In buyer-supplier relationships in which companies depend on one another, performance may improve.
Conventional wisdom suggests that companies should avoid growing dependent on their business partners. If one company, the thinking goes, grows too dependent on a counterpart by getting the entire input for a particular activity from it and not being able to switch quickly to alternative sources of supply, then the counterpart company gets powerful levers of influence. By threatening to exit the relationship, the supplier may then renegotiate the relationship toward more favorable terms and claim a bigger share of the economic pie. And this bigger share will come at the purchasing company’s expense.Is dependence on another company bad, then? Not necessarily.While seemingly intuitive, the conventional wisdom fails to realize that there are not one but two critical processes that affect how a company fares in a business partnership. One is indeed value appropriation, in which each company’s performance is determined by how much value it captures from the pool of value generated by the partnership. But to capture value, companies first need to create it, and this is where the second process comes into play: value creation.