Platt Perspective on Business and Technology

Online store, online market space – part 29: developing B to B partnerships and collaborations to gain better collective terms from suppliers 2

Posted in startups, strategy and planning by Timothy Platt on October 10, 2013

This is the twenty ninth installment in a series on building an online store as a new business (see Startups and Early Stage Businesses, postings 20 and loosely following for Parts 1-28.) And it is also a direct continuation of Part 28, where I began a process of widening out and expanding a discussion of how startups and early stage businesses can develop sources of value from business to business collaborations – with an explicit focus on capturing big company bargaining power when negotiating prices and terms with suppliers.

I raised three questions towards the top of Part 28:

1. What types of business would benefit from this type of collaborative agreement?
2. What criteria should they use when selecting potential partners and negotiating with them in setting up and running these agreements?
3. What types of goods and/or services would make the most sense for them to collaboratively buy together and under what terms?

And I focused in that series installment on the first of those questions. My goal for this posting is to follow through on that with a discussion of how question two might be answered, by a specific business in keeping with its own needs, priorities and goals and circumstance. And I begin this by acknowledging the obvious:

• It does not make sense to collaborate with a direct competitor, at least under circumstances where participation in these agreements would undercut the competitive position of participating members
• Or unfavorably skew risk to benefits ratios realized for them.
• But it does make sound business sense to enter into collaborative agreements where this leads to reduced costs, decreased risk or some combination.
• There, what is important is overall costs and risks and the overall aggregate effect of collaboration on the business across all affected business processes.

My goal for the balance of this posting is to at least begin a discussion of what these bullet points mean, and I begin with the first and “direct competitor.”

• Consider businesses that might find value in marketing online and offering value to their customers through online channels, but that still do the bulk of their business locally and through face to face interactions in bricks and mortar settings. This can mean auto repair shops, barber shops, bakeries, tax preparation and accounting services or any of a wide range of other small locally situated businesses. And consider a geographically dispersed array of such businesses as drawn from one such business type and industry.
• Each of these businesses has its pool of loyal repeat-business customers. Each competes with at least some of its same-business competitors where their potential customer catchment areas overlap and where they are competing for the same clients. But when they are more distantly located from each other they might very well not actually be effectively competing against each other as they primarily have their own non-overlapping customer bases,
• Even though they are in the same type of business and by most demographics considerations compete for the same types of customer.
• They need the same types of office supplies and a lot of other materials and in principle if they were to enter into a group purchasing consortium they could all get the supplies and materials that they need more cost-effectively – at lower per item costs and on better terms. Would it make sense for them to actually enter into this type of agreement?

If they did that would limit if not effectively block any one of them, from expanding its territory to become a more direct competitor with any of its now fellow purchasing consortium partners. So any non-member business that sought to break into this de facto territory partitioning agreement with their own competing business, could argue that these businesses have in fact colluded to carve up the marketplace into exclusively owned territories, and that they were acting “in restraint of trade” (to cite the key wording that empowered the first US federal anti-monopoly law: the Sherman Antitrust Act) in doing so.

• Even if direct and immediate impact of this type of agreement were to bring cost savings benefits for all participating members, increased risk stemming here from potential legal challenges could make this a losing proposition for all possible member businesses anyway.
• So both direct financial considerations need to be taken into account here in deciding whether or not this would make business sense, and
• Risk/benefits analyses have to be taken into account here too when determining overall potential costs and benefits.

But this only addresses potential collaborations between businesses that hold a significant potential for directly competing for the provision of similar or significantly overlapping goods or services, to at least same-type marketplaces and customer bases. The more distinctly and arguably different it is, what these businesses offer and who they offer it to, the less risk there would be that any non-member business might challenge these collaborative agreements for illegally colluding so as to restrain their ability to fairly compete. And as a perhaps opposite example from this one, where businesses in an agreement all in fact offer different products and services that for core business capabilities do not compete or overlap, consider the possibility of small business supply chain system partners entering into purchasing consortium agreements too, for supplies and resources that they all individually need.

When I wrote Part 20: vetting and brokerage as business expansion -1 and its direct continuation, Part 21 of this series, I in fact outlined a vetting process for finding and developing collaborations with noncompeting businesses too, where this type of purchasing consortium might make practical sense. This and more tradition supply chain partnerships, and certainly between smaller businesses are only two possible approaches for finding the right businesses to partner with in this way. And I simply add that they need not do this to improve their competitive position against the same large competitors’ volume discount buying power. They only need to share similar types of need and concern, or otherwise see value to themselves from closer collaboration.

And this brings me to that third question as cited at the top of this posting:

• What types of goods and/or services would make the most sense for them to collaboratively buy together and under what terms?

I am going to address that in a next series installment. Meanwhile, you can find this series and related postings at Startups and Early Stage Businesses and also at Business Strategy and Operations and its continuation pages Business Strategy and Operations – 2 and Business Strategy and Operations – 3.

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