Supply Chain

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Firms operate in extended business networks. In order to be sustainably profitable, a firm
needs to be able to operate in an attractive network position and to exploit that position by
effectively managing relationships with its customers and suppliers.
Abstract
This essay intends to discuss key issues related to firms operating within the networks superior
profitability. There are number of factors determining ‘rents’, however as it just a brief overview of
IBS&SCM module it mainly concentrates on positioning, sales management and marketing, also
procurement. In addition, quick introduction to boundaries of firm’s decisions as well as power
aspect in buyer-supplier relations will be presented. Because of the limited essay volume, the lack
of extensive examples relevant to theory may arise. This paper aims to present summary of the
IBS&SCM module by showing that the main theories has been grasped through the lectures and
additional reading.
Introduction
Every company seeks to be profitable by earning at least normal-profits under perfect competition
in the long run or better achieving above-normal ‘rents’. In order to do so enterprises need to
consider positioning within the business network, boundary of the firm decisions, marketing and
sales, procurement and supply management. Further on every section will be examined more
detailed.
Business networks concept
Firstly, the title of the essay suggests to explore concept of business network which could be
defined as sets of connected firms (Astley and Fombrun 1983; Miles and Snow 1992, cited in Ford,
2002) or as sets of connected relationships between firms. Alternatively, Todeva (2011) suggests
that: ‘Business networks are sets of repetitive transactions based on structural and relational
formations with dynamic boundaries comprising interconnected elements (actors, resources and
activities). Networks accommodate the contradictory and complementary aims pursued by each
member, and facilitate joint activities and repetitive exchanges that have specific directionality and
flow of information, commodities, heterogeneous resources, individual affection, commitment and
trust between the network members.’ In addition to that, Sanderson set few premises about business
networks (IBS&SCM Lecture notes, Week 1): firms could be located within one or more business
networks, it might be affected either directly or indirectly by other actors within the network. Firms
are not isolated from its competitors, customers, suppliers this means that they operate within
business networks.
Positioning
Positioning means choosing certain stage of the business network, bearing in mind that its
attractiveness may vary. In order to choose best strategy it is beneficial to take into consideration
Gadiesh and Gilbert (1998) notion about ‘profit pools’, which emphasises the importance of
choosing the profitable segment in other words the one with high profit margins, which not
necessarily are related to the high revenues. This could be seen from the failure of the Gucci’s
attempt to capture more revenues in 1980 by expansion to not premium priced eyewear or watches
(Gadiesh and Gilbert, 1998). Aggressive strategy was successful for those items, however resulted
in ruined image of the brand. This led to decreased high-end goods with high margins sale and
overall profitability. Another aspect which is crucial to analyse is competitive intensity. This could
be done by adopting Porter’s Five Forces (1979) which might help to capture attractiveness of the
Industry meaning that the more attractive is more profitable. In addition, M. Porter also suggested
choosing one of the generic strategies for gaining a competitive advantage which leads to
profitability. These includes differentiation, cost leadership, differentiation focus and cost focus.
The first one is oriented to creating something unique for example it could standout by
technological or aesthetical aspect as well as related to brand image or customer service etc. As for
illustrating product differentiation it is worth looking at Apple which differs from competitors by its
unique products’ design and strong brand image. Alternatively, a firm might employ cost leadership
meaning that it focuses on providing cheaper production or services than other rivals do and this
could be seen in example of Primark leading low-prices apparel brand. Another way to earn above
normal-profits is differentiation focus. This means that unique product is tailored to specific
segment for example vegetarian restaurants only concentrates on non-meat eaters and in general
have unique menus. The last generic strategy could be defined as having low prices and operating in
niche. Cost focus instance could be IKEA which targets customers who do not mind low service
and is famous for low prices. Important to note, that author stresses the importance of choosing just
one strategy, otherwise a firm would not be able to have competitive advantage and be highly
profitable. Apart from generic strategies business capabilities are another element of positioning. “A
business capability is a particular ability or capacity that a business may possess or exchange to
achieve a specific purpose or outcome.” (Homann, 2006). A business capability also defines what
enterprise does that creates value for clients. Capabilities are developed and accompanied by
tangible (finance, buildings, land etc.) and intangible (for example, brand recognition, supplier
networks etc.) (Rosen, 2010) For instance significant proportion of the Dysons profit is dedicated to
R&D also it has a bunch of the patents meaning that it could deliver highly innovative, and unique
production for its customers. This kind of capabilities are vital for a technology company and add to
successful positioning of Dysons. After evaluating previously mentioned elements, it is crucial to
decide whether to stay in the same position, exit the network or re-position. The latter option require
to examining ‘...zones of manoeuvre within which firms have certain potentials and outside which
there are— other things being similar— problems of performance.’ (Clark, 2000, p. 304) This
implies that even though some stage may be attractive without certain capabilities the firm‘s repositioning may be unsuccessful meaning that the enterprise could not earn superior profits.
Boundaries of the firm’s decisions
After assessing positioning aspects, the need to evaluate boundaries arises, which dictates to decide
what activities should be undertaken by the firm and which outsourced, bearing in mind that just
non-core capabilities could be appointed to other firms. For example, Zara has high level of
integration, and this enables it to develop new items extremely quickly. On contrary, Primark has
about 700 suppliers, which allows to offer cheap production for customers (www.primark.com, no
date). Despite the possible benefits, it is argued that: ‘Firms that bring the wrong business activities
within their boundaries risk losing strategic focus and becoming bloated and bureaucratic’,
according to Barney (1999). However, an outsourcing is no less risky, as in the case of Primark,
where the reputation of the company has been damaged, by scandal of suppliers who used children
labour.
Buyer-supplier relationships
The ability to maximise surplus value in buyer-supplier relations depends on power structures. Four
generic structures (Table 1.) include − buyer dominance, supplier dominance, buyer-supplier
interdependence (high mutual dependence), and buyer-supplier independence (low mutual
dependence) (Cox, Sanderson and Watson, no date). Relative utility and scarcity determines level of
dependency in such exchange processes. ‘…the utility of a resource refers to its commercial and
operational importance for the firm, and the scarcity of a resource refers to the extent to which an
equivalent resource can be found elsewhere.’(Cox, Sanderson and Watson, no date). For instance in
1900 North America had 35 suppliers of cast rail wheels. Nowadays there is just one and this means
that great supplier scarcity is leading to the power shifting from the buyers to suppliers (Paranikas et
al, 2015). To add, aspect of information also plays a significant role in buyer-supplier relations and
it is directly linked to power (Table 2.).
Management of downstream customers
Another implication for a firm to achieve above-normal returns is to successfully manage its
marketing and sales activities. As Hague (no date) states, marketing is ‘about meeting the needs of
other businesses, though ultimately the demand for the products made by these businesses is likely
be driven by customers in their homes.’ Good regular share of surplus (which is referred as ‘the
difference in a transaction between the supplier’s costs and the buyer’s utility function (Cox,
Sanderson and Watson, no date)) from downstream side could be achieved through series of
actions such as evaluating market opportunities, developing the offering, attracting customers,
selling products or services and retaining customers. The first step towards B2B marketing strategy
is segmentation which is viewed as a grouping customers into segments by their common
characteristics, needs and purchasing behaviour (Engel et al., 1972; Bonoma and Shapiro, 1984;
Weinstein, 2004, cited in Market Segmentation & Organizational Demand Analysis, no date).
Alternatively, it is proposed that target market strategies have to be ‘more aligned to the behaviours
and attitudes of targeted customers.’(Christensen et al., 2007, recited in Simkin, 2008). Despite the
debates, the importance of segmentation is widely emphasised by Simkin (2008) which calls it vital
for success as well as senior executives who recognizes benefits of it ((Dibb and Simkin, 2001,
recited in Simkin 2008). In general segmentation has two levels - macro, with variables like
geographical area, size of customer and usage rate, and micro concerning things like buyers’
attitude towards risk, VFM perception, purchasing effort. Another element in managing
downstream side is branding in B2B business. This topic is discussed by Rozin, Randall (2004) and
few findings are stated. It is expressed that majority of B2B purchases are significant in their scale
meaning that a substantial risk may arise on the part of the buyer, thus the firm is challenged to
persuade its credibility. In addition, the editorial also compares B2C and B2B marketing, noting
that competition in both is fierce and emphasising the difference between purchasing processes by
outline of the B2B complexity. After addressing segmentation, it is worth overviewing pricing
which is generally seen as a tactical activity according to Hinterhuber, Andreas; Liozu, Stephan M.
(2012) The same article summarizes Johansson et al (2012) finding about pricing capabilities
strategic role which enables firms to gain competitive advantage also highlights that quantification
of customers’ value is a basis for development of effective pricing. There are number of other facets
which affect pricing including buyer’s switching costs, supplier’s cost of production, demand and
supply conditions, competition in supply market, importance of customer etc. Under the certain
circumstances one of the pricing policies such as premium under monopolistic competition,
monopoly or penetration may be employed. By adopting an appropriate pricing policy a supplier
will be able to maximise its surplus value which leads to superior profitability. Apart from this,
another key task in downstream relationships is to obtain customers and there are several factors
which help to do so. First of all, advertising role in B2B marketing is to create awareness, provide
information. Even though its nature it is informative and usually perceived as not creative and has
nothing to do with emotions McKee (2007) argues this by stressing the fact that audience no matter
how professional and concerned about figures are still human –beings which could be affected by
emotional aspect and cares about aesthetical facet. Another ways for raising customers’ awareness
involves trade shows and social media. The latter was successfully used in the case of Adobe
Systems when it acquired Omniture, a marketing analytics company, which had different buyers
and a different sales process than AS. In order to create awareness and inform possible customers
the website of Omniture - CMO.com was into ‘a powerhouse of original and curated content that’s
highly relevant to heads of marketing.’(Kovac, 2016) Complimentary component for previously
mentioned manners to create awareness is personal selling. In general, a firm’s sales representative
will deal with possible customers while figuring out their needs, discussing and negotiating
requirements and terms also managing post-sales relationships. As for retaining customers loyalty
programmes might be employed. For instance Nortel, telecommunications manufacture, did that by
providing channel partners with ‘frequent flyer’ loyalty program. (Nortel launches ‘frequent flyer’
loyalty program for SMBs, 2008) To summarize, the management of downstream relationships is
an important part for gaining significant amount supplier’s surplus and will contribute to overall
profitability.
Procurement
Upstream relationships management may enable the firm to capture good share of buyer’s surplus.
There are certain elements which may be employed for successful procurement. It is defined as ‘...
the business management function that ensures identification, sourcing, access and management of
the external resources that an organisation needs or may need to fulfil its strategic objectives.’
(CIPS, 2013). This paragraph will examine – supplier selection and supplier relationship
management. These parts are concerned about achieving value for money which could be expressed
as equitation - functionality divided by cost (CIPS, no date). However, there might arise some
obstacles. One of them is competitive structure of supply markets as it could be seen in the case of
NHS where monopolistic competition was causing high prices and low VFM (Watson, Lonsdale
eds. 2014). Another issue might be the opportunistic nature of some supplier’s behaviour, meaning
that supplier will seek self-interest with guile (Williamson, 1985, cited in Watson, Lonsdale eds.
2014). The premise for this is usually an information asymmetry between the buyer and the seller.
Another critical element for achieving VFM is appropriate methodology for selecting suppliers.
Watson and Lonsdale (2014) present debates about the basic criteria for choosing suppliers. One is
supplier competence - how well a firm‘s requirements could be fulfilled and another one is
congruence - ‘incentive for a supplier to want to fulfil the buyer’s requirements’ (Table 3) ( Watson,
Lonsdale eds. 2014, p. 80)). The example of competence requirement could be Clorox. This
company focuses on innovative suppliers and then was a need to produce new kind of sweetener,
the firm asked procurement organizations to search for suppliers capable of inventing such thing
(Niezen, Weller, 2006). Another issue is management of supplier relationships and it could be
divided into two ways of working: a collaborative or an arm’s-length one. The first one could be
defined as proactive and involves high level of interaction as well as creation of additional surplus
value by means of innovation or waste reduction. This kind of approach tends to dominate among
Japanese (Sako 1992; Hines 1994, recited in Cox, Sanderson and Watson, 2001). Another source MIT Sloan journal (Barney, 1999) also emphasises Japanese relations with their suppliers as they
have been working with the same network suppliers for more than 500 years. In economic terms the
cause of collaborative relationship is to reduce a supplier costs or boost a buyer’s utility. To add, the
great investments might be required in collaborative relationships as it is in defence markets where
states invest huge amounts of money for guns development (Watson and Lonsdale, 2014).
Alternatively, the arm’s-length relation might be chosen where ‘two parties engage in very little
contact during the relationship, beyond the exchange of the basic commercial information – what is
to be supplied, at what price, by what date, etc – that needs to be exchanged in order for a
transaction to take place.’ (Watson and Lonsdale, 2014, p. 90). This level of interaction is mostly
suitable for supply of ‘off-shelf’ goods and services.
Conclusions
To summarize, the ultimate aim of the firm-to be sustainably profitable could be achieved through
series of complex decisions. These involves positioning within the networks, boundaries of the
firm’s decisions, buyer-supplier relationships as well as management of upstream and downstream
customers. This essay presented condensed view of IBS&SCM module, however further studying is
essential to fully understand subject in depth.
Appendix:
Table 1. Cambell and Cunningham (1983) and Cox, Sanderson, Watson (2000)
Table 2. (IBS&SCM Lecture notes: Week 4)
Table 3. (IBS&SCM Lecture notes: Week 9)
References:
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Barney, J. B. (1999) ‘How a Firm's Capabilities Affect Boundary Decisions’, Sloan
Business Review, Spring issue
CIPS (no date) ‘The Definitions of ‘Procurement’ and ‘Supply Chain Management’- CIPS
Australasia. Available at: https://www.cips.org/Documents/Knowledge/ProcurementTopics-and-Skills/13-SRM-and-SC-Management/Supplier-RelationshipManagement/definitions_of_procurement_and_scm.pdf (Accessed: 25 of January, 2016)
Cox, A. Sanderson, J. and Watson, G. (2001) Supply chains and power regimes: ‘Toward an
analytic framework for managing extended networks of buyer and supplier relationships’,
The Journal of Supply Chain Management, 29(1), pp. 28-35.
Cox, A. Sanderson, J. and Watson, G. (no date) ‘Power Regimes: A Strategic Perspective on
the Management of Business-to-Business Relationships in Supply Networks’. Available at:
http://www.impgroup.org/uploads/papers/163.pdf (Accessed: 25 of January, 2016)
Ford, D.(2002) Understanding business marketing and purchasing: an interaction
approach, 3rd ed. Australia; London: Thomson Learning
Gadiesh, O. Gilbert, J.L. (1998) ‘Profit Pools: A Fresh Look at Strategy’, Harvard Business
Review, May-June.
Hague, N. (no date) ‘B2B marketing: What Makes It Special?’, Available
at:https://www.b2binternational.com/publications/b2b-marketing/ (Accessed: 25 of January,
2016)
Hinterhuber, A. Liozu, Stephan M (2012) ‘Strategic B2B pricing’, Journal of Revenue and
Pricing Management, suppl. Special Issue: Strategic B2B Pricing 11(1), pp. 1-3.
Homann, U. (2006) ‘A Business-Oriented Foundation for Service Orientation’. Available at:
https://msdn.microsoft.com/en-us/library/aa479368.aspx (Accessed: 25 of January, 2016)
Jay B. Barney(1999) ‘How a Firm's Capabilities Affect Boundary Decisions’, Sloan
Management Review, available at http://sloanreview.mit.edu/article/how-a-firmscapabilities-affect-boundary-decisions/ (Accessed: 25 of January, 2016)
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Kovac, M. (2016) ‘Social Media Works for B2B Sales, Too’. Business Harvard Review.
Available at: https://hbr.org/2016/01/social-media-works-for-b2b-sales-too (Accessed: 25 of
January, 2016)
McKee, S. (2007) ‘Five Common B2B Advertising Myths’. Bloomberg Business. Available
at: http://www.bloomberg.com/bw/stories/2007-04-11/five-common-b2b-advertisingmythsbusinessweek-business-news-stock-market-and-financial-advice (Accessed: 25 of
January, 2016)
Niezen, C. Weller, W. (2006) ‘Procurement as Strategy’ Harvard Business Review. 84 (9),
pp. 22-25.
Paranikas, P. Whiteford, G. P. Tevelson, B. and Belz, D. (2015) ‘How to Negotiate with
Powerful Suppliers’, Business Harvard Review, July-August issue. Available at:
https://hbr.org/2015/07/how-to-negotiate-with-powerful-suppliers (Accessed: 25 of January,
2016)
Pcworld.idig.com (2008) ‘Nortel launches ‘frequent flyer’ loyalty program for SMBs’.
Available at: http://www.pcworld.idg.com.au/mediareleases/1500/nortel-launches-frequentflyer-loyalty-program-for/ (Accessed: 25 of January, 2016)
Primark (no date) Available at: www.primark.com (Accessed: 25 of January, 2016)
Rosen, M. (2010) ‘Business Processes Start with Capabilities’ Available at:
http://www.bptrends.com/publicationfiles/12-07-10-COL-BPM%20&%20SOA-BusProcesses%20begin%20with%20Capabilities%201003%20v01--Rosen.pdf
Rozin, Randall S.(2004) ‘Buyers in business-to-business branding’, Journal of Brand
Management. 11 (5), pp.344-345.
Simkin, L. (2008) ‘Achieving market segmentation from B2B sectorisation’, Journal of
Business & Industrial Marketing, 23 (7), pp.464 – 474.
Todeva, E. (ed.) (2011) Business Networks, Encyclopedia of Social Networks, Sage. pp. 9598
Bibliography:
Lonsdale, C. Watson, G. eds. (2014) Managing the Supply Base within Business Networks, chapter
8 and 9.
IBS&SCM Lecture notes: Weeks 1, 2, 3, 4, 5, 6, 7, 8, 9
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