Organising your network is about cooperating with suppliers, partners and customers. A good network helps you build an efficient business that focuses on its strengths. But getting it wrong can be a costly mistake.
Every business is part of a network, dealing with suppliers and customers. The connections in your network can be a great part of your business success, or they can hold you back. Taking time to plan your network carefully is a strategic step in creating a lasting, sustainable business model.
Improve your network to own the distinctive value you create, and control quality and performance. Focus on your strengths by freeing yourself from the things that are not a core part of your business.
You can improve your network in various ways. This page talks about outsourcing, vertical integration and location to give you inspiration. A poor network can undermine your performance, so you can also read about getting supply contracts right and looking after your intellectual property (IP).
Outsourcing is choosing to buy goods or a service from a supplier instead of making them yourself. When you outsource you are contracting someone else to complete a part of your product or service creation.
Businesses often outsource an activity so they can focus on something else. If you identify a business activity you can do better than anyone else, focusing on that activity is a good way to increase your competitive advantage. But first you need to free up resources (time and money). Outsourcing a different activity that isn’t a point of difference helps you free up those resources. For example, a gourmet food producer might excel at quality and coming up with new varieties, but struggle with striking distribution deals and fulfilling orders. They could choose to ship their products to a wholesaling company that finds customers and distributes their products for them. Outsourcing distribution lets the food producer focus on their strengths.
Outsourcing has pros and cons. The pros might include:
The cons might include:
You’ll need to take your time and choose partners wisely, with a particular eye on quality control. And you’ll need a non-disclosure agreement (NDA) in place because you will be sharing information with your partners. Confidential information about production methods or planned production volumes are examples of trade secrets that might not be protected by a patent or trademark.
Outsourcing is sometimes criticised for letting companies lose their competitive advantage. They lose control of valuable knowledge about production methods, and they lose product and market feedback when they are too distant from their customers. That’s why experts suggest not outsourcing unless everything stacks up.
Follow this sequence of questions to decide about outsourcing an activity or keeping it in-house. Ask yourself:
If you answered ‘yes’ to any of the questions, keeping the activity in-house could help you keep control, stay flexible and maintain quality. If you answered ‘no’ to every question, consider exploring vendors who could do this activity for you.
The decision whether to rent or buy things you need is related to outsourcing, but different. Renting equipment is a bit like outsourcing your supply of equipment that is suitable and ready to use. Lease agreements often cost more in the long run but remove the need to pay upfront for equipment – saving you the cost of finance, or freeing up money to invest in something more strategic.
Leases that include maintenance ensure your equipment is reliable and ready to go – and if something goes wrong, you are spared the cost and stress of fixing it. If your business is growing or changing, leases can give you flexibility to upgrade your equipment easily when you need to.
Vertical integration is taking ownership of, or creating, something in your production process. Some people refer to it as a ‘make vs buy’ decision. Vertical integration is roughly the opposite of outsourcing, starting from the situation where you don’t own or make something yourself. For example, a wine maker might initially buy grapes from around the country, make wine and then sell it to the supermarkets. They decide to purchase a vineyard so they can control the supply of grapes for their winemaking. Or a café might initially buy coffee beans from a local roaster. They decide to source their own beans and roast them so they can manage availability and freshness better.
Vertical integration has pros and cons.
The pros might include:
The control you gain can help you create or protect value. Here are a few more detailed examples.
The cons might include:
Ask yourself these questions to decide about vertically integrating by taking on another activity or buying another business.
Australian McKinsey practitioners John Stuckey and David White were wary of vertical integration after studying the outcomes. Their main message: Don’t vertically integrate unless it is absolutely necessary to create or protect value. Vertical integration is risky, hard to reverse, and costly in time and resources.
Resources are things you control that form part of your business. You use resources to create value for your customers and to stay ahead of your competitors. Resources can be physical (such as buildings, equipment or people) or non-physical (such as processes, knowledge or reputation).
Use this tool to reflect on the resources in your business and whether you’re making the most of them.
For each resource, you’ll think about whether:
Based on your profile, we'll explain whether the resource helps you compete or holds you back, and whether it makes or loses you money. We’ll also give you some tips to make the most of the situation — such as whether you should focus more on an under-exploited resource.
Deciding where your business locates its shopfront matters, whether it’s a website or a physical store. The same goes for a place of production, both for services and for products.
Where are your customers? Where do your supplies come from? These and many other factors come together to give each business its ideal location. Your shopfront and place of production may be together or in different places, depending on customer need and perception, cost factors, and logistics of suppliers.
For example, you might run an accounting business that services mostly tradespeople. You locate your shopfront in an area your customers visit anyway, such as near the hardware superstore in a suburban business park. You might also decide this is the best place of production, where the accountants do their work, because customers like to pop in and see their accountant.
On the other hand, a catering company might use a website for sales and interacting with customers, preparing its food in a warehouse away from the town centre. The rent there is cheaper, and it can receive produce deliveries more easily. The catering company doesn’t interact with its customers until it delivers the food, so there is no need to pay higher rent for a flashy building in the town centre.
Here are five steps towards choosing the ideal strategic location for your shop front, workshop, office or other facility.
The prospect of growing your business or changing your focus might influence how much you commit to a location. Moving might involve an expensive fit-out at the new location, or a range of other costs. For example, a brewery might need to install new drainage, install and re-commission brewing kit, and repeat onsite food safety assessments and other paperwork.
Te’s printed tees started out as a home business, selling at the market and to a few local independent clothes shops. They took out a short lease on a run-down shop with a workshop at the back, but that’s coming to an end. Growing reputation and demand mean a good opportunity to grow the business, but scaling up needs more room.
Te looks at the current production setup for inspiration.
Te identifies a few options. The top two are:
The courier’s depot was picked for its accessibility, and they already visit the city centre every day. A cheap production location nearby would help Te afford a bigger workshop. They could continue to sell through the existing network of small shops, with efficient stock replenishment using the courier. They would be vulnerable to changes in the sales network (the independent shops often go out of fashion and close down, so there is quite a bit of ‘churn’). But changes to their ‘shopfront’ locations won’t lose them custom. Their fans will follow them on social media to keep up to date with sales outlets. They could even try out another pop-up shop if they need to.
The t-shirt manufacturer only takes up part of the warehouse they use, and the building owner is happy to lease Te the remaining space. Te could move in and benefit from more flexible supply (especially if the manufacturer is happy to set up a new supply agreement). The warehouse already has the waste disposal and safety systems they need. The warehouse has a small area they could set up as a factory shop — fans like getting to chat to Te and their staff. And they could set up an online store too, extending the area they sell to. Swapping from the independent shops to ‘clicks and mortar’ for their storefronts would give them better margins. They’d probably lose a few sales from the town centre shops, but they’d no longer risk losing out if a store goes into receivership.
Both options save rent and fit-out costs over a new central location, where rent would be higher and they would need to install ventilation and fire equipment. Te uses the five-step process above to weigh up the two locations, and decides to co-locate with the t-shirt manufacturer. Saving on equipment costs lets them set up and market their online store. Exciting times!
Good contracts (also known as agreements) are vital to effective networks. From leases and supply contracts to sales agreements and customer service, contracts formalise your network. They set out expectations and give you a framework for resolving problems. If your contracts are poor or missing, your network is unreliable and could collapse, leaving you out of pocket and unable to meet your own obligations.
Written contracts are a must, despite taking more time and effort to set up. Spoken or ‘handshake’ agreements are legally binding too, but in practice they are very difficult to enforce. Details can be murky, and neither party in a dispute can easily prove what was agreed or how the agreement has been breached. You might have different understanding of a good faith agreement. Writing things down in a contract establishes common understanding up front.
Here are some tips for an effective contract. Some apply to any contract, no matter how small or simple, and others might only be necessary for a higher-stakes contract.
Read about the Government’s five procurement principles. They provide a good starting point for developing and negotiating fair and effective agreements, and most of the recommendations work well for any agreement.
Government procurement principles (external link) — New Zealand Government Procurement
If you are writing a contract to outsource manufacturing, read our advice about manufacturing agreements as part of manufacturing overseas. Much of the advice applies to other supply-chain agreements in New Zealand or overseas too.
If you are considering changing location, our information about leasing or buying business premises might be useful.
If you are considering vertical integration, our information about buying a business or franchise might be useful.
Your terms of service for customers need to be clear, whether for large commercial contracts or small retail sales. Read our advice about what you need to tell customers.
Negotiating an agreement with another business is part of establishing your relationship with them. The way you negotiate can set a good or bad precedent for the rest of your business with them.
Start by figuring out the most important things both parties want out of the agreement. From there, establish what you agree on, and where you might have different expectations. Suggest terms that are reasonable for both parties. Be ready to suggest and accept changes if they make sense. Any area of your agreement could need negotiation. Here are some areas to think about.
Some businesses (especially larger ones) have standard contracts for working together. A standard contract could be fine if you check it carefully and find it covers everything you need. Sometimes you might notice something missing, or a provision you need to change to be happy.
Aroha’s café is doing well but she notices other coffee bean suppliers are beating hers on price. She likes her current supplier, so she doesn’t just change abruptly. She gets in touch with the supplier and asks if they have any suggestions to improve the terms of their trade.
The supplier has recently taken on distribution for other products like coffee accessories and condiments, and is keen to grow their distribution and brand awareness. They suggest a supply agreement with four main elements:
The supply agreement looks good, but Aroha asks her lawyer to look over it. They suggest adding a clause where Aroha is free to end the agreement early if she needs to close or sell the café during the 3-year period. The supplier accepts the change and Aroha signs the agreement, happy to get a better deal without changing her supplier.
Intellectual property can be any creation that is not physical but could have value, such as a logo, brand, trade secret, design or invention. Read our general information about IP and ways to protect it:
Your network with suppliers, customers, and service providers can bring opportunities to get value from your IP, but also reasons to be cautious. IP in networks can include information about business strategy, innovations, processes, equipment, customer lists, upcoming promotions, and purchase volumes and trends.
Here are some examples of getting value from IP in your network.
Here are some examples of problems with IP in your network.
Read case studies and information about managing IP on the New Zealand Intellectual Property Office (external link) website.
You can protect IP in several ways, depending on the type of information and what you want to protect it against. Some are more expensive and less flexible than others.
A non-disclosure agreement (NDA) is one way to protect trade secrets and other information your network partners such as suppliers and on-site contractors see. Think about requirements not to use the information (as well as not passing it on). Make signing easier by keeping the NDA simple and giving everyone involved the same obligations. Set the NDA to continue for a reasonable time beyond your work together.
Another way to protect trade secrets is to simply limit access to the information. You might manage who in the business knows it, or separate your design or manufacturing space from the areas suppliers or customers see.