A CRUCIAL element that determines the success of a new venture is the entrepreneur's ability to manage fundamental business relationships.

Reaching for the world: An entrepreneur needs to build a number of critical relationships to sustain and grow his business

As Steven White, assistant professor of entrepreneurship and family enterprise at Insead, explained: 'With few financial and management resources available to the company, a number of critical relationships are required to sustain and grow the business. The central task is finding partners who will offer maximum cooperation and benefit at a reasonable cost, with acceptable levels of time and expertise to manage the relationship.'

New ventures, especially in Asia, are confronted with an array of potential partners to choose from - family-owned businesses, multi-national companies and government-linked agencies - with each option presenting a combination of benefits and shortcomings.

Prior to making the decision, the entrepreneur needs to address the question of which capabilities can be created and maintained internally (make), those that will be acquired on the open market according to need (buy), and finally, resources that will be co developed and accessed through external relationships (ally).

Lack of ability and affordability to either develop necessary business-development systems internally, or procure them from the market respectively, are key limitations that necessitate a balance between make, buy and ally.

Every make/buy/ally combination entails significant advantages as well as trade-offs for new high-growth ventures.

Insead InnovAsia's survey brought out some notable trends in this regard: a majority of Asian entrepreneurs chose to ally with customers (37.1 per cent) and collaborators (35.5 per cent), while some chose suppliers (14.5 per cent), distributors (8.1 per cent) and local foreign government agencies (3.2 per cent). Other critical allies reported included equity partners, incubators, investors, manufacturers and professional service providers (1.6 per cent).

As Avinash Jayaraman of Innove Technologies Pte Ltd, a Singapore software company explained, his partner and himself decided to form a sales partnership as they 'had little knowledge of the sales process and few industry contacts'.

The partnership enabled the entrepreneurs to focus their time on developing the venture's core strength in the early stages, rather than having to expend the fledgling company's energies on building a network of sales contacts.

Creating an equitable balance

Nevertheless, a partnership arrangement also implies a dilution of the entrepreneur's complete control over decision-making processes, and creates the need for recurring renegotiation according to changes in the business ecosystem. A fundamental requisite for successful relationships is the need to assess the benefits derived by both partners from the arrangement.

Problems can arise when one of the partners perceives the relationship to be inequitable or 'unfair'. Over time, this perception may damage the working relationship. However, open communication networks and a conscious decision to ensure mutual benefits for both parties can help to avoid potential fissures in a relationship.

A case in point is that of Shanghai Luxefood in China. A leading manufacturer of bakery and frozen food products in Eastern China, Luxefood faced a rude shock when one of its long-standing and biggest customers, an international fast-food chain, launched a new system that made procurement decisions based entirely on prices offered by the suppliers - a change that affected Luxefood significantly as their emphasis on quality translated to a comparatively higher price.

Luxefood converted the potential crisis to an opportunity for communication. The company, along with other suppliers, approached the fast-food chain to apprise the latter that it stood to lose on standards of quality by placing price as the sole yardstick.

The customer modified its system and launched a simpler system that provided weightage for both price and quality - a win-win outcome for all parties.

One of the key elements that can be inferred from the case above is the strong emphasis on the need to 'maintain' relationships with long-term benefits in mind.

Prof White pointed out: 'At the ground level, some of the experience shared by survey respondents is defined by the unique set of circumstances faced by high-growth, innovative businesses in Asia. For instance, despite the pressure on new businesses to generate revenues, respondents realise that critical relationships are not necessarily about revenue.' Shared values, learning opportunities gained from the partnership and mutually shared characteristics take precedence.

Insead InnovAsia's survey findings complement this assessment: a majority (38.7 per cent of relationships reported) cited shared objectives and priorities of alliance with their partners, while other similarities included language, personality, background, working style, expertise and company size.

As the relationship matures, however, a key factor that requires attention is the question of whether the entrepreneur continues to rely on an external agent for resources despite having the ability to develop them internally. Overreliance on a partner as a 'substitution strategy' could cease to benefit the venture, and instead deprive the company of a chance to develop its potential.

Dealing with cultural differences

On the level of periodic interactions, culture and social norms play an important part in determining the course of a business partnership. For example, a Singaporean entrepreneur's attitude may be seen 'legalistic' or 'insensitive' due to his/her insistence on efficient legal frameworks, while a Malaysian venture's insistence on social activities to build friendly relations might frustrate the former as 'non-business' procedures might be regarded as impinging on tight timelines.

Needless to say, conscious effort to understand cross cultural differences and the investment of time and effort to satisfy social rituals can go a long way in helping partners to forge resilient relationships - a crucial factor that can stand an entrepreneur in good stead during trying times.

Contracts and legal enforcement

Given the unpredictable nature of social relationships, the importance of the legal element in a business partnership cannot be understated. As research by Insead InnovAsia shows, formal legal contracts underpinned the majority (85.5 per cent) of external relationships formed by our survey respondents.

Most of these contracts (74 per cent) were signed at the inception of the alliance. This is hardly surprising given that contracts constitute a valuable 'safety net' mechanism that help to clarify the expectations and benefits from an ally, especially for entrepreneurs who would need to protect their core capabilities from encroachment.

Yet, overdependence on contracts is not viable for upcoming ventures, which may not be willing to allocate the finance to create and enforce complex legal frameworks. In such cases, the entrepreneur should explore alternative arrangements and trust-building measures rather than relying on a paper trail.

Clear view of the costs involved

In a nutshell, several maxims may be gleaned from the multitude of experiences faced by entrepreneurs across varied industries.

As logic would dictate, not all are applicable to each and every business. Hence, it is largely the entrepreneur's responsibility to retain a grasp of his/her venture's core competencies and requirements, and ensure that his/her business relationships are formed to best bridge the gap between the two.

A caveat from Prof White is worth bearing in mind: 'While the vast majority of critical business relationships indeed yield benefits, Asian entrepreneurs often underestimate the inherent costs - the costs of controlling a relationship, ensuring an acceptable level of fairness and delving into a cooperative strategy may be unexpectedly high.'

This article is contributed by Patrick Turner, assistant professor of entrepreneurship and family enterprise, Insead; Martin Kralik, research director, Insead InnovAsia; and Yamini Vasudevan, research analyst, Insead InnovAsia.

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