Well, before we go further let's consider a question of the day related to relationship management. The question is, is it worthwhile to form close relationships with business partners? Well, a common analog in popular culture or marriages, which many liken to alliances or partnerships. But do you know that on average, 50% of marriages end in divorce? This is a statistic that has not changed in decades, it's very stable. Well, you might say the business relationships are different, they're not built on emotions but on rational choices. But in fact, the failure rate of business alliances has also hovered at the same level 50 to 60%, and this has not changed for decades. So it would seem that relationships in the business realm are as much of a gamble as in our personal lives. Perhaps your reaction is that, well, that's the rate for the first marriage. People make mistakes, but surely we learn from them and we get better over time, it's a plausible hypothesis. But the statistics tell us that in fact second marriages have a higher failure rate of 60%, and the failure rate only worsens if you do it again 73%. Of all of this is to say that experience does not necessarily improve our outcomes. If anything, I'd say that experience just makes us older but not necessarily smarter. So where does this leave us? Well, most business people will tell you that 50% of business is relationships. And if you remember way back at the start of the course with the Cola life example, we saw that Simon Berry was never able to win the relationship with Coke. And that costs a Cola life organization, a very inexpensive and effective distribution channel for its oral rehydration salts. In fact, it was because of their inability to win Coke over that Simon had to devise the channel structure that they have today. So relationships can and do matter, and they can make a big difference in business. But have you ever noticed that when you inspect the courses of any MBA curriculum, you will rarely if ever see a course on relationship management. MBA programs are very good at teaching students the quantitative economic case for business, but we don't teach students how to deal with the squishiness of business relationships. Many in business do not realize that in fact, business relationships can be analyzed just as systematically as we analyze most other business decisions. And so, what I'd like to share with you now is a decision framework for how to think about managing your business relationships. Let's put this in context. A number of years ago I worked at the banking organization called ANZ or Australia New Zealand. ANZ is the largest bank in Australia and New Zealand with a 40% market share and over two million customers at the time of this case. In the B2B space they had 24,000 organizational customers, many of whom were farmers, and they were serviced by 150 relationship managers in the agricultural sector. ANZ also had 200 relationship managers in the commercial sector. And you might work for companies that have positions with the word relationship or partnership in the title, and all of this is the signal the importance of personal relationships in business. So there is a pervasive assumption that relationships are generally good and important in business. Well, by the end of the session, I will ask you to rethink this a bit, but back to our case. Now ANZ worked hard to position itself as being a thought and investment leader who supported their customers businesses and enabled transactions. The bank was a key planner in building local communities. They published insight pieces, they provided major dairy sponsorships and benchmarking efforts. All of which contained a common theme of stronger business management. They created business of the farmer seminars for customers to attend with their financial advisors. So that customers could learn how to run their business better. Now, the question they asked me is, is our relationship building strategy optimal? In other words, do we have the right amount of relationship building in our business approach? And how can we know if it's too little or too much? Or if, like Goldilocks and the Three Bears, it's just right. This is a very relevant question for nearly every business today who goes to market relying on quote relationship building as part of its value add in positioning. But it's important to realize that using a relationship building strategy in your go-to-market approach is an expensive strategy. Because strong relationships take time to build and constitute a scarce resource, they can help differentiate your firm, but they are also costly. And so you want to spend these efforts optimally. I want to share a framework with you that I developed with a colleague that can help you be smarter about when to emphasize relationship building in your channel strategy. And help you assess whether or not you know your relationship building strategy is optimal. A key premise is that you should only take the time, effort, and resources to build relationships with channel members and customers when there are payoffs from doing so. This is the partnering potential of a relationship. We have said the strategic partnering relationships should occur under A B C D conditions. Alternatives are few, big stakes, complex processes, and dynamic market conditions. Let's be even more concrete. Here are a number of statements that capture the A B C D conditions. And as you think about a key account or focal customer, consider your level of agreement with these statements. If your product is crucial, involves customization or create some type of tacit know how. Then these are conditions under which you should consider having a closer relationship with your customer in order to facilitate and enable more value. If your customer has a great deal of purchasing power, if it's differentiated and its downstream markets or faces few competitive alternatives, perhaps because you have the market power. Then you should be attempting to form a close relationship with them in order to protect your exchange. If your industry is one in which there is a great deal of demand fluctuation or technological uncertainty when these conditions are difficult to predict. Then close relationships with your customers can be useful for safeguarding your economic outcomes. Now these are just some of the key conditions necessary for partnering. If your customer relationships are not marked by these conditions, then I would say that you do not need to emphasize relationship closeness. In other words, your sales people should not be spending their time whining and dining your customers. You should not be taking them on lavish trips, sporting events, etc. In summary, a key aspect of evaluating your relationship management strategy is assessing what the potential value might be for partnering. The other aspect to consider is the state of your current relationship with the customer. So if you currently have a close relationship with your customer and it treats you like a partner, then you have a strong relational exchange. If your customer shares privileged information with you, it evidences trust, and this is essential to close relationships. Understanding where your relationship is today informs what your next step should be in terms of getting your customer relationship to where it should be. In other words, what we want to assess is whether our current customer relationships are where they should be, in light of the real economic partnering potential that might or might not exist. Let's map out the possibilities. This diagram plots out the potential space of relationships that can vary in their partnering potential from low to high, and in their current state from transactional to relational. And there are several regions worth noting. The first is the diagonal. This is the optimal area in which your efforts to build the relationship are lined to the economic value of that customer. Ideally, you build close relationships when there is high partnering potential. We like to refer to this as the friend area, because this is where you want your salespeople to cultivate close relationships, build trust, and share privileged information. If you have an entertainment budget, this is where it should be spent. At the other end of the spectrum, your goal should be to minimize your relationship investments for customers who do not have economic potential. I label this as a foe type of relationship, and I put this word in quotes, because I'm not really advocating that you treat a customer as an adversary. But for the sake of the liberation, this type of relationship is the opposite of being a friend in terms of the relational closeness, it's more of a transactional mindset. Now do we see firms adhering to this? Sure. Consider airlines, they know exactly what every customer's economic value is to them. And for higher economic value customers, they are given the gold standard of service. Relationships are built in terms of boarding priority, free upgrades, gifts, and so on. And this is an example of investing to build a close relationship with customers only when it matters. And there's a potential from doing so. In the same way, channel strategists can be smarter about the types of relationships that there firm builds with its customers. Let's now turn to the off diagonals. These regions indicate where your relationship strategy is off kilter, so we refer to these areas as fallacies. Now, there are two types of fallacies or misalignments possible. One, is that you've created relationships when they aren't really warranted in terms of their economic value. I see this happen a lot, particularly in firms that emphasize relationship building. Firms that have a lot of titles, like relationship manager, or relationship specialists, or vice president of strategic partnerships, etc. If your firm has a culture that emphasizes close relationships with all customers, then chances are high that you've got a lot of customer relationships in this area. The other fallacy region is to have under invested in relationship building, when in fact you should have, because there's a lot of economic potential. As much as firms like to encourage the building of strong relationships, it's important to note that it is only one out of the four corners of the matrix we're building a strategic partnership really makes sense. And that is when there is high economic potential from doing so. And this is where I see many firms go wrong, and this is why I don't really agree with an emphasis on close relationship culture at many firms. In the full range, relationships are not needed. In the fallacy ranges you have too much or too little, which are states of misalignment. Thus, a key conclusion is that forming strong relationships with everyone is not economically rational or easy to get right. In this sense, strategic partnering and taking the time to build and cultivate close relationships is not a dominating strategy. But a minority approach done selectively with customers who are worth it. Maybe this explains the high rate of strategic partnership and alliance failure. It could well be that relationships are more likely to be misaligned or unnecessary than we really think they are. Now, let's unpack how the framework should be used.
