In today’s business world, organizations increasingly depend upon developing external relationships to remain competitive. This trend occurs for two reasons. First, organizations have come to realize that they cannot be first-rate in every phase of their business (e.g. marketing, production, information systems, etc). Instead, they recognize that a better strategy is one in which they focus on core competencies, or the things they do best, and establish relationships with other companies to perform those functions where they do not have outstanding capabilities. For example, offers a wide variety of products and even recommends personalized suggestions to its customers. It realizes, however, that other companies such as FedEx and UPS have world-class competence in delivering goods. That is why Amazon.com customers have their purchases delivered by FedEx, UPS or a country’s postal service. You do not see Amazon delivery trucks and likely never will. Secondly, information and communication technologies make it much easier to operationally create seamless relationships. Instant communications between two separate companies enable them to manage a business process as if the two companies were a single company. Both companies and the customers benefit from relationships that work. The entire business process of ordering and delivering is world class for Amazon.com. Additionally, FedEx or UPS receives more business, and customers benefit from receiving superior service.
External relationships provide access to additional information and financial resources, which ideally results in increased profitability and success. Yet, forming relationships involves associated risks, and debate continues about how to best realize benefits and minimize costs (Street and Cameron, 2007). Nevertheless, many managers now agree that strategies for establishing and managing external relationships are necessary for all organizations in the current and future global business environment.
This chapter describes the components of external relationships to provide the background needed to understand and form the right relationships for organizations of all sizes. These include the types of common relationships, the phases of relationship development, critical factors for successful relationships and the skills needed to perform these essential tasks. Leveraging external relationships requires a strategic perspective that ranges from obtaining reliable supplies of raw materials for internal production processes to outsourcing entire business processes. Figure 8.1 shows that developing the right relationships depends on implementing explicit strategies that are built upon an understanding of relationship fundamentals.
An external relationship is defined as a commercially oriented link between two business institutions with the intent of increasing tangible and/or intangible benefits for one or both of the organizations involved (Street and Cameron, 2007). Two common types of external relationships are market exchanges and partnerships, which we will discuss later in this chapter.