Vertical and horizontal cooperation strategies - Which one is suitable for my company?

Vertical and horizontal cooperation strategies - Which one is suitable for my company?

Today, cooperative strategies are a common term in the supply chain. These can be vertical or horizontal and support the supply, disposal and recycling functions within the supply chain.

The difference between vertical and horizontal strategies is based on the integrated stages of the value chain: this is how vertical cooperation strategies with upstream or downstream value chain partner’s work. Upstream value-added partners refer to supplier integration, downstream partners to customer loyalty. Horizontal cooperation strategies exist between competing partners in the same value chain, usually in the form of strategic alliances.

This guide article deals with both strategies and specific forms of business cooperation as well as their advantages and disadvantages.

Vertical and horizontal cooperation strategies – Supplier and customer cooperation’s

Whether vertical or horizontal – the direction indicates the level of value creation at which the companies are located and the economic sector in which they operate. If both companies operate in the same sector and are at the same level of value creation, they cooperate horizontally. These companies are often competitors.

However, if the companies are from other sectors, they are at different levels of the value chain and cooperate vertically. In vertical cooperation, a distinction is made between customer cooperation and supplier cooperation.

The relationship between the supplier and the customer has been of increasing importance for several years. The supplier of today is seen and accepted as a “real” value-added partner and forms an interface for the customer himself. When selecting the suppliers themselves, one can distinguish between the intensity of the commitment and the performance potential and thus make a better decision on the selection of the suppliers.

Differentiation according to bond intensity

If the suppliers are differentiated according to the bond intensity, two groups can be formed here: The system suppliers and the subcontractors.

System suppliers supply the manufacturer directly (also called first-tier suppliers). They are also partly responsible for development. The interlocking with the manufacturer is permanent. The bond intensity with the system suppliers is high.

Subcontractors are suppliers of the second or next order (Tier 2 to tier n). They are mainly direct or indirect suppliers of a system provider and also indirect suppliers of the manufacturer (OEM). The influence of a producer and also the intensity of the bond is low here.

Differentiation according to the performance potential of the suppliers

In addition to distinguishing between suppliers according to the intensity of their commitment, suppliers can also be distinguished according to their performance potential. There are three supplier categories here: black box suppliers, detail specification suppliers and catalogue suppliers.

The black box suppliers are involved in the manufacturer’s product development as early as possible. The target profile is defined in the specifications. The supplier is given the freedom to implement requirements. The supplier’s performance potential is very high.

In the case of detail specification suppliers, the manufacturer provides the supplier with drawings and sketches. The production is carried out according to strict instructions and the service offer of the detail specification supplier is based on the framework and production conditions of the producer.

In the case of catalogue suppliers, standard parts are called up by customers from a “catalogue”. Specific wishes are not taken into account here. The range of services offered by the supplier is low.

Types of horizontal cooperation

An example of horizontal cooperation is coopetition. The term coopetition is derived from the Terms Corporation and competition. The term means that two companies cooperate in one area but remain competitors in all other areas.

Special forms of cooperation

In addition to classical cooperation strategies, there are also more specific forms of corporate cooperation. These include joint venture cooperation, the interest group and the strategic alliance.

A joint venture is a subsidiary established as a joint enterprise by two legally independent entities. Although there is cooperation through capital, certain know-how and the management of the companies, the joint venture has an autonomous status.

A community of interests is a group of independent companies which protect and promote their common interests. In most cases, these are civil law partnerships (GbR) that form production, operating or profit pools. According to the definition of interest groups, these are located between groups of companies and cartels.

The third special form of cooperation is the strategic alliance. This is a longer-term, formalized relationship between at least two cooperation partners. Alliances are designed to improve the competitive position of the companies involved. Here, the respective weaknesses of the company shall be compensated by the strengths of the partner. But also the risks can be reduced by a strategic alliance and divided between both companies. For example, the risk of company growth is lower than for complete takeovers. Alliances can also be dissolved more quickly than other cooperation’s and are therefore easier to control.

Does it make sense to cooperate?

If you decide to enter business cooperation, you should bear in mind that this has advantages but also disadvantages. Cooperation brings a certain advantage for both companies. However, the downsides of cooperation must also be taken into account:

Advantages or possible purposes of cooperation

The advantages of cooperation are the expansion of the target group, the development of further market shares, the bundling of resources for larger orders, the reduction of R&D costs, the distribution of risk among several cooperation partners and the possibility of increasing short-term and long-term sales, the reduction of costs through joint purchasing and larger purchasing quantities and the compensation of capacity bottlenecks and better utilization of the capacities of both cooperation partners.

Disadvantages of cooperation

Disadvantages of business cooperation are, for example, that important decisions usually cannot be made alone, that a high degree of coordination and compromise is required, that losses have to be shared just as much as profits, that a fair division between the tasks of both companies tends to be difficult, that know-how and internal information have to be disclosed and that a prediction and guarantee of success is uncertain.

Conclusion

Business cooperation’s can appear in various forms and bring various advantages but also disadvantages for the company. When and how exactly cooperation should take place, depends on the company and should be considered carefully.

Further articles and information about Kloepfel Consulting can be found here:

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Christopher Willson
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