How Relevant Is the Concept of Power to Buyer-Supplier Exchanges - Case Study Example

| ID Table of Contents Introduction 3 2. References 10 Appendix 12 Appendix 2 13 Introduction Theory of Power and Power Relations Power is defined as a property of social relation between individuals or groups with a mutual dependence between the parties (Emerson 1962, 32). Definition of power with commercial focus describes it as the firm’s ability to influence the intentions and actions of another firm (Maloni & Benton 2000). Emerson has carried out a research on the characteristics of power relationship and explained that power of one party to influence or control the other party is highly dependent on the dependency level of the party in control. Thus, dependence of one party provides the basis for the power of the other and is defined as a potential influence (Emerson 1962, 32). By modelling Emerson’s concept of generic power-dependence relation to the buyer-supplier exchanges it is possible to formulate the following: buyer/supplier may be dependent upon another buyer/supplier based upon motivation toward the goods bought/supplied, the availability of alternative buyers/suppliers, etc (Emerson 1962). The more dependent buyer is on supplier and vice versa the greater power the supplier has and vice versa. In this case, the power of buyer over supplier is the amount of resistance on the part of supplier which can be potentially overcome by buyer (Emerson 1962). Emerson’s theory of power and dependence relations helps to explain the idea why certain buyers tend to dominate their suppliers. Consider two companies both benefiting from doing business together by supplying (supplier) and purchasing the supplied goods (buyer). Both, supplier and buyer, form a balance relation if we assume further that each has the other as his only business partner. In case, there appears the third party (new supplier) and signs a contract for supply of the same/substitute goods/services to the buyer, the relationships of the buyer and the first supplier will be imbalance as a result of virtue of buyer’s decreased dependence on the first buyer (Emerson 1962). Availability of the second supplier will enable buyer to dominate the first supplier and demonstrate its power through requirement of better conditions of supply, discounts, etc (the so called bargaining power). Power resources in buyer-supplier relationships Cox et al (2003) explain that collaboration in buyer-supplier relationships is a very important factor contributing to additional value for both parties. However, conduct and results of such relationships will depend highly on the power-dependence factor (Cox et al. 2003). Each power structure mentioned above will lead to different outcomes. Possession of power resources provides a party to overcome or minimise resistance from the other party (Cox et al. 2003). Cox et al., (2003) have identified scarcity, utility and information, as the key power resources. All three power resources are applicable to both buyers and suppliers. Below is presented a more detailed overview of the power resources for both parties. Scarcity as a power resource for buyer Scarcity as a power resource defines the dependence of the supplier on buyer based which is determined by the availability of alternative exchange options in the market (Cox et al. 2003). Thus, the more equivalent options are available the less scarcity for it on the market, and the lower dependence of the buyer/supplier is. Scarcity as a power resource for supplier For supplier scarcity as a power resource depends on three external factors, namely: competition among suppliers, potential new entrants to the supply market, and potential substitutes for the supply market (Cox et al. 2003). Power resource of the supplier is highly correlated with the competition on the supply market. If supplier is a market leader or is a monopolist on the market his power is growing significantly, as the dependence of the buyer on him is extremely high. However, the suppliers’ power will also be influenced by the barriers to entry such as government policy, economies of scale, etc. In case the supplier’s offering has substitutes on the market, scarcity factor will be lowered due to the availability of alternative goods. Utility as a power resource for buyer Utility is another resource of power for a buyer, in case the demand generated by buyer for specific good/s or service/s accounts for a significant portion of the supplier’s turnover (Cox et al. 2003). This makes buyer more powerful as the supplier has greater interest and expected benefits out of large or important order. Utility as a power resource for supplier Utility is also an important power resource for supplier and is interrelated with the scarcity. In case suppliers’ offering fits the operational and strategic expectations of the buyer and plays an important role to a buyer, then the supplier’s power to sell this specific offering has high chances (Cox et al. 2003). Information as a power resource for buyer The third power resource in the buyer-supplier exchanges is information. For the buyer, information is an important factor in relation to the extent to which the buyers can accurately assess the value for money of the supply offering and his capability to monitor other supplier offerings available on the market. Such supplier opportunism efforts for acquiring necessary information might require additional costs, as value for money for some goods can be assessed prior usage and actual purchase (test), for other goods it can be assessed after usage (TV), or cannot be assessed even after usage (for example, pension) (Cox et al. 2003). Information as a power resource for supplier Information as a power resource for supplier is also important for suppliers as it has relation to three key issues: buyer’s expectations from the market, buyer’s budget, and buyer’s willingness to pay for the expected good/service (Cox et al. 2003). When the supplier possesses reliable and accurate information about these three issues the supplier’s chance to interest the potential buyer can be increased if proper adequate supply offering is made. Four Generic Power Structures There are defined four generic buyer–supplier power structures, including: buyer dominance, interdependence, independence and supplier dominance (Cox et al 2003). Thus, power resources of buyers/supplier define who is dominating in the buyer-supplier relationships. In case both parties have high power resources they are interdependent on each other, and if both have lower power resources – independent from each other (Cox 2001). Cox (2001) has proposed six different ways for managing existing relationships with suppliers in so called “proactive manner. Brief overview of these routes is presented below. Supplier DominanceBuyer Dominance This stage implies transition of power from supplier to buyer, through: the increase of the buyer’s share of the market or number of suppliers; ensuring of quality and cost transparency; etc. (Cox 2001). Supplier Dominance  Interdependence This route can be achieved through: the increase of the buyer’s share of the market; increase of the suppliers; creation of jointly owned goods/service differentiation; lock-in high quality suppliers, etc. (Cox 2001). Supplier Dominance Independence This power transition can be achieved through: the increase of the number of suppliers; substitutes’ encouragement; innovation aimed at reduction of buyer search costs; etc. (Cox 2001). Interdependence  Interdependence Buyers can achieve power independence with suppliers by: increasing its share of the market; increasing number of suppliers; increasing standardization and commoditization of supply; reducing control of supplier over intellectual property rights, etc. (Cox 2001). Independence Buyer Dominance Buyers can dominate the suppliers through: the increase of the market share; reduction of buyer’s research costs; selective approach to suppliers with a focus on high dependent suppliers; increase of attractiveness of buyer to supplier (Cox 2001). While buyer dominance provides buyers with obvious opportunities and bargaining power, exploitation of the supplier chain may result in dissension and underperformance (Maloni & Benton 2000). References Cox, A, Lonsdale, C, Watson, G, & Qiao, H 2003, Supplier relationship management: a framework for understanding managerial capacity and constraints, European Business Journal, 15, 3, pp. 135-145. Cox, A. 2001, "Managing with power: Strategies for improving value appropriation from supply relationships", Journal of Supply Chain Management, vol. 37, no. 2, pp. 42-47. Emerson, R. (1962) ‘Power-Dependence Relations’, American Sociological Review, 27 (1). Lonsdale, C. (2012) ‘Procurement and Market Management’, in Glasby, J. (ed.), Commissioning for Health and Well-Being. (Hand-out) Watson, G. and Lonsdale, C., eds. (2003) Managing the Supply Base within Business Networks, chapters 1-3, 6 and 9 (from 107-112). (Canvas) Maloni, M, & Benton, W 2000, ‘Power Influences in the Supply Chain’, Journal of Business Logistics, 21, 1, pp. 49-73. Ramsay, J. 1996, "The case against purchasing partnerships", International Journal of Purchasing and Materials Management, vol. 32, no. 4, pp. 13-19 Caniels, M. and Gelderman, C. (2007) ‘Power and Interdependence in Buyer-Supplier Relationships’, Industrial Marketing Management, 36 (2). (EJ) Williamson, O. (1996) ‘Efficiency, Power, Authority and Economic Organization’. (Available from UG office). ROLOFF, J, & ASSLÄNDER, M 2008, AUTONOMY IN BUYER-SUPPLIER RELATIONSHIPS, Academy Of Management Annual Meeting Proceedings, pp. 1-6, Business Source Elite, EBSCOhost, viewed 3 August 2014. Read More