Importance of the Buyer-Supplier Power in Management and Outcomes of the Buyer-Supplier Exchanges - Coursework Example

THE IMPORTANCE OF THE BUYER-SUPPLIER POWER IN THE MANAGEMENT AND OUTCOMES OF THE BUYER-SUPPLIER EXCHANGES Student’s Name Course Professor’s Name University City Date The Importance of the Buyer-Supplier Power in the Management and Outcomes of the Buyer-Supplier Exchanges Introduction The two most important players in the business world are the buyers and suppliers. In the study of value chains, any firm may become a supplier or a buyer. On both sides of view, the power relations to each side seeks to determine the price. In the determination of price, one important aspect for any scholar in the value chains and procurement studies should understand is the issue of surplus value. By definition, surplus value is the difference between the cost of production of the supplier and the value placed on the product by the buyer. Roughly, power in the buyer-supplier relationship is the ability of one party to influence the other party to do something they would not have done originally (Morsy and Ibrahim). For a price to be determined, buyer-supplier power plays an important role in the division of the surplus value. An analysis of the buyer-supplier power and the influence it has on the buyer-supplier exchanges is important because determination of an agreeable price is important for both parties. In understanding the buyer-supplier power, a detailed analysis of three factors that affect this buyer-supplier power is needed. These factors are scarcity, utility, and information (Lonsdale, 2004). These three factors play an important role in defining the buyer-supplier exchanges. These factors can be interpreted as resources to be exploited by both buyers and suppliers. It is of practical importance, therefore, to analyze the impact of these resources on buyer-supplier power and the end impacts on the buyer-supplier exchanges. Distribution Of The Buyer-Supplier Power In the power plays, each player in the market seeks to obtain the largest portion of the surplus value. The conditions of the markets are dynamic with a characteristic of changing over time. These constant changes in the market are due to the changes in the supply market and other factors such as shifts in technological employment and the economic environment. Taking into consideration these factors, there may exist different power layouts in the market (Campbell and Cunningham, 1983). These layouts include supplier dominance, buyer dominance, interdependence and independence (Chicksand et al. 2014). The different power sharing scenarios are, therefore, a significant area for academics in the field of market studies. In the skewed power distribution of supplier distribution, various aspects of the market determine facilitate this occurrence. For supplier dominance to occur, there is a very high supplier power in comparison to the buyer and the market consists of many buyers but very few supplier (Chicksand et al. 2014). The suppliers have a leeway in determining price. In terms of the information factor that affect the buyer-supplier power relationship, it is clear that the supplier is at an advantage with information asymmetry (Chicksand et al. 2014). The item being traded has a very high utility for the buyer. For this kind of power sharing to occur, the supplier plainly does not depend on the buyer at all for revenue. The goods offered by the supplier are unique (Chicksand et al. 2014. A good example to illustrate this kind of market sharing dynamics is the sale and purchase of a highly sophisticated and top class technology engine casing in the engineering sector (Cox et al. 2003). On the supplier dominance type of market, the supplier obviously takes the largest proportion of the surplus value. The market conditions of different goods are different and, therefore, some markets will have a market power sharing scenario characterized by buyer dominance. In a market with buyer dominance, several prevalent conditions are observed. The ratio of buyers to suppliers is very uneven, with numbers in favor of suppliers (Chicksand et al. 2014). In this power relationship, the supplier is heavily dependent on the buyer for revenues. The supplier has no information asymmetry advantages over the buyer. In terms of switching costs, the buyer experiences low switching costs while suppliers experience very high switching costs (Chicksand et al. 2014). The commodity offered by the supplier is standardized and therefore homogeneous with other suppliers (Chicksand et al. 2014). In terms of utility, the buyer finds the product being of low utility combined with low information scarcity and a plenty supply of suppliers (Chicksand 2015). Due to the skewness in the market in favor of the buyers, the largest share of the surplus value goes to the buyers. A good case scenario to illustrate this kind of market power sharing is where a financial institution is to buy printed materials (Cox et al. 2003). The understanding of the buyer dominant type of market is therefore important in better understanding the power dynamics of the market. The other power scenarios in the power games of the market are the reciprocal power dynamics. These kind of power dynamics include the independence and interdependence dynamics. The independent power definitions of the market entails various characteristics. One salient feature of the independent power distribution dynamics in the market is the existence of many buyers and suppliers (Chicksand et al. 2014). From the existence of many buyers and suppliers, one can define the other factors of the independent form of power sharing market. The fact that suppliers have very little dependence on buyers for their revenues and little switching costs on the part of suppliers arise from the existence of many buyers and sellers. One cannot examine the independent power sharing dynamics without observing that suppliers have very limited information asymmetry advantage over the buyers (Chicksand et al. 2014). The commodity offered by the suppliers is homogeneous to all suppliers (Chicksand et al. 2014). This market orientation and division are unique in that it paints a picture of low utility, low scarcity and high access to information on the views of both suppliers and buyers (Chicksand 2015). Independent sharing of power in the market, therefore, means that there is an equal share of the surplus value between the suppliers and the buyers. Another scenario that defines the market scenes of the power struggles between buyers and suppliers is the interdependent relationship. In the interdependent power relationship, there is the existence of fewer buyers and few suppliers (Chicksand et al. 2014). The supplier depends heavily on the buyer for the revenues with few available alternatives for the buyer. The switching costs for both the buyers and the sellers are very high (Chicksand et al. 2014). The commodities offered by the suppliers are unique, and the search costs are very high for the buyer. Regarding information, there is the existence of moderate information asymmetry for the suppliers. There is the existence of high utility and scarcity from the views of both the buyers and the suppliers (Chicksand 2015). From these characteristics of an interdependent power-sharing scenario in the market, it is evident that the surplus value is equally shared between the suppliers and the buyers. A good case example of the interdependent power relationships in the market is the purchase of production services in the film sector by an advertising agency (Cox et al. 2003). A good understanding of the interdependence in the power-sharing relationship is therefore of great importance to any academic studying the dynamics of the business organizations. The Importance of the Observed Power Sharing Scenarios to the Buyer-Supplier Exchanges Having analyzed the basic buyer-supplier power sharing dispositions in the market, a look at the importance of these market buyer-supplier power conditions in determining the buyer-supplier exchanges and outcomes is therefore important. How does the existence of a market with the supplier or buyer dominance, influence the way business is conducted? How are the approaches to business different from an independent power sharing market to those of an interdependent power sharing market? To be able to answer these questions, it is important for any scholar to analyze cases in these types of power sharing markets. It is also of importance to understand the different buyer-supplier exchanges. How are these exchanges shaped by the different power-sharing models? It is of importance, therefore, to look at the importance of these power-sharing models to the buyer-supplier exchanges. An analysis of the AMI/Easton Negotiation case is important in understanding how power sharing influences the buyer-supplier exchanges. As an AMI representative, it is of paramount importance to understand the power relationship between AMI and Easton. It is important to note that there is a scarcity of suppliers, although the switching costs of AMI are low. It is also of importance to note that Easton as a supplier is not dependent on AMI as a buyer for their revenues. From the observation of the product supplied by the Easton it is clear that although the competition is closing the gap between the product differences, Easton still maintains its uniqueness regarding the product. The detailed provision of after sales services by Easton also adds to the uniqueness of Easton's products. From the above analysis, it is, therefore, evident that the power relationship between these two companies is a supplier dominance. Analyzing further AMI's current value for money proposition for XPX, it is evident that based on the returns from 2015, the value for money is around two hundred and thirty-four million dollars (Lonsdale, 2017). This value of money has been calculated by taking thirty-five percent of Easton's turnover in 2015 and adding five percent of that value. Easton's market offering fits into the above proposition minimally. The demand of a fourteen percent profit margin limits the congruence of the AMI position with Easton's market attitude. After developing leverage from the interactions with AMI and developing supplier dominance, Easton is now exploiting that leverage (Burt, et al.2003). From the above deliberations, it is evident that the commercial position in the negotiation with Easton is a narrow and limited to the supplier dominance power-sharing model. A negotiation plan is, therefore, necessary to draw in which the negotiation team will seek to mitigate the supplier-buyer differences from a partnership point of view. According to (Morsy and Ibrahim), a partnership is the relationship between the supplier and the buyer is a long-term and durable relationship coupled with cooperativeness. The contract of five years between AMI and Easton serves to cement this side of the argument. Innovativeness plays an important role in the determination of partnership as evidenced by the investments put in place by Easton. This case between AMI and Easton has served a very important role in showcasing the exchanges between buyers and suppliers in a supplier dominance type of market. In the case study where Comm-Net Technologies are considering outsourcing, an interdependence power relationship presents itself. While this claim might be a far cry, a look at the reasons why the company wants to outsource some of its products and services is important in determining the interdependent relationship between the Comm-Net Technologies and its buyers (Lonsdale, 2017). First, the clients are a critical source of revenues for the company as it controls a market share of forty-five percent. This high market share shows that there are few buyers and suppliers in the market. As indicated in the case materials, it is clear that the costs of buyers of shifting to other suppliers are quite high (Lonsdale, 2017). However, the products provided by CNT are unique products as having been witnessed in the difficulties by competitors to develop copycat products. The equal sharing of the surplus value has caused the jitteriness among the buyers regarding pricing. The result is that CNT has been forced to look at products that it can outsource. The following table illustrates a well-analyzed table of core and non-core products of CNT and their abilities to be outsourced. ‘Core’ ‘Non-Core’ Outsource Yes/No Research and Development No Manufacture of frequency processor No Development of operating software No Manufacture of steel casing Yes Manufacture of PCAs and PCBs Yes Manufacture of cooling system Yes Manufacture of digital display system Yes Manufacture of electrical system and cabling Yes Manufacture of minor components Yes Assembly of testing box No Testing of the testing box No Packaging Yes Transportation to customers Yes After-sales service No (Lonsdale, 2017). Interdependency, therefore, shows the effect and importance that buyer-supplier power has on the exchanges between buyers and suppliers. In the case where IBM was conducting a branding campaign, an independence, power-sharing scenario in the market presents itself. In this market, as it is shown in the case materials, there are numerous buyers and suppliers (vendors) (Lonsdale, 2017). The need for the company to vigorously advertise means that the possibility of losing traction in the market is very high. The fact that a company is number one in the market share, but the perception in the market the company receive an index of three or four showcases the large presence of suppliers in the particular market (Lonsdale, 2017). It is, therefore, clear that an independent power relationship determines the nature of interactions between the buyers and suppliers. One of these interactions is the aggressiveness of advertising strategies employed by the various suppliers in an attempt to lure these buyers into their businesses. So far the analysis has been skewed for the buyer-supplier power. But a question still lingers in mind, what are the buyer-supplier exchanges? In the business environment, there are four main significant buyer-supplier exchanges. These are based on a scale of transactional nature on one end and collaborations on the other end. A collaborative approach has been an area of interest in the buyer-supplier exchanges in the agricultural industries and retailers in the UK (Hingley 2005). Beginning on the side of transactional nature, one has arms-length, coordination, integration and partnerships where there is total collaboration meaning the firms are working together in order to create value (Corsten and Felde, 2005). An analysis of these buyer-supplier exchanges helps scholars understand how important the buyer-supplier power is important to the particular exchanges. To begin with, the arm's-length exchanges are characterized by the independence between suppliers and buyers. The characteristics of these exchanges are that there are low involvement and interaction among players, communication is minimal between buyers and suppliers while trust levels are at the lowest in these exchanges (Morsy and Ibrahim). Furthermore, the interaction between supply chain entities is very weak. The importance of buyer-supplier power continues to be evident as it shapes the nature of exchanges present in the market. Another exchange scenario between the buyers and suppliers is the coordination exchange. In this type of exchange, the entities have moved a step away from the transactional bottom line, but still a long way from total collaboration (Morsy and Ibrahim). In this exchange scenario, it is characteristic for the existence of a small pool of suppliers, but a large number of buyers (Morsy and Ibrahim). Clearly, a supplier dominance power-sharing model heavily influences the formation of this type of exchange between buyers and sellers in the market. In essence, buyer-supplier power has a significant hold on the way exchanges between buyers and suppliers are conducted. Moving closer towards collaboration, the other form of buyer-supplier exchange is integration. Uniqueness, innovation, creativity, and high information sharing are salient aspects of this exchange (Morsy and Ibrahim). From the salient features, the bells of a buyer dominance form of market share of the surplus value ring in mind. The prospective of customization of the goods and processes shows that the supplier is dependent on the buyer for their revenue. This form of buyer-supplier exchange proceeds partnerships in the achievement of total collaboration. Buyer dominance, therefore, plays a major role in defining the integral part of the collaboration scale. The most collaborative form of buyer-supplier exchange is the partnership form of exchange. In this form of exchange between buyers and suppliers, the frequency of the transactions is very high (Morsy and Ibrahim). This shows that there is a minimum supply of both buyers and suppliers. Communications and interactions in this exchange model are top-notch (Morsy and Ibrahim). To add to that, the commitment between buyers and suppliers is a very high degree (Morsy and Ibrahim). From the above features, one can only define the partnership exchanges using the interdependence narrative of power sharing in the division of surplus value. The associations between the buyer-supplier power sharing and exchanges, therefore, serve to define the scape of the business environment. A study of the relationship between these two notions serves to inform any academic or business professional of the importance of buyer-supplier relationships. Conclusion From the study of the relationship between suppliers and buyers, it is evident that the contention is in the division of the surplus value. It is from this notion of surplus value that the issue of power between the suppliers and the buyers arise. Utility, scarcity and information are three resources that are used to define the various power distribution models in the market. The four power models of supplier dominance, buyer dominance, independence, and interdependency are clearly analyzed. Various cases are used to further understand how buyer-supplier power affects the exchanges between buyers and suppliers. The cases are the AMI/Easton negotiations, CNT outsourcing, and IBM branding campaign. In the last section, the existing forms of buyer-supplier exchanges are clearly outlined. The relationship between the buyer-supplier exchanges and the respective buyer-supplier power models are clearly analyzed. Bibliograpghy Burt, D.N., Dobler, D.W. and Starling, S.L., 2003. World class supply management: The key to supply chain management. New York, NY: McGraw-Hill/Irwin. Campbell, N.C. and Cunningham, M.T., 1983. Customer analysis for strategy development in industrial markets. Strategic Management Journal, 4(4), pp.369-380. Chicksand, D., 2015. Partnerships: The role that power plays in shaping collaborative buyer–supplier exchanges. Industrial Marketing Management, 48, pp.121-139. Chicksand, D., Rehme, J., Nordigarden, D. and Yang, T., 2014. Understanding Business Relationship Management in China: A Power and Leverage Perspective. China-USA Business Review, p.636. Corsten, D. and Felde, J., 2005. Exploring the performance effects of key-supplier collaboration: an empirical investigation into Swiss buyer-supplier relationships. International Journal of Physical Distribution & Logistics Management, 35(6), pp.445-461. Cox, A., Lonsdale, C. and Watson, G., 2003, September. The role of incentives in buyer–supplier relationships: Industrial cases from a UK study. In Proceedings from the 19th Annual IMP Conference: 4th–6th September. Hingley, M.K., 2005. Power imbalance in UK agri-food supply channels: Learning to live with the supermarkets?. Journal of Marketing Management, 21(1-2), pp.63-88. Lonsdale, C. (2017) ‘AMI/Easton Negotiation Case Exercise’, Value Chains, Outsourcing and Procurement lecture notes, Session 1. Lonsdale, C. (2017) ‘IBM Corporation: Anatomy of a Branding Campaign’, Value Chains, Outsourcing and Procurement lecture notes, Session 4. Lonsdale, C. (2017) ‘Make/Buy at Comm-Net Technologies: Outsourcing Case Study’, Value Chains, Outsourcing and Procurement lecture notes, Session 6. Lonsdale, C., 2004. Player power: capturing value in the English football supply network. Supply Chain Management: An International Journal, 9(5), pp.383-391. Morsy, H.M. and Ibrahim, S.E., Buyer-Supplier Relationships and the effect of Power Balance on Innovative Knowledge Exchange. Read More