In early 1992, Mead Packaging, a premier manufacturer of beverage cartons, was suffering a spiraling decline in its relationship as a supplier to Pillsbury’s flagship refrigerated baked goods division. At risk was the 50 percent of Pillsbury dough multipack packaging that Mead supplied. The relationship had become so antagonistic that Pillsbury had decided to "get out of Mead," and was actively exploring how to make a switch. Mead’s value proposition, honed and executed with great success worldwide among beverage manufacturers, was out of step with the needs of Pillsbury’s dough business.

On the brink of a major loss, Mead proposed a meeting of a group of leaders from both companies. From that meeting in the fall of 1992, the companies have united to build an exemplary partnership. A joint team helped develop a comprehensive improvement plan that cut production and ordering lead times, reduced inventory, improved responsiveness, and boosted product quality. Two years later, Pillsbury awarded Mead 100 percent of its refrigerated dough multipack business.

The US Postal Service (USPS) found it was losing share to Federal Express and UPS because it could not trace and track where packages were in its delivery system. Worse, an internal investigation found that developing such a competency could take years (as did the FedEx and UPS systems), would be very expensive, and would require systems skills the organization did not possess. In the face of the competitive threat, the USPS turned instead to SHL, a systems integrator. Before too long, it was able to boast its own tracking and tracing system.

To the customer, the USPS is now more competitive on this important attribute. What customers do not see is that the USPS system is entirely managed and operated by SHL. Transcending the traditional confines of outsourcing "backroom" functions, SHL handles everything down to the "frontline" function of dealing with customer queries over the phone. The two organizations have merged elements of their business systems to provide the new value. Through this unique partnership, USPS was able to compete more quickly and at a lower cost than if it had followed FedEx and UPS in developing its own system.

Partnering defined

These are only two examples of one of the strongest trends of the past decade: companies working together with unprecedented intimacy to accomplish mutual goals. There are hundreds, perhaps thousands, of similar stories worldwide. Here, we intend to explore a common but often hidden theme behind these relationships: namely, how companies are using partnerships as part of their arsenal in marketing to other businesses.

Powerful synergies can be tapped by tearing down the traditional boundaries between companies

What partnering is and how it should be defined are open to numerous interpretations. For our purposes, partnering is when two or more parties agree to change how they do business, integrate and jointly control some part of their mutual business system, and share mutually in the benefit (Exhibit 1). Such an arrangement is built on a deep understanding of what each company brings to the partnership and how complementary assets or skills can be leveraged to "grow the (shared) pie." While there are other interpretations and overlapping concepts such as alliances, our definition stems from observing how successful partnerships achieve impact. Just as synergies exist from breaking down the walls between functions within a company, similar but more powerful synergies can be tapped by tearing down the traditional boundaries between companies and replacing them with new processes, behaviors, and activities that can benefit both.

Four kinds of partnerships

Ten to 15 years ago, partnering was conceived almost exclusively as a means for major manufacturers to reduce supplier costs. Seeing advantages, these suppliers spread the partnering gospel and began initiating partnerships with other customers. Today, supplier partnering is ubiquitous. Of companies active in partnering, virtually all are partnering with their suppliers.

Yet partnering has become more than a supplier-customer issue. Though it originated in supplier-customer relationships, many companies have moved beyond working only with their suppliers. The principles learned from teaming up with suppliers are now being applied to achieve impact with intermediaries or channels, with peer companies or allies, and, of course, directly with customers (Exhibit 2).

The best companies actively think about and manage each of these four kinds of partnerships as they decide how to go to market. Allen-Bradley, the world leader in automation control solutions, is a good example of a company that manages its portfolio of partners to achieve its goals. Naturally, it has partnerships with suppliers, as with Motorola for microprocessors, but more interesting is its use of other partnerships. With its longstanding key distributors, for example, Allen-Bradley has moved away from traditional relationships toward channel partnerships.

Where once the company merely supplied its products to distributors of electrical/mechanical goods, it has now moved to strengthen the entire distribution chain. Today, it manufactures and ships more quickly to help reduce distributor inventory, works to build technical sophistication in distributor salesforces, and provides servicing for advanced software. In return, the distributors are not only selling more, but also returning other value. They are beginning to supply more detailed and timely point-of-sale data, for example, which will support Allen-Bradley in its drive for manufacturing productivity and excellence in customer service.

Because many of its customers’ needs are broader and more complex than it can satisfy alone, Allen-Bradley also manages a portfolio of more than 80 partnerships with peer companies. To fulfill its objective of solving customer problems, it has sought out and carefully selected companies that complement its product and service offering—even though some of them are direct competitors in certain applications. (Anyone working in such high-tech industries as software or telecommunications will consider partnering with peers as standard practice. Though Microsoft owes much of its success to the operating system it pioneered, for example, its dominance would not be quite so emphatic without the interlocking web of partnerships that the company deploys worldwide.) Annually, Allen-Bradley convenes its peer partners at its own trade show for customers. Most important, through these partners, the company can offer a complete portfolio of products to its distributors, which then do not need to go to competitors to fill out their lines.

Finally, like Mead Packaging, Allen-Bradley has recognized the value of customer partnerships, and has chosen a small number of global companies with which it can form close partnerships to develop new products, enter new markets, and build skill at creating customer value. The result of the company’s use of the four kinds of partnerships has been an impressive record of growth and profitability.

The new "P" of marketing

While cost reduction is the most obvious way for partnerships to create value, companies can also partner to build revenue. This can be accomplished by using a partner’s complementary skill or asset to create additional value for customers; by exploiting a partner’s access to different customers, segments, or markets to generate revenue growth; or by jointly developing and commercializing new products to stimulate demand.

Examples of such growth-oriented partnerships abound. One of the most common is the partnership aimed at accessing a new market or strengthening a weak position in a market. When Astra, a Swedish pharmaceutical company, formed a partnership with Merck, it leveraged the latter’s strength in the United States to gain access to this huge market. Astra had hitherto not been very successful in getting its products established in the United States.

At the time, Astra was a relatively small company, but had a strong R&D portfolio. Merck, one of the world’s largest pharmaceutical companies, had a strong presence in its home market and found Astra’s products highly appealing. Merck became responsible for the clinical testing, registration, marketing, and sales of products derived from 12 of Astra’s research projects in the US market.

Real success for the partnership came in 1989, when Astra and Merck launched the blockbuster anti-ulcer drug Prilosec in America. By 1994, US sales had hit $850 million, and Prilosec was predicted to become the first drug ever to reach annual sales of over $5 billion worldwide. In November 1994, the partnership was transformed when Astra paid Merck $820 million for a 50 percent share in a joint venture, christened Astra Merck Inc., an arrangement that both companies had agreed to consider when Astra’s US sales reached a specified target level.

Channel or intermediary partnerships often work for the purpose of building revenue. In Europe, a major airline was looking for ways to increase share in its core markets without introducing price reductions that would ultimately detract from profits. Intermediary partnerships became a key vehicle and a potent lever. Possessing relatively sophisticated selling knowledge and skills, the airline began to develop partnerships with selected travel bureaus. Through joint selling, achieved via carefully motivated and measured joint training, planning, information system development, promotion, and marketing, the airline was able to achieve dramatic share changes while holding price—even after competitors belatedly responded with promotion, trade, and price measures.

Often, partnerships that start with a cost reduction focus lead to value creation through growth

Often, partnerships that start with a cost reduction focus lead to value creation through growth. The partnership between Motorola and UPS, for example, initially had a dramatic effect by reducing shipping time and costs for Motorola’s Asian and Latin American factories. The partnership also generated new products: UPS now markets Consolidated Clearance,™ a unique combination of bulk and individual package shipping that it developed to serve Motorola. Motorola, in turn, created Rapid NET™ direct delivery services for its customers through its partnership with UPS.

Like cost reduction and revenue growth, another common reason for partnering is to reduce or share risk

Like cost reduction and revenue growth, another common reason for partnering is to reduce or share risk. In some industries, such as aircraft manufacturing, the risks associated with developing new products have grown faster than companies’ abilities to finance them. In developing its new line of 777 jets, Boeing partnered closely with United Airlines as its "launch customer." By choosing a leading airline as a partner, Boeing reduced the likelihood of a product miss, as United will undoubtedly purchase a large number of the new planes. Moreover, the partnership will inevitably influence United’s key competitors, which will not want it to have any perceived equipment advantage; thus purchase of the 777 will become even more widespread.

McDonnell Douglas has also pursued partnerships, partly to reduce the investment risk, around its new product the MD-95. It is partnering with Halla Engineering and Heavy Industries of Korea for the new plane’s wings, and with BMW and Rolls-Royce for its engines. Overall, McDonnell Douglas will limit its financial exposure from development to less than $200 million, less than a fifth of the plane’s total development costs. In a similar way, Allen-Bradley is reducing the risk of entering emerging markets by consciously deciding to follow its customer partners to these new markets and then, once there, building on its established beachhead.

Partnering can also provide value to customers that is neither immediately visible to competitors nor susceptible to ready imitation

Partnering can also act as a potent competitive weapon—for example, as a means to lock in key customers, channels, or suppliers. Another use is to provide value to customers that is neither immediately visible to competitors nor susceptible to ready imitation (for instance, providing specialized training for a distributor’s inside salesforce). This permits stealthiness in industries where product or service innovations get copied quickly. Or, as in the USPS example, it allows a company to react rapidly to its competitor’s innovation, or more quickly to launch an innovation of its own. Compaq leveraged partnering in this way as a means of pioneering the three-year warranty at a time when one year was standard—while reducing warranty cost.

Partnering can also be used to offer lower prices. McDonnell Douglas’s extensive partnering on the MD-95 was aimed squarely at allowing the company to produce and sell the new plane for a third less than comparable Boeing and Airbus models. Since both these competitors are working on their own cost reduction efforts, it is unclear whether McDonnell Douglas will achieve the price advantage it sought. But partnering is certainly helping the industry to lower its prices to airlines.

Some companies use partnering to shape industry structure to encourage more healthy and profitable industry conduct. Several years ago, Boeing faced a classic "prisoner’s dilemma" with its rival Airbus over the development of the super jumbo jet designed to carry 600 passengers. Both companies determined that though there was definitely a market for super jumbos, demand was probably only high enough to allow one company to recoup the enormous—$15 billion or more—investment of developing the jet. If Boeing went ahead, Airbus would follow, not wanting to cede this niche to its arch-rival. Similarly, if Airbus entered first, Boeing would need to follow. Both could lose.

What these manufacturers did instead was to form a partnership to study the feasibility of the super jumbo more closely—thereby slowing or even blocking a separate effort by either manufacturer. Thus, the structure of competition in new product development was shaped to avoid a costly contest that would probably have produced losses on both sides.

Skill at partnering and the broad but judicious use of partnerships distinguish performance leaders from laggards

Although many partnerships were born out of the need for cost reduction, then, companies have moved beyond this goal to revenue growth, risk management, maintaining competitiveness, and shaping industry structure—all issues at the core of business marketing. As the trend toward partnering accelerates and matures, more partnerships are being formed purely for business marketing reasons, without cost reduction as the central issue. Indeed, it is common for participants to describe their partnerships in marketing terms, which leads us to conclude that partnering has established itself as one of the "Ps" of business marketing alongside product, price, place (channel), positioning (branding), promotion, packaging, and people (the salesforce). A close look at best practice business marketing reveals that skill at partnering and the broad but judicious use of partnerships distinguish performance leaders from laggards.

Why this is so has much to do with the changes taking place in the global economy. Partnering would never have emerged in its present potent form without the explosion in information technologies, which enabled companies to merge critical elements of their business systems with relative ease and speed. Only then could they capture the efficiency and effectiveness benefits of tearing down the boundaries between firms. This point highlights the distinction between partnerships and alliances, for the latter, though they involve acting in concert toward mutually shared goals, do not necessarily require (or benefit from) a merging of business systems.

A second major trend encouraging the spread of partnering is the intensifying pressure for financial performance. The current great cyclical swing toward growth will emphasize partnering still more, as increasing numbers of companies seek to team up with partners that have complementary competencies and assets, rather than incur the cost and risk of going it alone.

A third trend toward greater customer diversity and sophistication will also promote partnering. For some time, many large and demanding business customers have been viewed as "segments of one" by the companies that serve them. Partnering can enable such companies flexibly to tailor their product or service offerings to these individual customers, while maintaining high standards. Moreover, most leading business marketers have recognized the tremendous value of identifying and serving visionary or lead customers as a means of growing and staying competitive. The early pioneers of serving global customers have long seen the benefit of closer ties, and many partnerships have evolved naturally from this foundation.

Beyond suppliers

The first step in building a partnership is a strategic understanding of industry structure, competitor conduct, and performance, combined with a clear, well-thought-out value proposition. Companies ought then to ask themselves what kinds of partnerships they should pursue. It is advisable to look well beyond suppliers to intermediaries, peers, and customers, and well beyond cost reduction to revenue growth, competitiveness, managing risk, and influencing industry structure if companies are to maximize the value of their efforts.

Second, companies need to evaluate their potential partners in a systematic fashion. In thinking through a supplier partnership as a means of increasing value to its customers, for example, a company might ask which of its suppliers (current and potential) can directly affect the level or quality of a desired customer benefit, as well as which candidates offer the best potential for maximum shared impact.

Companies also need to ask themselves whether a potential partner is compatible: that is, does it have a similar culture and values, or, is there conflict? For example, one focusing on cost, another on quality? Consider Mead and Pillsbury, which share some fundamental similarities: both exhibit a Midwestern down-to-earth openness, candor, and respect for individuals and differing opinions. Though still not an easy effort, this partnership might not have worked at all had either been a hard-driving, fast-talking, Manhattan-based company.

Too often partnerships fail when the charismatic leaders that originally created them move on

Many companies do not naturally possess the skills to partner, and a range of initiatives will need to be undertaken to build internal readiness. Does each partner, for instance, have a sufficiently deep "bench" of people? A simple matter, yet too often partnerships fail when the charismatic leaders that originally created them move on. If a partner’s bench is not deep enough, it will be difficult to develop the cross-hierarchical and cross-functional intimacy that characterizes successful partnerships.

Another important question is: does a partner have the expertise and experience necessary to achieve the impact specified in the vision? The best partnerships bring together organizations that already possess creative reengineering skills (needed for tearing down boundaries and building new processes), key account management skills, conflict resolution skills, and adaptable information systems.

Success depends on how well two organizations learn to resolve problems and work together on a common vision

Building skill is only part of the partnership process; the real work begins in hammering out the vision and the partners’ roles, setting up the teams and procedures for achieving impact, and reinforcing this basis with adequate leadership and communication. As with other marketing tools, it is the quality not so much of the idea but of the execution that ultimately determines success. This is especially true of partnering where success depends on how well two organizations learn to resolve problems and work together on a common vision—a process for which there is no recipe or template.

Finally, luck, or rather serendipity, plays a role. Removing organizational boundaries acts as a tremendous impetus to creative thinking. The best partnerships continue to be sustained by this stimulus well after their original visions have been achieved. The reason is simple: the frequent and intense interaction of a partnership, often including the sharing of employees, puts people in a position to talk about all of their business issues and problems. Through this dynamic, partnership itself changes from the intense cost reduction effort between supplier and customer that it once was to the new marketing role it has assumed. Indeed the marketing discipline will continue to devise new uses for this powerful tool as it increasingly gets adopted into the arsenals of business marketers worldwide.

Partnering is not a panacea. It is not appropriate for all relationships; nor can it compensate for uncompetitive products or prices. And it carries risks: loss of control over core processes, loss of independence, the opportunity costs of management time and relationships with nonpartners, choosing badly, getting locked out of a key technology or market, financial exposure, and dependency.

All the same, the best marketers are using partnerships to transform the competitive landscape of their industry. Marketing has always overlapped with strategy—especially business marketing, where understanding, influencing, and shaping industry structure are core concerns for marketers. Partnering has now become one of the major tools that sit squarely in the middle of both disciplines.