Bachelor Thesis. Partner Selection Phase in Supply Chains

Transcription

1 Bachelor Thesis Organization & Strategy Partner Selection Phase in Supply Chains How to Select a Reliable Partner to form a Vertical Relationship? Date: June 2010 Author: Niels de Rooij

2 Partner Selection Phase in Supply Chains How to Select a Reliable Partner to form a Vertical Relationship? ANR: Name: Niels de Rooij N.deRooij_1@uvt.nl Topic: Supply Chain Management in International Operating Companies Subtopic: Partner Selection Phase in Supply Chains Study Program: Pre-master Logistics and Operations Management Supervisor: Drs. M. Overboom Word count:

3 Preface In front of you, you will find my bachelor thesis for the department of Organization and Strategy of the Faculty Economics and Business Administration from the University of Tilburg, the Netherlands. The purpose of this thesis is to improve skills and competences because of informational literacy and scientific reasoning. I would like to thank my group members for proof reading my thesis carefully and to give feedback on my work in progress during this period. Especially I would like to thank Drs. M. Overboom for his comments and valuable accompaniment during our several meetings. Niels de Rooij Tilburg, June

4 Management Summary Vertical relationships have become more popular in recent years in order to improve competitive advantage. Relationships can be created between organizations from the same country, continent, or all over the world. Because of relationships outside the country of origin, globalization is making a great march. Organizations that are searching for a partner could have different reasons for it. Most vertical relationship goals are established to reduce costs, to perpetrate global marketing, or sharing knowledge and capabilities. Vertical relationship styles depend on their degree of integration. Relationships can differ from a low degree of integration, where organizations make appointments about prices, to a full integration between firms. Also a strategic alliance might occur, where parties are sharing business practices to improve joint performance. Vertical relationships might occur downstream or upstream, and with one or more firms at the same time. Finding a reliable partner is the first step of a long- term vertical relationship, and most of the time the most important one. Mostly, too less time and effort is invested into the partner selection phase and many mistakes are undertaken. Most of the time, cultural influences in international partnerships are not carefully defined. This is the cause of the high percentage vertical relationship failure. This research is appointed to gain more information about the partner selection phase into vertical relationships. The goal of this research thesis is to determine how multinational organizations can select a reliable partner to join a vertical relationship. To give a clear answer on this, the main question needs to be answered. The main research question for this research is; What are the key success factors during the partner selection phase in international vertical relationships and what are the cultural consequences? When organizations are searching for a partnership, it is of great importance to find a partner with mutual goals and a jointly character profile. Because of the existing of many different partnership styles, organizations need to consider a main vertical relationship strategy first. Mapping the suppliers into a portfolio, depending on the risks of the supplying materials and the profit impact, will give an answer. Strategies might differ from focus on (1) exploitation of purchasing power, (2) exploitation, balance or exploit, (3) efficiently processing or (4) to build volume assurance. After deciding the strategy, the organization that is searching for a partner, needs to consider the main elements of the partnership. These elements include mutual trust, commitment, mutual goals and objectives, joint planning, communication quality, and problem resolution. Most of these main elements have to match witch the opposite firm. This is necessary to reduce the available partners and will result into a list of a few highly potential partners. If these elements will become success factors, depends on the degree of integration between the partnering organizations. 4

5 Negotiating about setting up a legal framework is important to guarantee the agreements of the relationship. This will guide as a safeguard, legally bounds, and will reduce conflicts like moral hazards. When partner selection deals with organizations from different origins, there might be a cultural difference between parties. It is important to analyze carefully the differences and similarities between the firms. To deal with the cultural aspects, managing coordination and developing mutual trust are important factors. This can be realized by creating leadership and interfirm collaboration. It is important that both parties are taking leadership and inter-firm collaboration needs to be improved by taking away the critical issues. Communication during occurring issues is a crucial phase. It is important to improve the quality of it and share a lot of information with each other. By doing this, coordination and mutual trust will be developed. The learning phase during the selection of a partner into relationships is important for future relationships. It is proven that more experiences into vertical partnership selection will be profitable into next partnerships. This learning phase will become useful in the partner selection phase of future collaborations, but also improves the efficiency during the whole life-cycle of an existing partnership. 5

6 Table of Content 1. Introduction Problem Indication Problem Statement Main Research Question Sub Questions Research Design and Data Collection Relevance Overview of the Remaining Chapters Vertical Relationships Vertical Relationship Styles Motivations to Enter a Vertical Relationships Summary of Chapter Two Key Success Factors in Partner Selection Vertical Relation Formulation Vertical Relation Design Post-Formulation Phase Learning Phase Summary of Chapter Three Selecting a Potential Partner Select a Vertical Partnership Strategy Select a Partner to Enter a Vertical Relationship Summary of Chapter Four Cultural Aspects Differences in Cultures, Mind-set and Behavior Dealing with Cultural Differences Summary of Chapter Five Conclusions and Recommendations Conclusions from this Research Recommendations for Further Research Literature Sources

7 1. Introduction This chapter will introduce the topic of the research. First, the problem identification and problem statement are described. Next, research questions are formulated and finally the research design is described to find an answer on the main question- and problem statement. 1.1 Problem Indication To keep or reach competitive advantage, multinational organizations entering more and more vertical mergers with other firms to combine individual strengths and sources (Wipple, 2000). An example of a vertical collaboration between separated organizations is a vertical integration relationship. This contains a long-term relationship between partnering organizations (Iyer 2002). The benefit of this vertical integration strategy is to reduce non-value adding processes and create a win-win situation for both supply chain organizations (Wipple, 2000). Bowersox, et al (1999) recognized that within vertical partnership, competition is shifting from firm to firm to supply chain to supply chain. Because of strong competition and pressure on margins in all kind of markets, research in this specific field will become very important. Because of globalization, forming partnerships with organizations all over the world increased. Many multinational organizations will create a partnership with organizations from different countries. Often organizations recognize the need for collaboration, but during the setup many wrong decisions are taken (Barclay and Smith, 1997). Between organizations with different origins it will become difficult to determine the expectations from the other company during the formation of collaboration. Seventy percent of all partnerships failed not meet the expectations from different organizations (Day, 1995). 1.2 Problem Statement Collaboration between separated organizations has become a very important development for multinational organizations. Before and during the setup phase of a partnership, firms have to deal with many barriers which can determine if a vertical relationship between separated organizations can form a success (Iyer 2000). Brouthers, Brouthers and Wilkinson (1995) indicate that fifty percent of vertical collaborations fail because the expected required elements of the partnership are not carefully considered. According to the authors, finding a trustworthy partner is the most important phase of a merger but is often underestimated. This selection phase is the first stage of a long-term relationship and will determine the success of it in advance. Reasons for failure in partnerships can occur because of differences in mind-set, culture and behavior (Whipple, 2000). In most international vertical partnerships, organizations forgot to understand the influence of organizational cultural differences (Pett & Dibrell, 2001). 7

8 Because of the high failure rate into partnerships it will be interesting to know how multinational organizations can select a partner to join a successful vertical relationship. This paper focuses on the partner selection phase of a vertical relationship between firms that are coping with functional products. 1.3 Main Research Question To deal with the problem statement a main research question is formulated. The main research question for this thesis will be: What are the key success factors during the partner selection phase in international vertical relationships, and what are the cultural consequences? 1.4 Sub Questions To answer the main question several sub questions needs to be determined. Finding answers on the sub question, the main question will become easier to answer. The sub questions are: 1. What kind of vertical relationship styles exist, what are the motivations, and do they influence the partner selection phase? 2. What are important success factors during the partner selection phase of a vertical partnership? 3. How to select potential partners with the same expectations, to form a vertical relationship? 4. How to deal with differences in cultures, mind-set and behavior during the selection phase? 1.5 Research Design and Data Collection This paper contains a descriptive literary review from high quality journals. To collect the right information, relevant literature on this specific topic will be investigated. Results about the several key issues of several, high quality, articles and papers will be brought together into a literary discussion. The papers that will be used into this research will be collected from the database of ScienceDirect and ABI/Inform. Keywords to find information where: Vertical partnership, vertical integration, success factors, partner selection, and organizational culture. Also information from relevant books will be used to get more information about specific topics. First of all, more information about partnership styles and motivations of vertical relationship was investigated. When information is known about the motivations behind different styles of vertical relations, the investigation will focus on key success factors of it. After investigating the styles, motivations and success factors, it will become important to know how organizations select a one of the potential 8

9 partners for the collaboration. Once organizations have found a partner, negotiation about several agreements should be determined. During negotiation, organizations have to be aware of culture differences. In this part it will be investigated how organizations have to deal with differences in cultures, mind-set and behavior during a partnership. 1.6 Relevance Smith and Van de Ven (1992) suggest that by rapid changes in technology, competitive environment and other pressure vertical mergers within supply chains has increased. This is why more and more literature has been originated into this specific topic. For managers in any organization, this paper could be seen as a preparation according to select firms for partnering. This research gives managers insight into the different partnership styles, partnership motivations, success factors and important factors and issues during the selection phase of a vertical relationship. 1.7 Overview of the Remaining Chapters The second chapter will give more information about what kind of different vertical relationship styles exist. The second part of this chapter will describe the motivations for organizations to gain vertical partnerships. The third chapter of this thesis will explain the key success factors, and the barriers that can arise, of vertical relationships. This will be described into the main life-cycle stages of a vertical relationship. The following chapter (four) will describe how organizations can find potential partners with the same expectations of the partnership. First a partnership strategy needs to be chosen, secondly the partner for collaboration needs to be selected. Chapter five will give an explanation of how separated organizations, from different origins, can handle with differences in culture, mind-set and behavior during a vertical partnership. In the last chapter (six) the conclusions and recommendations will be summarized. 9

10 2. Vertical Relationships This paper will focus on the partner selection phase of vertical relationships. There are many definitions of vertical relationships between organizations; several have been formulated in the first chapter. Many other insights and descriptions are formulated in numerous other sources. According to Kale and Singh (2009), a vertical relationship is a partnership between two or more independent organizations to reach goals more efficiently and to strengthen the competitive advantage. Bleeke and Ernst (1991) complement this statement with the argumentations of mutual benefits which separated organizations could not reach while acting alone. The trend of forming partnership has reached many organizations all over the world. Powel (1987) suggests that organizations have changed their business dramatically the last two decades. Especially partnerships in the supply chain are popular hybrid organizational forms and have become more flexible. Whereas flexibility intend to rapidly responding towards customer demands (Grant, 2008). Because several different relationship styles in partnerships are possible, this chapter will gain more profound about different types of vertical relationships. This will make clear what the differences are between the relationship styles and how the selection phase will be influenced. The last paragraph of this chapter will focus on the characteristics and motivations of vertical relationships. 2.1 Vertical Relationship Styles Cooper and Gardner (1993) distinguish different kinds of vertical relationships. Partnership might differ from arm s length to vertical integration, see the figure 2.1 below. In cases of an arm s length relationship, the collaboration depends on the marketplace to determine prices. In cases of vertical integration, the relationship is most integrated and based on ownership. It can exist of more than one tier and the direction may be upstream or downstream, or both (Harrison & van Hoek, 2008). Figure 2.1: Vertical relationship styles (source Harrison & van Hoek, 2008) The literal definition of an alliance is according to Whipple (2000) is a long-term relationship where participants sharing their business practices to improve joint performance. The difference between a vertical integration and a strategic alliance is that during a strategic alliance the organizations remains separated into the market (Zhang & Zhang, 2006). So, normally consumers don t notice strategic alliances because the separated organizations remain their own brand- and firm name. 10

11 Grant (2008) distinguish (1) full vertical integration and (2) partial vertical integration relationships. (1) Full integrations occur between 2 stages of production, when no sales or purchase activities arise between the organization and outsiders. (2) Partial integration refers to the production processes that are not internally self-sufficient. Vertical integration commit to ownership of organizations of vertically connected processes (Grant 2008). The type of a partnership style depends on the degree of commitment and the formalization between parties. The figure that Grant uses, see figure 2.2, is almost similar towards the previous figure 2.1. On the X-axis the degree of commitment can differ from low to high, and the Y-axis indicates if there is a high or a low formalization between partners. Grant (2008) argues that during arm s length relationships there are no significant commitments. He also argued that the superior the ownership of successful vertical processes of an organization is, the greater its amount of vertical integration. Vertical relationships might occur backward, where firms take over their suppliers and input components, and/or forwards, where ownership occurs toward customer activity processes. Figure 2.2: Mapping vertical relationship styles (source Grant, 2008) Proved by Perks and Easton (2000), (1) Resource exchange, (2) resource creation, (3) competitor strategic alliance and (4) joint ventures are various styles of partnerships. (1) Resource exchange is based on sharing resources that one of the company s assets. (2) Resource creation arises when partnering occurs according to startup completely new resources. (3) Strategic alliances are partnerships between separated organizations into the same market and (4) joint ventures occur more when organizations are dealing with a specific project for an agreed time period. 11

12 2.2 Motivations to Enter a Vertical Relationships This paragraph will focus on the characteristics of vertical relationships and motivations organizations have to enter one. To explain the reason for companies to enter a strategic partnership, an example will be given. Organizations often recognized the need for a partner. In this case, assuming a producer of soft drinks, for instance Coca-Cola, is searching for a partner to deliver iron cans. Coca-Cola uses these iron cans to fill with different types of soft drinks and to sell it on the market. There will be innumerable suppliers for iron cans all over the world. But how does a company like Coca-Cola find a partner, and maybe more than one, to supply these iron cans? Grant (2008) also explained a similar case in his book, see figure 2.3. This figure shows a complex situation, because Coca-Colas supplier of iron cans have also vertical partnerships with other suppliers. In this case Coca-Cola deals with different tier suppliers for their own products. Figure 2.3 also indicates that different partnering types can arrange toward one single output item. Figure 2.3: Relationship styles in order to one single output item (source Grant, 2008) Iron cans, in the case of Coca-Cola, is only one example of a partnership. Coca-Cola would have several other reasons to find a partner. Potential partnerships could be in case of supplying ingredients like sugar into the drinks (commodities), a caterer in the canteen (services), printing company for promotion material, and so on. It can be concluded that firms have more than one partnership with separated organizations at the same time. Main motivations for partnering are getting access to new technologies, economies of scales, access to knowledge, sharing of risks, get access to complementary skills and increasing global environment are motivations for finding a partner (Powel, 1990). According to Harrison and Van Hoek (2008), main drivers for this increasing global environment are: - Search for low factor and supply costs (land, labour, materials) 12

13 - The need to follow customers internationally according to be able to supply local and fast (flexibility) - A search for new geographical market areas - A search for new learning opportunities and exposure to knowledge Hennarts (1998) motivations are equivalent to Powel s: Economies of scale, wider range of products/services, pooling knowledge and reducing political risk. Sharing risk refers towards any problem that occur at one stage threaten profitability of all involved parties (Grant 2008). When looking back to the Coca-Cola example, the supplier of iron cans is a very important one. Outsourcing the process of making irons cans is in this case a clear objective. Coca-Colas main goals are focused on producing and selling soft drinks. But without iron cans, Coca-Cola cannot sale her product on the market (in cans). When Coca-Cola builds a strong long-term relationship with the supplier of iron cans, the main advantages will be that cans continuously will be delivered, transaction costs will be reduced, there will be no investments into technological machines, and the expertise of the supplier will be used. Therefore a reliable vertical relationship needs to be developed. 2.3 Summary of Chapter Two A vertical relationship is a cooperation between two separated firms with the main goal to gain a better competitive advantage. The requirements of this competitive advantage might differ per relationship. This chapter concludes that many different vertical relationship styles exist. Authors have all kind of different names for relationships. Basically vertical relationships might differ from a low degree of integration to a high degree of integration, which depends on the degree of formalization and the degree of commitment. The main reasons for vertical partnership are because of: 1. Cost-oriented collaboration; reducing costs (transaction costs analysis) 2. Position-orientated collaboration; entering new markets or following consumers 3. Knowledge-directed collaboration; learn from others capacities and expertise (Marcus & Van Dam, 2007) These different partnership styles and reasons for collaboration influence the partner selection phase. In low integration relationships it will be less important to find a trustworthy partner than into a full vertical integration. The following chapter will focus on the main success factors of vertical relationship styles. 13

14 3. Key Success Factors in Partner Selection After analyzing the characteristics and motivations that organizations could have to enter a vertical partnership, this chapter focuses on the success factors. Because different barriers can occur, during different phases of partnerships, these will be also described in this chapter. To give this chapter a structure, the success factors will be classified into the different stages of a vertical relationship. During the partnership many process changes occur. Iyer (2002) substantiated that there are four different evolutionary phases, according to Dwyer, Schurr and Oh (1987) and Wilson (1995), these phases during development are: Awareness and partner selection, exploration, expansion and commitment to relationship. Whipple (2000) has almost the same success factors appointed in her article, but she proved that the five main success factors are the same for the buyer as well as the supply party. However parties are ranking the main success factors in a different order. Kale and Singh (2009) distinguished the life-cycle of a vertical partnership into 3 main success determinative stages: Vertical relation formation, select a partner for the collaboration Vertical relation design, set up a legal framework Post-formation phase, realize the partnership and create value Because many authors distinguish all different kind of life-cycle stages of a vertical relationship, these three stages will be chosen as handhold for this chapter. Relevant other stages, which are argued by other authors, will be explained into the matching main stage. The above stages are life-cycle stages of a vertical relationship. Because Iyer (2002) indicates that the evolutionary phase of learning in vertical partnership is an essential element, the success factors of this phase will also be described. This is more an overall phase, and can be useful for organizations when entering new relationships over a period. Kale and Singh (2009) quoted this phase as the evaluation of a partnership. Learning phase, during the whole partnership 3.1. Vertical Relation Formulation The study of Mohr and Spekman (1994) founds out that important for successful partnering is the jointly character profile of it. The authors statement is that collaborations only succeed when most of all conditions of the profile are positive. This profile is based on mutual trust, commitment, the same goals and objectives, joint planning, communication quality, and joint problem resolution. In case of a lack of adequate resources, like skills, technology, or financials a partnership needs to be avoided (Brouthers, Brouthers & Wilkinson, 1995). How to find and select a vertical partner, that is crucial for this research, will be explained in the next chapter. 14

15 3.2 Vertical Relation Design As described in chapter two, vertical integration might be (1) non-equity and (2) equity based. A (1) non-equity vertical relationship is based on arrangements within complex situations. (2) Equity relations are based on a hierarchy that is balanced to share ownership and control (Reuer & Ariño 2007). During the formation phase a moral hazard can overcome. This is a sudden, unwanted, change in behavior, after contract is made (Luo, 2002). Luo s arguments to protect this kind of issues, a complete contract between partnering firms need to be considered. Contracts will provide a safeguard for both parties, set up legally bounds, and reduces conflicts. The agreements into a contract binding both parties, but can also block progression, because a contract on its own is insufficient to guarantee the maximum yield of a partnership. Furthermore, perfect contracts are impossible to draw effectively completely (Mayer & Teece, 2008), but gives an institutional outline in which each party s rights, duties and responsibilities are encoded and where policies, underlying strategies, and goals are specified. This is also related to Grant (2008). 3.3 Post-Formulation Phase Mahashwari et al (2006) described the phase when partners realize the new operations as the shakedown process. During this shake down process, organizations need to put more focus on the critical issues in the partnering process. To do this, organizations need to organize leadership, training, stimulus and a workable environment. This might influence the mind-set of employees. Kale, Dyer and Singh (2001) argues that companies first need to structure the relationship for coordination, secondly capturing, communicate codify and create vertical integration experiments with implementing systems for internal coordination and external support. Coaching managers during the change process and creating mutual trust are also important factors for realizing process improvements. Grant (2008) argues that most benefits during coordination can be achieved by internal collaboration. Leadership and management become very important during this phase. Crucial for a success of a partnership are the communications strategies (Mohr & Spekman, 1994). To be successful, this communication strategy needs to contain a good quality of information, a joint participation and shared information. Also conflict resolution techniques are meaningful for both organizations according to long-term successful collaborations. 3.4 Learning Phase During the life-cycle phases of a vertical relationship this learning phase is a more general phase, but it is very helpful for organizations when seeking another partner at a later stage. During the decision of partner selection firms can learn from each other approaches and abilities (Smith & Barclay, 1997). Anand and Khanna (2000) found evidence those organizations with more vertical partnership 15

16 experiences will be better to meet the expectations of it in the future. Experiences in this case refer to experience with the entire process of vertical relationship formulation. So more experienced organizations are better to selecting the right partner, but also better in the design and postformulation phase. Kale, Dyer and Singh (2001) motivates that there are more way s to succeed partnerships besides experience. They think that a better vertical relationship success can be reached by adapting one or more ways to achieve better skills which are used at the same time. Organizations with more experiences in collaboration are probably more efficiently during the partner selection phase, bargaining and the designing of the processes (Kale, Dyer & Singh, 2001). However, usually organizations with more experiences manage the collaboration better. 3.5 Summary of Chapter Three Vertical relationships can be spitted into many different life-cycle phases. In this chapter four different main stages are distinguished. Into the stages, the main success factors are described. To link this chapter back to chapter two, the degree of the success of a success factor depends on the degree of partnership integration. In figure 3.1 a conceptual framework is sketched. In low integration relationships, other success factors are more important than into full integration relationships. Figure 3.1. The degree of an success factor depend on the degree of integration In the first stage (relation formulation) organizations trying to find another potential organization to collaborate. In this stage it is important to form a profile where the other party needs to contain main elements. These main elements are based on trust, commitment, the same goals and objectives, joint planning, communication quality, and joint problem resolution. In the second stage of a vertical relationship (relation design) it is important to negotiate about the contract. This will gain safety about the relationship and the guarantee that both organizations will take the agreed share within the relationship. In the next life-cycle phase (post-formulation), where the relationship is going to be realized, it is important to create internal collaboration by providing leadership, training and preventing issues and a good communication strategy. Finally, the learning phase is chosen. This is a more overall phase, but might be useful for organizations that will be formulate 16

17 another vertical relationship in the future. During this phase it is Important to gain more experience with partnerships. This will be useful into next partnerships in the future, to be more efficient in the selection phase and improve the relationship. In table 3.1 an overview of the importance of a success factor, depended on the degree of integration, is given. Low integration Full integration Factor relationship relationship Communication Mutual goals Trust Cultural differences Level of risk Contract building Partnership experience Complementary skills Table 3.1 Important factors per relationship style The following chapter put more focus on how organizations can find and select a partner for collaboration, accompanied with these success factors. 17

18 4. Selecting a Potential Partner In chapter two and three there is indicated that the selection phase of a long-term vertical relationship is a crucial phase that can determine the success of it. In the previous chapter important elements of a successful partnership are highlighted, but there is not a lot of information given about how organizations can select one of the potential partners. This chapter will give more information about this. According to Mohr and Spekman (1994) there are several dangerous and risky situations that can affect managers to decide to form a partnership with another firm. There are two stages in this chapter distinguished. First, the selection of a vertical partnership style is considered, and secondly the selection of the partner itself. 4.1 Select a Vertical Partnership Strategy Many different vertical partnership styles are indicated. As we saw in figure 2.2 the choice of a vertical partnership style depends on the degree of commitment and formalization. It is also noticed that different partnership styles can be formed to supply one component. But how should an organization choose a matching vertical relationship style? When organizations recognized the need of a partnership, it first needs to make a segmentation of the products. This determines the relationship style that needs to be chosen. The model of Kraljic is a well known purchasing portfolio to map partners (Caniëls & Gelderman, 2005). This segmentation is dependent on the risk of the supplying materials and their profit impact. Products can be classified into 4 different items: 1. Leverage items; Profit impact is high and supply risk low. 2. Strategic items; Profit impact and strategic risk are high 3. Non- Critical items; Profit impact and supply risk are low 4. Bottleneck items; Profit impact is low and supply risk is high When suppliers are classified into a segment, a goal for a strategic partnership can be chosen. In order to leverage items, there is more focus on exploitation of purchasing power. Relationships in order to strategic items focus more on diversity, balance or exploit. In case of non- critical items the relationship focuses on efficient processing and in case of bottleneck items the relationship is build to increase volume assurance. According to the Coca-Cola case (chapter 2), the iron supplier is a bottleneck supplier, where the profit impact is low and the supply chain risk is high. In this example Coca-Cola is dependent on the supplier and visa versa, otherwise Coca-Cola could not bring the soft drinks in cans on the market. 18

19 4.2 Select a Partner to Enter a Vertical Relationship Brouthers et al (1995) suggest that it is most important to invest a lot of time and effort into the phase of finding potential partners and the selection of one of them. It is crucial to determine whether the separated organizations have the willingness to depend on each other. To reach this, an active behavior is necessary. During the partner selection phase there are four key steps (Holberg & Cummings, 2009): 1. Aligning corporate and vertical integration objectives 2. Developing appropriate sets of critical success factors against which to evaluate potential partner activities 3. Mapping potential partner industries, industry-segments and firms 4. Using a dynamic partner selection analysis tool to evaluate potential of various targets To do so, this above key steps will be explained. When an organization recognizes the need for a partner, it first needs to consider the main required elements (Brouthers, Brouthers & Wilkinson, 1995). According to Maheshwari et al (2006) determination of the (1) suitability and (2) feasibility are two critical main factors in the selection process. Whereas (1) suitability refers to the analysis of risks and benefits and (2) feasibility refers to the level of trust. Therefore, a fit in cultural, organizational, political end human aspects is necessary. When the choice is made to enter a vertical relationship it is important to map potential organizations. To make a segmentation of potential partners, the purchase portfolio of Syson can be used. According to the purchase portfolio of Syson suppliers can be segmentated on basis of the number of available suppliers and the company index (Douglas, 2008). In the model of Syson, strength is been used carefully to reduce dependency. The main difference between the portfolio of Syson and Kraljic is that the model of Syson is based on the buying power and the Kraljic portfolio on the role of product production process (Caniëls & Gelderman, 2005; Douglas, 2008). When an organization has classified some potential partners, it needs to choose one of them. A method to decide whether or not to form a vertical partnership with another organization is the four C model of Brouthers et al (1995). All four C s, as described below, have to match with the partnering firm. - Complementary skills that separated organizations share - Cooperative cultures between separated firms - Compatible goals are needed - Commensurate level of risk 19

20 4.3 Summary of Chapter Four First of all, when an organization is searching for a partner, it needs to decide what kind of vertical relationship strategy it is looking for. This can be done by segmenting the products the organization is dealing with. This segmentation, in order to the Kraljic portfolio, is depending on the profit impact and the supply risk of the goods. Depending on the segmentation, a relationship strategy can be chosen. Next, while selecting a partner, the firm needs to consider the main elements. This contains an analysis of risks and benefits, and the level of trust. The next stage is to make a segmentation of the potential partners. Therefore the portfolio of Syson can be used. This portfolio is based on the number of available suppliers and the company index. In this model strength is been used carefully to reduce dependency. The four C model of Brouthers et al (1995) describes four C s (Complementary skills, Cooperative cultures, Compatible goals, and commensurate level of risks) where the organization can decide whether or not to form a vertical relationship with another firm. As showed in chapter three the importance of the C s can differ per relationship strategy. The following chapter will gain more information in how organizations can deal with cultural differences between organizations from different countries. 20

21 5. Cultural Aspects During partnerships multinational organizations are active into different counties or even in different continents. While screening a potential partner on ethical issues and governmental regulations, it will become important to know how organizations can deal with the cultural differences between the partners. This is a crucial phase before the start of the negotiation about contractual frameworks, making appointments, but also considering other meetings and other communicational processes. Because of other backgrounds, the opposite organization could deal with different opinions several issues. In this chapter we will firstly gain more information about several differences between cultures, and secondly give more information about how to deal with these kind of differences. 5.1 Differences in Cultures, Mind-set and Behavior Cultures have impact on the outcome of global strategic vertical partnerships. It affects the relationship to authority, self-conception and way of dealing with conflicts (Pett & Dibrell, 2001). Differences are most noticeable between countries from different continents. A proven example by Hofstede is that Japan has a more collectivistic culture, whereas the USA has a more individualistic culture (Hofstede, 1998). Japan is more long-term strategy focused, and the USA more short-term oriented (Pett & Dibrell, 2001). But also within continents differences into cultures exists. Kolman et al (2003) have proven that there are differences in culture between Western Europe and Central Europe. In general, countries can differ in five dimensions of culture (Hofstede, 1998): 1. Power distance, hierarchy in organizations 2. Individualism - collectivism, individual or group focused 3. Uncertainty avoidance, structured or unstructured situations 4. Masculinity - femininity, percentage of female managers 5. Long versus short - term orientation, tendency to save These five dimensions are noticeable in countries, but they also affect the organizational culture en behavior of it. With these five dimensions it will become easier to analyze cultural differences or similarities of the partnering organization. Because the organization could be a reflection of the national culture, and high management could be influenced by it, culture has impact on the decision making process. That s why a link between the organization and the culture needs to be made (Pett & Dibrell, 2001). The next paragraph will gain more information on how this link can be realized. 5.2 Dealing with Cultural Differences A contractual agreement between partners on its own will not guarantee the success of the partnership. There will be two important main factors in order to form a vertical relationship. These 21

22 are (1) managing coordination and (2) developing mutual trust. Whipple (2000) suggests that it is the main issue to reengineer the business processes, dealing with cultural differences. Therefore, not one but both of the concerned organizations needs to take the lead of the partnership (Brouthers, Brouthers and Wilkinson, 1995). Both parties need to build a success out of the partnership and learn from the different phases. The link between the organization and the culture can be made by using the Echelon Theory. This theory includes the assumption that decisions are made in the form of bounded rationality. This bounded rationality refers to the personal demographic criteria of the higher management (Pett & Dibrell, 2001). It is not possible to avoid the fact that an international partnership deals with language difficulties and misunderstandings, but also schedule overruns and technical and/or compatibility issues might occur (Maheshwari et al, 2006). Therefore, inter-firm reliability needs to be developed. This contains a high rate of loyalty, harmony, sincerity and twoway-communication. Communication refers to the quality of it, sharing the information, and the participation of both organizations. More focus is needed on behavioral issues instead of structural and control processes (Kauser & Shaw, 2004). Smith and Barclay (1997) recommend that organizations need to invest time in the partnership and have to be open about their relationship, industry and clients. Also the little things like answering phone calls, and give updates about all kind of occurring changes and obtained improvements. This will help to develop the trustworthy perception and motives and judgments. The authors also suggest that firms will learn from each other by joint planning and looking at the approaches and abilities of the other party. Jointly workshops might reduce the differences between organizations and change possible (negative) reputations. 5.3 Summary of Chapter Five Cultural differences are noticed between organizations from different continents, but also between organizations within the same continent. Partnerships between organizations of different origins are influenced by the differences in culture, mind-set and behavior. Main differences are noticed in power distance, individualism-collectivism, uncertainty avoidance, masculinity-femininity, and long versus short-term orientation. Because people into the organizations are affected with their own culture, inter-firm collaboration becomes very important. During this process organizations have to be equivalent in managing coordination and creating mutual trust. This is a crucial time- and effort consuming process. The coordination can be created by open communication, learning from each other by jointly workshops and by putting more focus on behavioral issues. The following chapter contains the conclusions of this research and the recommendations on this topic will be given. 22

23 6. Conclusions and Recommendations In this chapter the main proved conclusions will be drawn from the research that has been done. The main objective in the conclusions is to answer the main research question as formulated chapter one. Secondly, this chapter will give recommendations for further research on this subject Conclusions from this Research Before an organization wants to enter a vertical relationship, it needs to consider a partnership strategy. Most of the time, this strategy have a cost-orientation, position-orientation or knowledgeorientation. Organizations can determine a vertical relationship strategy by mapping suppliers into a portfolio, depending on the risks of the supplying materials and the profit impact. Secondly, the (1) suitability and the (2) feasibility of the potential partners need to be determined. This contains an analysis of (1) the risks and benefits and (2) the level of trust. This phase is necessary to reduce all the available partnering firms into a list of a few highly potential partners. The next step is to determine the main elements of the partnership needed and to set up communication with other firms. These elements might differ per relationship and depend on the degree of integration between the parties. Other Important factors in decision making whether or not to enter a relationship with another firm depend on the factors below: Differences in Culture, Mind-set and Behavior When finding a partner across the border, organizations deal with cultural differences. Main cultural differences are because of power distance, individualism collectivism, uncertainty avoidance, masculinity femininity, and long versus short term orientation. To deal with these factors, the suitability (analysis of the risks and benefits) and the feasibility (level of trust) needs to be determined. Mutual Goals and Objectives Organizations might have different strategies of collaboration. Main objectives are because of reducing costs, reaching global position and sharing knowledge. To guarantee that the companies will have the same goals during the relationship, it will be crucial to set up a legal framework. It is important to negotiate about the set up of an contract. This will provide a safeguard and reduces the risk of conflicts. Communication Quality To achieve a successful partnership, communication is an important success factor. During the negotiation about the possible relationship between firms, it can be clearly noticed if the communication is of an insufficient level. Communication needs to contain qualitative information, and food joint participation and sharing of information. 23

24 6.2. Recommendations for Further Research This research gain more global information in partner selection in all kind of different styles of vertical relationships. It might be necessary to find explicit requirements concerning one of the different vertical relationship styles. Because of wide variation in firm sectors, products, and sizes it would be valuable to examine the critical issues more appropriate. It is important to find more information on regulatory and political issues. Organizations have to keep in mind that every relationship with an organization is unique and cultural differences might differ per country, but also per organization. 24

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