The Use of Business Models: Impact on Performance Management
In addition to organic growth and acquisition, an organization can grow the business by entering into different business relationship with other companies. In ACCA Advanced Performance Management (APM), business models such as strategic alliances, joint ventures and complex supply chain structures are discussed.
However, these business models are challenging to business leaders in performance management. Today, we are going to discuss the impact of performance management of these business models.
But first, we will discuss the main types of business models that can use performance management with some examples.
Strategic alliances are formed by two or more businesses when they wish to share their resources and activities to pursue a particular strategy. They decide to do this rather than set up a new company or buy access to resources and competences.
A strategic alliance is similar to joint ventures where two businesses come together to take a mutually beneficial project to achieve a common goal. A strategic alliance allows both businesses more freedom as compared to a joint venture.
There are many reasons why businesses enter into strategic alliances. For example, two businesses may make a strategic alliance to expand their respective market shares, improve their products or gain a competitive edge over their competitors.
A real example of a strategic alliance during recent times was that of Microsoft and Samsung. Samsung announced its partnership with Microsoft during one of Samsung's launch events. Microsoft CEO Satya Nadella made an appearance during the event himself. The alliance is beneficial for both companies. In the alliance, Microsoft has agreed to sell Samsung products through its retail locations. On the other hand, Samsung will preinstall Microsoft applications in its new phones.
There are some similarities between joint ventures and strategic alliances. However, they are still different structures. In a joint venture, two or more businesses come and join together as partners to pool their resources to accomplish a particular common goal.
The partners remain independent setting up a collaborative venture usually for a longer term than a consortium. This arrangement is popular in countries such as China, where Western companies would provide technical expertise and finance and a Chinese company would offer a workforce and entry into the local market.
You can think of join ventures being similar to partnerships. Each parent business in a joint venture brings their own expertise to the equation.
If you have heard of the online streaming service HULU, then it is an example of a joint venture. HULU was founded in 2008 by parent companies NBC Group (Comcast) and Disney Group (The Walt Disney Company). The goal of the joint venture was to allow both the parent companies to have an online platform where they can stream their content.
Traditional Supply Chain Structure
A supply chain is a full process of producing or delivering a product or service. It starts with obtaining the raw materials necessary to manufacture a product and ends with the delivery of the finished goods to end-users. A supply chain consists of any parties that are involved in this process.
Supply chain structures consist of one lead business forming relationships with companies that buy and sell supplies from each other. Usually, supply chain structures can be vertical or horizontal, but they can be both in more complex supply chain structures.
Practically, all businesses are involved in supply chains. One practical example is that of Samsung. Samsung deals in all types of consumer electronics. In the production of a single smartphone, Samsung needs materials such as screens, processors, memory chips, etc. Some of these materials are supplied from other Samsung companies, while some may come from other outside companies. Similarly, Samsung relies on its branches and some other retailers worldwide to deliver their products to customers.
Performance Management Issues in Each of Business Model
The business models mentioned have their own advantages in strategic and business goals. However, they are not perfect and one issue is performance management. We are now sharing to you what are the problems of each of the model
Problem in Strategic Alliances
The problem of strategic alliances in regards to performance management is that the roles of strategic alliance partners cannot be determined. This is mainly because, in a strategic alliance, two businesses come together to achieve their objectives. Unlike joint ventures, these businesses do not form a new company. Therefore, it can be difficult for each business to determine what their role is in achieving the objectives.
Furthermore, it can be difficult to establish accountability in a strategic alliance. In the absence of accountability, it can be difficult to control the overall performance of the strategic alliance. Furthermore, it can cause conflicts among the two businesses.
Lastly, since strategic alliances are much easier to form and dismantle, it can be difficult for businesses to trust each other, especially when it comes to sharing confidential information.
All of these points create problems in performance management within strategic alliances.
Problem of joint ventures
Joint ventures may have some of the same problems as faced by strategic alliances and some of its own. First of all, although a new company is formed as a result of a joint venture, it may be difficult to establish accountability. This is mainly because each partner in a joint venture brings different skills or experience to it. Therefore, the same standards cannot be used to judge each partner.
Similarly, although joint ventures are formed as a result of different businesses coming together to achieve a common goal, each partner may not have the same expectations from it. Therefore, it may raise some conflicts and cause problems when it comes to performance management. Likewise, if each partner in a joint venture has a different expectation from it, it may be difficult to control and manage the quality, cost or risks of the joint venture.
Problem of Traditional Supply Chain
The problem with a traditional view of supply chain performance management is the limited amount of profits for a particular product. For example, if a product is available in the market for $10, then every business along the supply chain will want to maximize their profit. Therefore, while the businesses within a supply chain can help each other, they also must compete with each other for the percentage of profits available.
This traditional view of supply management becomes apparent when businesses within a supply chain negotiate before conducting business. They negotiate with each other so that each business can receive the maximum amount of profit. This makes performance management for each business within the supply chain difficult.
Modern View of Supply Chain Performance Management
The modern view of supply chain management is different from the traditional view. As we discussed above, the traditional view of supply chain management consists of supply chain linked businesses negotiating with each other to find a favourable position. The modern view, instead, states that there can be four types of relationships between buyers and suppliers.
The arm's length relationship is a basic relationship where the buyer and supplier are disconnected. Transactions happen at an arm's length. They exist when there is a large base of suppliers available for buyers to choose from. There is no connection between both parties in this relationship.
The coordination relationship takes the relationship between buyer and supplier a bit further from the arm's length relationship. Any relationship between the two parties is limited to coordinating such as sharing information and coordination between independent value-creating activities.
While the two above relationships took a more transactional approach to supply chain management, the integration relationship takes it a bit further to a more collaborative approach. With an integration relationship, businesses can create unique supply chains. However, both businesses need a high degree of trust, commitment and information sharing for the relationship to be successful.
Finally, the most collaborative relationship buyers and suppliers can have is a partnership. This is a long-term, durable and cooperative relationship that is created due to high frequency of communication, transactions, interactions and information exchanges. This is the highest level of relationship between supply chain participants.
Performance management in the modern view of the supply chain can also be difficult due to the existence of different relationships. Businesses must identify their relationship with each supplier and buyer in a supply chain and act accordingly. This means the business will need to have different policies for each supplier and buyer, thus, making performance management difficult.
Different types of business models can be impacted by performance management. For example, strategic alliances, joint ventures and complex supply chain structures can all be affected by it. There are a few problems that these structures will have to face in regards to performance management. We have discussed each of these problems for the respective structure in detail here.
Impact on performance management of the use of business models mentioned in this article is one of topics in Section E of ACCA APM exam. It has been examined many times. In July 2020 exam, a part of question is about business agreement and relationship which many students cannot answer it well. We hope this article help you to familiarize the topic.
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