be investigated. The
starting point is that of traditional competitive coordination
the use of the market mechanism by the OEM (transaction
buying). The issue arises as to whether it is worthwhile for the
OEM and supplier to reformulate the governance structure
(Williamson, 1985) into one of partnership.
With respect to the supplier of an OEM, a differentiation
should be made between four different groups (Fig. 2).
The matrix demonstrates that, for the purposes of further
observation, suppliers must be differentiated according to
whether or not they need to invest specifically (Klein et al.,
1978) in order to produce the necessary output for the OEM
Supplier Delivers
Specific
Components
Customer perceives a differ-
same components from dif-
ence in quality between the
No Type A
ferent suppliers
Yes Type B
Fig. 2. Differentiation of suppliers.
75
and to what extent the various potential suppliers for a special
product or component differ in terms of quality.
Type A represents suppliers which create specific compo-
nents (based on specific investments) for the OEM, and where
quality does not differ between potential suppliers. Various
module suppliers such as Benteler Automotive or the Draxl-
maier Group are good examples from the automotive industry.
They produce individualized products for each OEM, but
barely differ in quality perceived by the customer. It is
precisely here that conforming to the generally prevailing
network production quality is essential and is indeed already
the case. For this group of suppliers, a possible reduction in
coordination cost, while changing the coordination form to one
of partnership, would be welcome. These potential new
partners do not need to fear a delivery ban to other OEMs
(forced by the OEM under consideration), however, as long as
they offer genuinely highly specific components which are not
readily substitutable. Ultimately, it may not matter to the OEM
that, for example, vehicles are manufactured by other
automotive companies using different components manufac-
tured by the same supplier. The diametrical opposite applies to
the case of fixed overhead costs R&D could serve as an
example advantageous for all OEMs on the delivery list of a
single supplier, if several projects are developed concurrently.
This leads to a reduction in per-unit overhead costs. All in all, it
seems both quite feasible and productive to initiate a
partnership with the suppliers from group A, when monitoring,
and therefore, transaction cost advantages, are expected.
The perspective changes for suppliers of Type B in Fig. 2. If
there are substantial quality differences between various
potential suppliers of a specific component and the module/
component quality influences the satisfaction of final custo-
mers, it is essential to integrate the relatively best supplier in
terms of efficiency and/or effectiveness into the network. The
supplier HJS/Bosch, which is responsible for the particle filter
for diesel emissions for Peugeot, is a good example. Only such
integration will guarantee the benefits for the value-creating
network as a whole. In addition, the best supplier must agree
not to supply other OEMs or value-creating networks (in the
same market), so as to maintain the competitive position of the
network under consideration. Such a supply ban means a
reduction in turnover for the selected supplier, which would
Standardized
have to be compensated through the network. Otherwise, the
Components
supplier would have no incentive to participate. Yet, this
compensation can only derive from a greater market share and/
or higher prices, which the value-creating network achieves
through integrating the best supplier and thus the greatest
Type C
achievable competitive advantage.
Type C represents the suppliers of standardized components,
which are obtainable worldwide in roughly the same quality.
Flexible brake hoses for car manufacturing might serve as a
suitable example. For the OEM, and thus for the value-creating
Type D network, these commodities are least significant with respect to
the potential for product differentiation. Even in the case of
allocation to a value chain, they do not make a significant
contribution to creating a unique position through product
differentiation. By contrast, their value lies in achieving the most
76 M. Rese / Industrial Marketing Management 35 (2006) 72 82
significant economies of scale in comparison to other suppliers
offering the same products, such as brake hoses, and transferring
this value, with the minimum profit margin, to the relevant
value-creating network. The best means of achieving this is
through highly efficient and competent procurement manage-
ment. As long as the OEMs always have the option of
purchasing from other suppliers, competitive pressure via the
pure market mechanism (transaction buying), will only be
disadvantageous to a limited degree in terms of poor quality.
Furthermore, for this group (Type C), the problem of revenue
participation does not arise. Profits can be distributed asymmet-
rically in favor of either the network or the OEM and to the
disadvantage of the commodity supplier. Therefore, the use of
the market mechanism improves the position of the OEM. A
partnership is not at all suitable for the purpose of coordination.
Type D comprises those suppliers which deliver relatively
standardized components to several OEMs. Such suppliers are
characterized by very substantial quality or technological
differences in international comparison. With its diesel fuel
injectors for automobiles, Bosch serves as a good example. For
these components, the OEM will normally be unable to achieve
a partnership-oriented integration of the supplier in combina-
tion with a supply ban to competitors. Yet, this is necessary to
improve the relative competitive position in comparison to
other value-creating networks. Only if the value-creating
network is the only one to offer the particular beneficial
component, is it possible to create an advantage in the final
market. However, this contradicts with the fact that the
economies of scale achieved so far by the supplier are reduced,
because of the supply ban to competitors, given that the
supplier must initially reduce production. Nevertheless, this has
two effects. Firstly, the profit for this particular supplier would
decline because of the quantity effect, and secondly, it would
decline even further on the basis of the now higher unit costs
that is, the allocation of overheads between the now limited
number of products. To return to our example, if the OEM or
network as a whole does not compensate Bosch for these
higher costs and quantity disadvantages, they are hardly likely
to agree to a partnership-based integration into the value-
creating network. Finally, however, the risk for the supplier
rises, if they are linked only to one or a few OEMs. The reason
is that the success of a value-creating network does not depend
only on one actor, but on all others as well. If, for example, the
OEM makes design errors or another supplier provides poor
quality goods, this can jeopardize the entire network. It is
precisely the integration of this supplier type D, which seems
difficult for these reasons. However, if suppliers are allowed
the freedom to supply more than one OEM, the concept of
advantage or the notion of competition between different
value-creating networks, becomes diluted.
If one considers all the issues raised so far, it is evident that
not only advantages, but also disadvantages are associated with
partnership in a value-creating network. These lie in the
sacrifices that must be made by individual suppliers in order to
contribute to the success of the network. From a managerial
perspective, it seems necessary to analyze the conditions
mentioned above in order to determine the nature of suitable
suppliers for the coordination form Fpartnership_. Yet, this is
not sufficient for evaluating the suitability of partnership as a
coordinational form within value-creating networks. The
necessary next step entails answer a second important question:
how should the revenue earned by the network be divided
amongst the various partners? Where previously, individual
behavior under competitive pressure was the primary determi-
nant of profits accruing to each actor, a means must now be
found to substitute this distribution mechanism. This second
problem will be discussed in the next section.
4. On the stability of partnerships: different forms of
revenue distribution and their consequences
One of the most important aspects of the sustainability of a
partnership is how the revenue of the value-creating network as
a whole should be allocated between the various partners. A
focus on revenue is necessary, because of the asymmetry
between cost and revenue origin. Costs arise through the
production by each individual partner, whereas the revenues
are generated by the entire network. In competition, the
revenue distribution is an outcome of the negotiation processes
based on the various competitive positions of the actors within
each transaction or relationship within the network. In a non-
competitive partnership, this mechanism ceases to function.
There is no longer any direct and individual competitive
pressure to serve as a regulatory force. Such regulation must
therefore be replaced by alternative distribution mechanisms.
In the previous discussion, it became evident that the
individual advantages accruing to potential partners are
determined across two dimensions: revenue and cost effects.
On the revenue side, there is a change relating to the
quantitative component. The network as a whole acquires a
competitive advantage and is able to sell more and/or for a
higher price. These aspects have already been discussed with
respect to the motivation of potential partners to participate in a
non-competitive partnership.
On the other hand, the internal transfer prices each supplier
gains for his efforts are crucial in this context. The decision on
individual output (quantity) is determined externally through the
level of demand from final customers. The distribution of total
unit revenue is the main internal problem amongst partners.
Ultimately, one cannot expect to derive one generally
applicable and valid rule for determining how to allocate total
revenue between the various partners. On the one hand, we
have techniques applying simple calculation rules, such as that
all actors get the same. These techniques do not take into
account the individual contributions of the network participants
and therefore will not be accepted by the parties involved. On
the other hand, we can assume only two possible forms of
internal revenue distribution, if we consider the asymmetric
contributions of the network partners:
an externally driven customer value-based distribution
each actor acquires a share of revenue, in relation to the
customer value he contributes or
an internally driven cost-based distribution.
 M. Rese / Industrial Marketing Management 35 (2006) 72 82
In the following section, both possibilities are analyzed in
terms of their feasibility, weaknesses and potential for
offering opportunistic behavioral scope to the various
different partners.
The first revenue-allocation option consists of distributing
revenues according to the relative degree to which the
different partners benefit the customer. In this case, revenue
would be allocated according to the contribution to customer
benefit, with the result that a desired increase in profit share
is associated with a relatively greater customer benefit.
Disregarding, for the moment, the viability of this approach,
this rule certainly acts as an incentive mechanism in the
right direction: each partner tries to maximize its share of
total customer benefit the part-worth of the overall utility
of a product/service in order to obtain a greater share of
total revenue (Green & Srinivasan, 1978). This benefits both
the customer and the competitive position of the network.
This fundamentally good idea seems beset with imple-
mentation difficulties. Firstly, customer benefit must be
measured and converted into monetary value. Secondly, and
this may be an even greater challenge, each part-worth from
each partner, translated into monetary value, must be
calculated individually in order to formulate the distributional
basis for the ultimate revenue shares. Only in a very small
number of situations, can customer benefit be calculated
directly in monetary terms. Especially in some business-to-
business markets, the net present value approach can be used
to calculate the relative economic advantage a customer
obtains from various different offers (Oxenfeldt, 1975). In all
other cases, it is necessary to find a different solution for part-
worth measurement and allocation of monetary values.
The conventional instrument for identifying part-worth
values is conjoint analysis. By means of this process, the
part-worth for the different product/service elements can be
calculated with respect to customers bringing different
product offers (each described on a card) with different
levels of performance parameters into an ordinal range
according to their subjectively perceived attractiveness.
Additionally, with the aid of the so-called Flimit card
concept_ (Voeth, 1998), willingness to buy can also be
observed. The integration of the limit card (into the set of the
ordinal ranged cards describing the product offers) is
important, because a preference order alone does not provide
any information on the purchasing probability. For applica-
tion conditions and assumptions underlying conjoint analysis,
see Hair, Anderson, Tatham, and Black (1998) and Green
and Srinivasan (1978).
Discussing the extent of the usability and suitability of the
conjoint analysis approach for the problem at issue here, firstly,
it can be stated with confidence that conjoint analysis would be
useful for the value-creating network in general, in order to
monitor which elements of the product bundle generate
customer value.
In order to use conjoint analysis results additionally for
revenue distribution purposes, it is necessary that the
identified part-worths measured from customer behavior
reveal a clear congruence with the components of individual
77
suppliers. Here, a distinction can be made between three
situations:
1. Each component, module, or service provided by a supplier
represents exactly one part-worth measured from customer
behavior.
2. A group of suppliers is responsible for a component, module
or service- which the customer perceives as being self-
contained and with respect to which, accordingly, a part-
worth can be identified.
3. Supplier performance benefits the customer only in combi-
nation with components of other suppliers. That is, no part-
worths can be directed to single partners or segregated
groups of partners. Only the network as a whole creates
single elements, which can be evaluated by the customers.
Situation 1 is realistic if different performance elements
really exist. This is the case if, for example, one supplier offers
hardware, the second offers software and the third, a service. In
such a situation, it is clearly possible to measure part-worths for
each performance element perceived by customers and to use
them as basis for allocating revenues. By so doing, a
substantial additional benefit is generated simultaneously.
Through integrating the offer from the strongest competitor
into the measurement, the competitive position could be
revealed in the sense of benchmarking.
Furthermore, the selection of partners or, more precisely, the
interest in the value-creating network, can be scrutinized by
each partner. If the part-worth converted into the share of
revenue falls below the firms own costs, the partner must
consider to what extent it can alter this situation. In principle, it
is possible to increase benefit through modifying performance
or reducing cost. At any rate, which partner generates value
within the entire value-creating network, becomes evident. It
also becomes clear that information about part-worth guides
the incentive mechanism in the right direction. Each partner
aims at raising his own margin, either through cost reduction or
increasing customer benefit. Even exceeding customer expec-
tations is only attractive if costs do not simultaneously increase
at a similar rate.
In Situation 2, an additional benefit of conjoint analysis
(CM) can be expected as well. Nevertheless, compared to
Situation 1, the benefit is limited. Here, several suppliers are
jointly in charge of an exactly definable element of the
product bundle. Therefore, a part-worth for the partner group
and thus the revenue rate as well, can be calculated, whereas
the distribution within the group cannot be determined.
Conjoint analysis is suitable when only a few module
sourcers 1st tier suppliers are in charge of the main
performance elements.
If the module suppliers are also interested in a partner-
oriented strategy at the 2nd tier-level, it is conceivable that a
conjoint analysis be performed for single sub-components.
However, the prerequisite is that downstream suppliers are in
turn responsible for elements of the module which represent a
part-worth for 1st tier suppliers and can be assessed
individually.
78 M. Rese / Industrial Marketing Management 35 (2006) 72 82
The problem in this context is not the implementation, but
rather the credibility of the module suppliers judgment. When
the final customer no longer evaluates the benefits, but rather
one supplier upstream in the value creation hierarchy, the
evaluated partner must anticipate opportunistic behavior. The
reason is that all partners ultimately strive towards as large as
possible a share of revenue obtained from the customer.
Consequently, the use of conjoint analysis is only realistic if
the distribution of revenue, taking into account part-worth
information, is conducted at the 1st tier-level of module
suppliers. The partnership oriented coordination can be
successful if restricted to these actors.
The third situation is the least attractive from the perspective
of identifying part-worth for allocating revenues to the various
partners. Here, there is no match between the part-worths
perceived by customers and the suppliers offers. Each element
evaluated separately by the customers, results, more or less,
from the cooperation of several actors within the value-creating
network. This is the case where there are highly integrated
product bundles with a diverse and widespread supplier
pyramid. Especially in such a situation, the assignment of
customer benefit to individual suppliers becomes impossible,
with the consequence that the allocation of revenue in terms of
part-worths, cannot work.
If allocation according to identified customer values does
not function effectively, the revenue allocation according to
cost, remains a second option. In contrast to the first customer
oriented form of measure, this is an input-related measure. The
advantages and disadvantages of this approach will be
discussed below.
Taking the costs as the allocational measure for revenues, it
is assumed that each partner makes approximately the same
profit or loss relative to her portion of added value of the whole
network. Under the assumption that the revenues obtained by
the value-creating network exceed total costs, each partner
participates in the success in shares that are relatively equal in
terms of his costs. Conversely, each is affected in relatively
equal shares in the event of a loss. This could be described in
terms of the concept of distributive justice (Aquinas, 1274).
One advantage is that all partners receive a contribution.
Furthermore, costs can be determined in retrospect, so that
there is also a valid basis for allocation.
Nonetheless, it is precisely here that there are some
problems. These refer to the allocation of costs on the one
hand, and to the motivation to save costs on the other. Thus, the
real cause of costs is at issue. Regarding the first point, the
costs incurred by one partner cannot be determined precisely in
terms of his share of performance. This is true whenever a
supplier (or OEM) offers more than one component, product
module or service for sale. The overhead costs must be allotted
pro rata to the different product groups according to an
overhead rate base (Plinke & Rese, 2002). Here, the supplier
has a degree of autonomy in choosing the basis for marking up
the overheads. A rationally acting Fpartner_ has a clear
motivation to choose the basis according to the total outcome
of the enterprise which is in his best interests, rather than
according to factual considerations the Fright_ amount of
overhead costs for every product group. If the assignment of
profit from the value-creating network depends on the level of
cost, the partner will allocate as much of his overheads as
possible to the product group, which is part of the production
process within the network. This leads to profit maximization
across all product groups, also to those beyond the network
(Hess & Schumann, 2000). Only if each partner acts in this
manner and if the possibility to shift costs is open to all, will
there be no distortion of profit distribution. However, a cost
disadvantage for the network as a whole arises, even if only
due to calculation tricks, e.g., calculating with higher hourly
fees for the workforce (compared to reality) or with higher
prices for input goods. Both strategies lead (in the case of
discovery by the others) to distrust and a re-introduction of
costly monitoring activities within the circle of partners.
The second effect focuses directly on the cause of costs and
is thereby more dangerous than the first, because the basic
attractiveness of the network business to the customers is at
stake. The incentive created by the Fcost_ allocation mechanism
conveys entirely the wrong market signals. Those who create
more cost, acquire a greater share of revenue! Creating cost
efficiency is no longer an attractive goal, with the consequence
that the profit margin of the entire value-creating network
shrinks. It is difficult to provide accurate information about
cost inefficiency to other participants. In order to do so,
specific knowledge about the production conditions of the
Fpartners_ becomes necessary. This in turn increases monitoring
costs.
This aspect has been held responsible by both practitioners
and researchers for significantly increasing transaction costs in
conventional competitive OEM-supplier relations and was the
reason for seeking alternative forms of cooperation by OEMs
and/or suppliers. The only and remaining threat for the residual
network is supplier substitution. However, this threat turns out
to be more impractical, the more the enterprise has invested
specifically in the partner or the more difficult it is to replace
the partner adequately and/or to obtain acceptable costs in the
short term.
In summary, due to the individual influence of each partner
on its own cost position as the measure of revenue allocation,
cost barely comes into question as an appropriate revenue-
allocation base. The key point is that ultimately, the system
rewards the most inefficient partner. At the very least, it does
not punish them, and supports free riders. A cost monitoring
system within the value-creating network for avoiding these
negative effects would in turn lead to transaction costs, thus
eroding the expected benefits of the partnership based
coordination within the network.
Only an integrated ERP system providing cost transparency
throughout the network would create effective monitoring. Yet,
in such a situation, the network would come closer to
integration/hierarchy again, which contradicts the fundamental
idea of partnership between autonomous enterprises (Menard,
2004). The problem of breaking down joint costs would only
be solved if all partners bear a relatively high share of direct
costs. However, this situation tends unlikely in many busi-
nesses and against the background of current production
 M. Rese / Industrial Marketing Management 35 (2006) 72 82
structures in Europe and the United States (Rese & Herter,
2004).
5. A decision model for identifying the right partner for
partner-based coordination
Previous analysis has demonstrated that, partnership as
understood here, does not represent the optimal general form of
coordination for value-creating networks. It is only one
alternative among several and only under very specific
circumstances, is it likely that a partnership will be successful,
that is, superior to other coordination forms.
These factors can be divided into the following sets of issues
(i) the advantageousness of competition between value-creating
networks (and not between individual actors at all levels of the
value network) (ii) the respective partner himself. With the basic
hypothesis of rising network competition, externalities in
particular, should be taken into account. When considering
products with network effects, the notion of competition
between value-creating networks becomes attractive to potential
partners. Only the implementation of standards in a market can
make this market prosper and attractive for the actor who has
established the standard. Thus, there may be an incentive for
suppliers to concentrate their endeavors on only one OEM or one
value-creating network. Compensating for lost revenue with
competing value-creating networks, may not only be equalized,
but also converted into a substantial advantage. Nevertheless,
the risk of betting on the wrong horse should be considered. If
the value network of which a supplier is a member, fails to win
the battle of giants in a market, this can signify a Flost market_ for
each partner in the inferior network. A competitor had already
joined the other more successful network.
The arguments relating to determining a suitable supplier
for integration into a value-creating network requiring a
partner-based coordination form, took centre stage in this
article. In this context, different aspects of suitability were
discussed. These can be integrated into an overall picture so
as to design a decision tool which helps an OEM considering
a partnership, to test whether the envisaged partner is suitable
or not (see Fig. 3).
The first question aims at the degree of specific investment
as a prerequisite for individualized components or modules.
Here, an estimate is made of the level of economies of scale the
potential partner could realize, what correlates most with the
degree of specificity of the products and the degree of specific
investment the supplier has to make. This is significant not
only for the future question of revenue compensation, but also
in general in terms of whether an exclusive integration within a
value-creating network makes sense. The general rule is as
follows: the greater the economies of scale on supplier side, the
less attractive an exclusive value-creating partnership for both
sides. Basically, the advantage of exclusiveness means an
excessive loss of scale advantages.
The next step in the decision process relates to quality
differences between the envisaged supplier and its competitors.
Only if such differences exist, is the potential partner able to
make a significant contribution to the competitive advantage of
79
the value-creating network. If there are no quality differences,
the argument in favor of exclusive integration is no longer
cogent. Accordingly, a partner-based integration is not desir-
able where there are relatively standardized products, modules
or services. Seeking the cheapest supplier and using the
conventional market price mechanism, then represents the best
form of coordination. It also gives the supplier the option of
supplying other networks as well and thereby generating
economies of scale from which the network (as well as other
OEMs or networks) benefit subsequently.
The suppliers who invest specifically for the value-creating
network do not encounter problems where there are no quality
differences. A partnership can be offered without any difficulty
if it leads to a decline in transaction costs. Economies of scale
are unlikely, due to the individuality of the components,
modules or services. Of greater interest are the two cases
relating to quality differences between different suppliers
offering a special good or service. They contribute to the
competitive advantage of the network. The precondition is that
they be the ones with the optimal mix of cost and quality. In
testing this, it is necessary to consider if a suitable supplier was
really chosen. Given that this is the case, the next question
about the previous supply structure can be posed. Problems of
revenue compensation, because of a delivery ban, do not arise
as long as the chosen supplier has so far delivered only the
OEM in the market under consideration. This supplier is
fundamentally suitable for a partnership. However, if he
supplied other OEMs or value-creating networks in the same
market as well, the supplier must be willing to abandon these
deliveries. Otherwise, the contribution to the competitive
advantage of the value-creating network is reduced. The
network has to consider whether it is able and willing to
compensate the potential partner for its revenue reduction.
Only if the network is able to compensate the potential partner
for exclusive delivery, will he be prepared to commit to the
network.
As a result, the potential partners comprise three groups,
whereas the likelihood of committing to the network via a
partnership as the coordinational form, may decline from the
left to the right in the first gray shaded result row in Fig. 3,
merely because the disadvantages which must be accepted by
the supplier do not outweigh the potential advantages.
This first result describes the basic matching of partners for
value-creating networks, but it remains unclear whether this
will be achieved or be sustainable over time. In order to ensure
sustainability, the allocation of revenue to the network partners
must be clarified. The above discussion has demonstrated that a
commensurate distribution of revenue, in the sense of
commutative justice (Aquinas, 1274), is only possible if the
respective partial benefits to the customer can be determined in
advance. Possibilities are the net present value approach by
Oxenfeldt or the conjoint analysis. If the partial benefits of the
different suppliers are measurable, the conditions for a stable
value-creating partnership are present. If not, an alternative
mechanism for distributing revenues must be determined.
The input (cost) orientation represents the only option which
is not totally independent of the activities of each partner. In
80 M. Rese / Industrial Marketing Management 35 (2006) 72 82

Start

Quality differences Yes Specific investments No Quality differences

among suppliers (on side of the supplier) among suppliers
in the industry? necessary? in the industry?

No Yes Yes No

Performance of No
potential ,partner Search for a
sufficient? matching partner

Yes

No Supplying also
other competitors?

Yes

Yes Revenue
compensation
possible?
No

Integration into business Buying in the market;

Principally suitable for a partnership
relationship possible using price mechanism

Measuring of the No Overhead Costs

Costs exactly
individual part-worth
of partners possible? identifiable?

Yes Direct Costs

Commensurate distribution Input oriented revenue Input oriented revenue

of revenues possible distribution possible distribution possible
Compatible with network goals Diffuse incentive structure Diffuse incentive structure
Manipulation difficult Manipulation difficult Manipulation possible

Stability of partnership decreases

Fig. 3. Decision model for selecting the right partner for a partnership.

this context, it is necessary to determine whether the costs of
producing the components, module or service are caused
directly by the respective products (direct costs in contrast to
overhead costs) and are therefore precisely measurable. In this
case of direct costs, there is a basis for allocation which is
largely free of manipulation by the potential partner. However,
there is an obvious incentive problem, as we have discussed
intensely above.
If the costs are predominantly overheads, an additional
problem emerges. This problem depends on the internal
allocation of the overheads of one supplier. What portion of
overheads is allotted to the components, products or services for
the value-creating network? The potential partner has an interest
in assigning as much overhead cost as possible to the network
related products or services, if revenue is allocated on this basis.
Yet, this would not only jeopardize the competitiveness of the
network, it would also frustrate the players and create a new
control addiction among the members of the value-creating
network. Therefore, it is likely that the stability of value-
creating partnerships decreases, when there is no potential for
an objective revenue distribution via part-worth or at least direct
costs (the second gray shaded result row in Fig. 3).
 M. Rese / Industrial Marketing Management 35 (2006) 72 82
On the whole, despite its complexity, this decision model is
based on many assumptions about the relative attractiveness of
a value-creating network and the advantageousness of
different governance mechanisms. The decision for or against
value-creating network competition, different coordination
forms and certain partners, can only be made integratively
taking into account all mentioned aspects at the same time.
Nevertheless, this model can and should help reveal signifi-
cant issues for or against partner-based coordination in a real
situation when deciding for or against a co-producer. What is
quite certain is that, despite declarations of friendship and
faithfulness, the fundamental rules of economics cannot be
ignored or broken.
In conclusion, it should be noted that, although not discussed
here, previous analysis has not considered what competitive
reactions such a strategic orientation would create on the part of
other OEMs. As demonstrated in the literature (Tirole, 2001),
in the prevailing, mainly oligopolistic structures, the develop-
ment of a network would not occur without a counter-reaction
and the corresponding economic consequences. If the estab-
lishment of a network with the corresponding exclusion of the
supplier from delivering to direct competitors is really
successful, it is likely that a dominant supplier will emerge
within a particular market segment. The parallel delivery ban
creates a barrier which cannot realistically be overcome by other
OEMs, as long as there are significant quality differences
between the suppliers (Baumol, Panzar, & Willig, 1988).
However, whether these quality differences can be maintained
over the longer term, also depends on the level of pressure to
innovate, which the competitive situation inevitably forces on
the competing value-creating networks. The result of such
competition is not predictable, and particularly in such
instances, can lead to nasty surprises (Hayek, 1978).
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Mario Rese is Professor for Business Administration and Marketing at the
Ruhr-University Bochum, Germany. He has written widely on competitive
strategy, customer analysis and marketing controlling.