Creating Profit Through Alliances - business models for collaboration E-book | Page 62
Being a market leader: this provides sufficient
scale size in itself.
Having a technological head start: this is a
condition for supplying distinctive products.
Being a supplier to a limited number of large
customers: this diminishes the need for
distribution partners and customer knowledge.
Aside from the absolute profit achieved by the
network, a significant issue is the share that each of
the participating companies will receive. The size of
this share will often be a matter for negotiation, with
a view to what each partner contributes. The more
essential a partner's contribution in achieving
synergy, the greater its negotiating power to claim a
larger a share of the added revenue.
Synergy factor
In practice it appears that participating in a network is
mainly advantageous for companies that are
relatively small in their market or industry, and thus
benefit from the advantages of scale or scope offered
by collaboration. Three factors cause certain
companies to be less inclined to enter into alliances:
A
Area in which
network
participation is
beneficial
Neutral 1
(no synergy)
Area in which network
participation is detrimental
B
0
1
Neutral
(no extra negotiating power)
Profit equal to
operating
independently
Negotiating
power factor
Figure 24. Benefit of operating in a network based on
synergy and negotiation power
In Figure 24, Company A might contribute a small
component of a compound product and thus not
wield much negotiating power in the network, but
the network is sufficiently effective for A to benefit
Taking into account synergy and negotiating power,
from participating, rather than to operate on its own.
the profit that a company can make in a network can
Company B might be a relatively large player that
shares his production capacity with others, and has
be expressed in a formula29:
therefore succeeded in
negotiating a
Company‟s profit
Company‟s
Synergy
Negotiating
=
×
×
in a network
individual profit
factor
power factor
disproportionally large
share of the network's
The possible outcomes of this formula are given in
profit. However, since they are all part of a network,
Figure 24. With a synergy factor of 1 (neutral) and a
the individual companies are less committed to
negotiating power factor of 1 (equivalent), acting in a
marketing efforts. For that reason, it would better
network yields a profit equal to what the company
serve Company B to leave the network.
would make independently. At the upper right of the
curve, network participation is attractive (a lot of
synergy and/or negotiating power), at the lower left
it is not.
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