Patterns in business model partnerships

In the research literature and case materials about partnerships and alliances, almost every author attempts to make a classification of partnerships based on the way they are organised. The table below is an example.

Types of Strategic Alliances

Although such overviews are useful for analysing how a process of partnership formation can arrive at certain outcomes, they are less useful when you’re faced with the practical challenge of determining what a partnership should do in the first place. This is a design challenge, where new options and directions need to be created.

The business model canvas is the only tool I have found that directly enables you to design multiple business model innovation options through using partnerships. Some trigger questions that would help to innovate through a partnership would be:

  • How can we increase the size of our market with minimal investment?
  • How can we enter new or adjacent markets with our product/service, without having to create one ourselves?
  • How can we put our resources to use more efficiently, without growing our company further?
  • What can we do to improve our existing competitive position?

By using these questions together with the business model canvas, you can define the rationale for a partnership from your business model’s perspective. But the big question is how you will tie your business model together with your partner’s business model. You will need to make explicit how you will create and deliver value to your partner, as well as how you intend to capture value from your partner in return. It is at this second step of defining the value exchange with your partner, that the business model canvas falls short as design tool. You’ll break your mind over trying to tie the partnership rationale together for both your own, as well as your partner’s business model!

Value exchange between partnering business models.
Specifically for the purpose of enhancing the design functionality of the business model canvas for partnerships, I’ve created the partnership canvas. The partnership canvas enables you to define and design the essence of value exchange with your partner. And it is through use of the partnership canvas in combination with the business model canvas, that I’ve already discovered some distinct design patterns that appear in the value exchange relationship between 2 business models. Unlike the list in the table above, the following patterns indicate what the implications of a partnership are to the design of your business model:

  1. Vendor relation
    The basic pattern here is that two business models are bound by a repetitive transaction of a good or service. The buyer appears as a customer in the vendor’s business model, because she’s buying a certain product or service from the vendor. The other way around the vendor will not appear in the buyer’s business model. Only their product or service appears in the buyer’s key activities or key resources, the cost for which is accounted in the cost structure.An example would be a food company buying ingredients from the world market. The ingredient is a key resource, but this can be acquired from multiple suppliers, who are technically interchangeable on an ad-hoc basis. A vendor relation turns into a vendor partnership, the moment additional value is exchanged on top of the transaction. This could be in an exclusive purchasing relationship, like the one between Samsung and Apple. In their early partnership in 2007, Samsung exchanged rights to exclusive procurement of flash memory, for the sharing of sales projections of Apple’s devices. In this case Samsung and Apple appear in their respective business models as key partners.
  1. Barter relation
    The pattern that shows up here is a partnership based on reciprocal non-monetary value exchange between partners. Unlike the vendor relation, neither partner pays the other any money to exchange value within the partnership. This applies to partnerships like Spotify-Facebook, where Spotify gained access to the US market through Facebook, and Facebook was able to stream music through its channel. Also, Nespresso and its outsourcing of machine manufacturing to its partners applies here. Nespresso in effect gets free access to its partner’s channels, in return for co-branding the machines and providing a technology license for (nearly) free.
  1. Hybrid customer/partnership relation
    In these setups partners contribute to each other’s business models like in the barter relation. At the same time one of them also profits from the customer value proposition as a customer of the other. You find these patterns mostly in matured online platform business models. The sheer volume of traffic that the platform generates is of value to businesses that want to sell something, and they’re wiling to pay for access. The App Store platform is such an example. App developers market apps in partnership with Apple, and split the revenue @ 30% for Apple. At the same time developers are customers through their yearly payment for the SDK app developers’ kit.Amazon Marketplace is another partnership example that shows the hybrid partnership pattern, and a special one called coopetition. Book vendors are partners because they complete the experience of multiple options in book offerings (new or second hand hard cover or paperback, or e-book) to Amazon’s customers. At sale they agree to split on a commission for Amazon. Yet, at the same time vendors are also competitors with their competing book title offerings. As customers, vendors pay for using Amazon’s web service channel in their business model through a vendor subscription.
  2. Joint venture relation
    The joint venture is a curious beast. It’s actually not a partnership in the sense of value exchange between two independent business models. A joint venture is a business model by itself, where two or more companies have decided to combine their resources. The reasoning behind creating a separate business model is that there are many elements involved in the collaboration, and the outcomes are too complex to attribute rewards and contributions to each partner separately. Often you’ll see founders of the joint venture, acting as partners in the joint business model. Examples of famous joint ventures are the Starbucks-Pepsi partnership for canned cold coffee drinks, or the Philips-Douwe Egberts joint venture for the Senseo coffee machines.

In conclusion
A partnership is defined when value exchange takes place between 2 independent business models that goes beyond the transaction relationship. The vendor relation is not a partnership as it only involves the shifting of ownership of goods or information. Only when the strategic importance of a vendor increases to your business model, will the exchange of value beyond the transaction start to make sense, and will a partnership come to life.

The barter and hybrid partnership types enable continuous value exchange between business models, whilst they still keep running independently. These are flexible business model innovations, and can create tremendous competitive advantage.

The joint venture also contains strong innovation potential, but is less flexible in setup. Partners bind themselves to the success of the joint business, and ending of the relation will most likely entail ending of the business.

The key for business model innovation through partnerships is both in finding the purpose of your partnership, as well as the mode of value exchange with your partner. The business model canvas will help you find out why you would need a partnership. The partnership canvas will help you figure out why your partner would also need one with you, and how and in what shape these two innovation imperatives can be linked together.


Interested to learn more about using the Partnership Canvas for transformative business collaboration?
Check out our upcoming Partnership Design Masterclasses

The partnership proposition canvas: designing your value network

[Ed. 17-10-2014 We have an updated version of this partnership tool]

Alex Osterwalder’s business model canvas is proving to be an indispensable tool in the process of business model innovation. It trawls your sets of ideas for those innovations where you can improve on, or create novelty in bringing value to the customer. Also, there are exciting new developments to this tool, such as the value proposition canvas, which can be used as a plugin. The business model canvas is ideal for gearing your business for market disruption, toppling your competitors with a proposition that best fits to current customer needs.

Yet, there is one important aspect in the process of market disruption, that the business model canvas doesn’t take into account in detail, namely the value network, located at the back-end of the business model. As Clay Christensen, and Richard Rosenbloom (1995) wrote,

“The key consideration is whether the performance attributes implicit in the innovation will be valued within networks already served by the innovator, or whether other networks must be addressed or new ones created in order to realize value for the innovation.”

Forging the value network partnerships, which are required to make your business model work, is not an easy task. Potential partner businesses are already part of other existing value networks, and it is often not self-evident for them to engage with you in a partnership; they would rather stay in the relations they’re currently in. The upshot is that in order to realize a new business model, we not only need to convince our end users to prefer our idea, but we also have to motivate others within the value network to stop using our competitors. In this blog post I will present a prototype of a new business tool, that helps you in designing your partnerships, and intends to work seamlessly together with the business model canvas.

Available tools
It is my experience in discussing key partnerships with the business model canvas, that the discussion remains constrained to what I would need as a complement to my own business model, ie. what I would like to use my value network for. But a partnership is not just about my business model. It is a two-way relation. The questions I see myself asking in addition are:

  • What position do I have in approaching potential partners? What can I offer that is of value to them?
  • How can I assess the balance between what I offer my partner, and what I obtain in return?
  • How can I best utilize these returns from my partnership for use in my own business model?

… and I keep guessing about the answers.

There are tools out there, value mapping being the most prominent of them. You can find a great feature of this tool in Vijay Kumar’s latest: 101 Design Methods. However, the inherent problem with this tool is that is primarily an analytical tool. It does not carry the conversation forward to creating the actionable hypotheses, which are required to validate a new business model. Just like the business model canvas, value mapping only provides guidance on possible outcomes for thinking about partnerships, not on how to specifically arrive at an outcome. There is thus a need for asking even better questions about your business model, making your thinking on partnerships more granular.

A prototype tool for discussing partnerships
Something that comes closer to a resolve of this issue is the value network exchange process between two partners that Verna Allee (2008) describes in het work. Verna defines an exchange relation in a value network as a 3 step process:

  1. value input to the relationship (what do you bring to the table?)
  2. value enhancement (how can you enhance the value you can provide to your partner?)
  3. value conversion (how can you make use of the value that your partner holds?)

Expanding on this, I’ve broken these 3 steps down into 8 building blocks. Each building block contains its own questions that need to be asked in order to achieve the flow of value between your business model and a specific partner.

Screen Shot 2013-07-05 at 1.58.02 PMThe content of this table can be rendered into a canvas structure. I have dubbed this the partnership proposition canvas.

Partnership Proposition Canvas

The partnership proposition canvas (v0.4): rendered from The Business Model Canvas (BusinessModelGeneration.com) 
and licensed under the Creative Commons Attribution-Share Alike 3.0 Un-ported License

How does the partnership proposition canvas work?
This canvas can be used either as a stand-alone tool, or in conjoint design with the business model canvas, as a zoom-in tool. You can use the partnership proposition canvas when you have validated the primary hypotheses relating to your value proposition-customer fit, and are looking to validate the rest of your business model. As Steve Blank explains in the (free!) Udacity Lean Launch Pad class: you can’t begin early enough with exploring potential partnerships.

Linking the partnership proposition and business model canvas

The partnership proposition canvas has a two level relation with the business model canvas. First, key activities and key resources need to match in both. Secondly,  “usable forms” in the partnership proposition canvas need to be relevant and applicable in any of the other building blocks of the business model canvas. This way you can indicate how a specific partnership adds value. The added value from your partnership can be evaluated by comparing the cost structure of the partnership, with the returns from application of the “usable forms” in your business model canvas.

Matching the back-end of the business model canvas

Matching the partnership proposition canvas with the back-end of the business model canvas

"Usable forms" and the business model building blocks

The “usable form” building block should contain elements, which fit back into the business model canvas.

2 Examples
I’ve worked out two cases to demonstrate how the partnership proposition canvas works. The first is case of a company that has really taken its partnership strategy to the next level: the relation between Nespresso and its machine manufacturers. The second is a relationship gone sour: the relation between Apple, and its component manufacturer Samsung.

Nespresso and the machine manufacturers
Nespresso’s business model is famous for the relation it has set up with its partners, the machine manufacturers. The manufacturers have their own distribution channels through which they market their versions of the Nespresso machines. This dramatically increases the reach of the Nespresso concept, because once you buy the machine, you’re also stuck to buying the coffee pods.

But what would compel these manufacturers to make their distribution channels available? The partnership proposition canvas below shows how this is done

Nespresso partnership model

Machine manufactures have 3 assets that Nespresso doesn’t have, namely manufacturing facilities, a product distribution network, and product marketing. These are the desired assets that Nespresso wants to make use of.

Nespresso offers manufacturers three propositions: a license for using their technology to build the machines, a co-branding opportunity for marketing them, and providing a one-stop-shop for product returns. Nespresso’s condition for giving out this proposition is that the manufacturer co-designs its machines with Nespresso, and that they co-design the machine advertisements. This is firstly to safeguard the overall look and feel of the Nespresso concept. Also this compact supports changes to machine designs as the Nespresso R&D department periodically comes up with new technologies. As a deliverable to the arrangement, Nespresso includes the machines in their advertisement activities. On top of that Nespresso also offers to market the machines through its own Nespress.com and flagship stores, and defective machines back if they’re still under warranty.

What does Nespresso get in return that it can utilize for its own business model? Firstly of course, the mentioned access to the manufacturer’s distribution channel. But there’s more! The offer is apparently so appealing to manufacturers, that Nespresso is even able to seize a percentage of the sales of the machine through the Nespresso stores out of the deal, as well as a small license fee. When looking at the bottom line of this partnership, it creates more than enough value to offset the cost of running the partnership.

Apple and Samsung
The Apple-Samsung relationship dates back to 2005. Apple was looking for a stable supplier that could realize the replacement of the hard disk drive in its iPods with flash memory, and could at the same time meet the supply requirement for its upcoming line of other portable devices. At that time there weren’t many players out there who could supply that technology at the volumes and quality required by Apple: “Whoever controls flash is going to control this space in consumer electronics,” Steve Jobs said. Not only did Samsung fit the requirement as a supplier of flash memory, it also would deliver processors, and screens of high quality for iPods, iPhones, and iPads, fitting to Apple’s huge quality and energy saving demands.

So, what does this partnership look like?

Apple - Samsung partnership model

Apple offers Samsung an exclusive procurement relation, where Apple will only buy its desired components from Samsung on a long-term basis. The steady growth in sales of i-devices backs the long term value of the proposal. Also, joint development of processors is a crucial part of the deal, as that requires capabilities that Apple doesn’t have on itself. As a deliverable, Apple purchases components, and shares sales projections, so that Samsung can coordinate its supply. The tricky bit of this arrangement is though that Samsung has also become very active on the mobile devices market since initiation of this partnership on 2005. That’s why the compact includes a confidentiality agreement, where Samsung’s components division is forbidden to share Apple sales forecasts with its mobile devices division.

Currently this relationship appears to be outlasted. Where Apple initially took advantage of the fact that Samsung was the largest manufacturer of flash drives in the early days when sales for the iPod really started to grow, Samsung has now turned into Apple’s main competitor on the mobile devices market. The confidentiality arrangement is put under pressure as the rivalry between the two companies on the consumer market heightens. Now that Samsung’s advantage as a flash drive manufacturer has lost significance due to more able rivals being active on the market, and due to the fact that it is directly competing with Apple, the relationship is downgraded. It is reduced to a basic component supplier relationship with limited added value (and potentially it is even a leaky risk!).  Quite clearly, the relation is under pressure, and Apple needs to innovate with new relations and new partners.

Wrap-up
The partnership proposition canvas is a first attempt at creating an actionable tool that can support design from the back-end of the business model. It is informed by value web mapping tools that analyze how an industry’s value network exchanges value. Insights from such analytical tools can be used in the partnership proposition canvas to create actionable hypotheses for experimenting with new relationships in your value network, helping you build a strong business model.

The tool is still at an early stage and will be prototyped by more practitioners over the coming weeks. I hope that this blog post has captured your interest. If so I would really like to invite you to give this canvas a spin, and provide me with straight up feedback on how it works for you. More to come in this space!

Download the partnership proposition canvas template in powerpoint with stickies here:

Key take aways:

1)   Value networks matter for business model design
2)   Your key partner relations are more specific than mere supplier relations. You are often looking for complex forms of (non-monetary) value from your partners to support your own business model operations, and you need to deliver something matching in return.
3)   Your partnership is temporary. What you need in search mode is different than the partnership you will need in execution mode, and even then your relations won’t last forever. Your partnership is thus likely to develop over the period of developing your business. The partnership proposition canvas can help you adapt to those upcoming requirements.

—————–
I would like to express my gratitude to Ernst Houdkamp for reviewing this blog post before publishing, encouraging me to make it as simple as possible. I hope this has worked out. I will be prototyping this canvas together with Ernst over the coming weeks to observe how it is used and learn about the needed refinements.

Literature used:

Allee, V. (2008), “Value network analysis and value conversion of tangible and intangible assets” Journal of Intellectual Capital, Vol. 9 Nr. 1, pp 5-24

Christensen, C.M. and Rosenbloom, R.S. (1995), “Explaining the attacker’s advantage: technological paradigms, organizational dynamics, and the value network” Research Policy, 24, pp. 233-257