The nature of a business relationship

Business relations have existed as long as there has been business between people. The first business relation was established when someone sold something to another person. The phenomenon of business relationship is old but the understanding of it still remains insufficient despite of positive development in the past decades.

In the late 30’s Ronald Coase presented the concept of transaction costs to explain the nature and limits of a single company. Oliver E. Williamson, as a student of Coase, reinforced the transaction cost approach in 1975. He was interested especially in the boundaries between companies. Both of these gentlemen have been awarded with the Nobel Memorial Price in Economics – the teacher in 1991, the student in 2009.

Today, the most significant challenge of establishing a high performance business relation is the asymmetry of information. The subcontractor usually has better understanding of the manufacturability of the component customer is purchasing. The customer and supplier’s understanding of the product value can vary a lot. These kinds of differences in the shared information between companies lead to extra costs. Information asymmetry causes confusion. Confusion causes hassle. Hassle causes costs – transaction costs.

Information sharing through common folders and files solves part of the challenge. However, the people operating on the interface of the business relation can still misunderstand each other. Information sharing alone is not always enough to establish a shared view about a matter. Static information usually needs interaction between people to create a shared view.

Network management has raised its significance in managing company effectively. When the sales margins are highly competed, the winners are companies that manage the strategic relations and supply chain effectively – both information and communication.

We need to find the best practices that solves the major challenge in the nature of business relation that the likes of Coase, Williamson and many others after them have been studying. Want to start a discussion about this phenomenon? Go for it! We love to be challenged.

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