Partnerships are increasingly common between buyers and sellers, but it’s inevitable that some relationships perform better than others. Recent research from Cambridge University explores why this is.

The researchers focus on the exercise company Peloton. They argue that while much of the focus for their recent share price collapse has been on changing exercise behaviors post-pandemic and the competition from rival firms, they believe that supply chain issues have played a crucial role.

These have resulted in product failures, costly recalls, and generally slow rates of production and extremely leisurely delivery timelines. What’s more, the company has made a number of ill-fated forays into the market by buying equipment manufacturers, such as Precor. They even made a rather ill-judged investment in an in-house production facility that was ultimately canceled. The authors believe such moves to in-source things are often a sign that relationships with suppliers are not in rude health.

Understanding identities

I wrote recently about the importance of political affinity for any cross-border merger, and the researchers believe a shared organizational identity is also important across our supply chain. For instance, they cite the example of Walmart, which has typically adopted a pretty adversarial relationship with its suppliers that focus on maximizing self-interest. Such a relationship tends to be governed by rules and requirements.

An alternative approach, as adopted between Red Bull and GoPro, for example, is far more based on relational identity and is therefore governed more by cultural norms than it is by contracts and rules. Alternatively, firms might strive for a relationship that is more collectivist, in which the emphasis is more on promoting the interests of a cluster or even an entire industry.

“Our core insight is that when identities between firms are mismatched, we can expect to see friction that can erode performance. The friction arising from these differences requires the focused application of governance solutions,” the researchers explain.

The right relationship

Getting these relationships right is crucial for the success of any partnership. For instance, if one firm has an individualistic orientation but they partner with one with a more collectivist or relational orientation, they’re likely to want rule-based governance with strictly applied contracts, which is unlikely to be the preference of their partner.

“The ensuing friction can lead to ongoing conflict or, worse, complete relationship breakdown,” the authors explain. “This mismatch, we suggest, should be resolved through formal governance, provided that the focal firm possesses a power advantage that permits the imposition of formal governance features on the partner.”

There are increasing efforts to understand the culture of organizations, but the researchers suggest that mostly these efforts focus internally. They argue that they should also look at the culture and identity of partners too.

“Managers should consider conducting systematic identity assessments as part of the firm’s overall governance efforts, both to achieve efficient governance solutions and to avoid unintended consequences,” they explain.