The nature of a business relationship

Business relations have existed as long as there has been business between people. The first business relationship 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 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 the Nobel Memorial Price in Economics – the teacher in 1991, the student in 2009.

Today, one of the most significant challenges of establishing a high-performance business relation is the asymmetry of information. The subcontractor usually has a 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 relationship can still misunderstand each other. Information sharing alone is not always enough to establish a shared view of 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 the goods and service flows, information and communication flows and cash flows.

We need to find the best practices that solve the major challenge in the nature of the business relationship 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.

This blog post has been published originally in Jakamo Official Blog on 28 October 2014.

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