Volume 2 - The IMP Journal

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Volume 2 - The IMP Journal
THE IMP JOURNAL
ISSN 0809-7259,
VOLUME 2
CONTENTS
ISSUE 2.1
Page 2-12
Keith Blois
‘Exit, voice and loyalty’ in business to business markets
Page 13-30
Alexandra Waluszewski and Martin Johanson
When Resource Interfaces Are Neglected: Lessons From
History
Page 31-45
Lars-Erik Gadde and Håkan Håkansson
Business relationships and resource combining
Page 46-59
Malcolm T Cunningham
Pictures At An Exhibition Of Business Markets: Is There A
Case For Competition?
ISSUE 2.2
Page 3-24
Wendy van der Valk, Finn Wynstra and Björn Axelsson
An Empirical Investigation of Interaction Processes
between Buyers and Sellers of Business Services
Page 25-37
Roberta Bocconcelli and Håkan Håkansson
External interaction as a means of making changes in a
company: The role of purchasing in a major turnaround for
Ducati
Page 38-58
Ann-Charlott Pedersen, Tim Torvatn and Elsebeth Holmen
Towards a Model for analysing Supplier Relationships when
developing a Supply Network
ISSUE 2.3
Pages 2-18
Frida Lind and Anna Dubois
Analysing Dimensions And Consequences Of Project
Embeddedness
Pages 19-35
Anna Bengtson and Håkan Håkansson
An Interactive View Of Innovations: Adopting A New Timber
Solution In An Old Concrete Context:
Pages 36-52
Lars-Erik Gadde and David Ford
Distribution Research And The Industrial Network Approach
Produced in cooperation with
Norwegian School of Management BI
The IMP Journal
Volume 2, number 1
1
A Letter From The Editor
Welcome to the second volume of the IMP Journal. This volume is intended to
continue the policy of publishing a maximum of twelve papers each year that
represent some of the best and most significant output of research into business
interaction. Our aim is to publish work that is genuinely interesting and worthwhile,
rather than articles that are written simply to achieve a publication target!
This issue includes work by authors who have made major contributions to
understanding the structure and processes of business:
The first article is a very thoughtful paper by Keith Blois. The paper revisits the
influential work of Hirschman who almost thirty years ago provided a discussion of
how a customer may use ‘voice’ or display ‘loyalty’ within an exchange situation
rather than discontinue the exchange by ‘exiting’. Keith develops this idea in the
context of business to business exchange and illustrates this with two empirical case
studies.
The second paper by Alexandra Waluszewski and Martin Johanson is located in a
rather different context. The paper is based on an interesting case-study of the
evolution of a Russian Printing Company from the Soviet era to the present day. The
paper uses the case to explain the particular and evolving situation of this company
and to draw insights into the nature of resource interfaces between companies.
The third paper by Lars-Erik Gadde and Hakan Hakansson is also concerned with
resource interfaces and also presents a case-study. The paper develops a
framework for the analysis of resource-combining based on four categories of
resources. The paper concludes by interpreting the role of business relationships in
systematic resource combining.
The final paper by Malcolm Cunningham is also case-study based. On one level the
paper is based on a study of the German Packaging Industry. But on a second level
the case study is that of the work of the IMP Group itself. The paper uses the
metaphor of “pictures at an exhibition” to point to the dangers of “the increasing
uniformity, repetition and stereotyping of the IMP style in recent years” and argues for
IMP researchers to learn from other “groups of artists” in areas such as
Organisational Behaviour and Business Strategy.
These papers were initially presented following review at IMP Conferences or IMP
Journal Seminars. They were accepted for publication after revision and further
review.
I hope that all of these papers will provide interesting and thought-provoking reading.
Best wishes
David Ford
The IMP Journal
Volume 2, number 1
2
‘Exit, voice and loyalty’ in business to business
markets
Keith Blois a
a University of Lancaster and Templeton College, 54 Newland Mill, Witney, OX28 3SZ, e-mail:
[email protected]
Abstract
Hirschman (1970) uses an analytical discussion to consider how a customer may use ‘voice’ or
display ‘loyalty’ within an exchange situation rather than discontinue the exchange by ‘exiting’. While his
analysis provides valuable insights into customers’ behaviour towards their suppliers, the need for
further development of his analysis when applied to business to business exchanges is considered. In
particular the paper will argue that there are circumstances where, rather than to respond to the
customer’s ‘voice’, the supplier will prefer the customer to ‘exit’. Finally the potential use of ‘event
analysis’ to provide insights into the financial impacts of ‘exit, voice or loyalty’ is considered.
Keywords: Exchanges, Financial implications, Loyalty, Relationships
Introduction
The IMP Group’s interaction
approach does not necessarily imply
that relationships of the type discussed
under the broad heading of “business
to business relationship marketing” will
exist. Nevertheless, there is no doubt
that the concepts of “commitment and
trust”, which have been identified to be
essential components of relationship
building (Morgan and Hunt, 1994), are
often found within the interactions
which are the central concern of the
IMP Group and that examples of
effective
business
to
business
relationship marketing are frequently
found in the cases discussed by the
IMP Group (e.g. Ford, 2002).
Yet, it is important that the
basis for the on-going nature of many
interactions is fully understood.
Indeed observations and comments on
the benefits of business to business
relationships
should always
be
tempered by the recognition that a firm
will enter into a relationship for
fundamentally only one reason. This
is that a firm will only enter
relationships because it perceives that
by doing so will it be able to create
greater value for itself than if it
pursued a transactional approach to
the exchange.
However, business
circumstances are constantly changing
and any firm will from time to time
need to reassess the value that both
its purchasing and its supply
arrangements create for it. Such a
reassessment may lead to changes
that range from minor alterations in the
detailed operation of the relationship
through to its being ended - even in
those cases where a customer and
supplier have had a long-term close
relationship.
1. Hirschman’s analysis – an
outline
Hirschman (1970) uses a
verbal analysis to consider the
complex
interplay
between
a
customer’s willingness to: ‘exit from’1;
‘use voice within’; and, ‘demonstrate
loyalty to’ a relationship. He considers
how the probability of a supplier
recognizing the need to remedy a
deterioration in the quality of its
product offering is affected by the
The IMP Journal
Volume 2, number 1
possibility of customers ‘exiting’ from
the exchange but that the customer’s
‘loyalty’ may delay the use of ‘exit’.
Hirschman uses these terms
as follows:
‘Exit’ is where “The customer,
who dissatisfied with the
product of one firm, shifts to
that of another,…” (p.15)2 and
Hirschman makes it clear in
various places that ‘exit’ is
moving from an existing
supplier
to
one
of
its
competitors. For example he
refers to going “over to the
competition” (p.30).
‘Voice’ is defined “…as any
attempt at all to change, rather
than
escape
from,
an
objectionable state of affairs…”
(p.30). ‘Voice’ might involve
individual or collective action
aimed at the supplying firm’s
“management or to some
authority to which management
is subordinate or through
general protest addressed to
anybody who cares to listen.”
(p.4).
The ‘loyalty’ option recognizes
that a customer may continue
to purchase from a supplier
“longer than they would
ordinarily, in the hope or, rather
the reasoned expectation that
improvement or reform can be
achieved ‘from within’ ” (p.79).
Thus Hirschman suggests that,
where ‘loyalty’ exists, the
customer is “willing to trade off
the certainty of exit against the
uncertainties
of
an
improvement”
(p.77)
and
‘loyalty’ thus “holds exit at bay
and activates voice” (p.78).
Hirschman does not define the
term product but appears, as an
economist, to be using it in the
restricted sense of the physical
attributes of the item purchased.
However, there seems to be nothing
3
inherent in his argument which would
make it inappropriate to use the term
in the manner more typical of
marketing writers. That is where the
product is made up of a bundle of
attributes
which
“includes
the
functional utility of the goods, the
product service that the manufacturer
provides, the technical service he may
give his customers, and the assurance
that the product will be delivered when
and where it is needed and in the
desired quantities.” (Corey, 1975)
This paper will therefore use the term
product in this more extended manner.
Some of Hirschman’s findings,
while perhaps not counterintuitive, do
provide unexpected insights.
For
example his argument shows that,
while the easy availability of the exit
option makes the recourse to voice
less likely, “…it appears that the
effectiveness3 of the voice mechanism
is strengthened by the possibility of
exit.” (p.83). Hirschman’s argument is
that, if ‘exit’ is available, then a
dissatisfied customer is less likely to
take the trouble to express ‘voice’.
However, Hirschman demonstrates
that a supplier’s recognition of the
need to remedy any deterioration that
its customers perceive in its offering’s
quality will be affected by its
assessment of the probability of its
customers ‘exiting’.
A specific
circumstance where Hirschman feels
that ‘voice’ is more likely to be
effective is where there are big buyers
and he states: “Voice is most likely to
function as an important mechanism in
markets with few buyers or where a
few buyers account for a significant
proportion of total sales,…” (p.41). An
important point is that Hirschman’s
analysis presumes that the supplier
would perceive the ‘exit’ of a customer
as something to be avoided. This
paper, though, will argue that there are
circumstances where, rather than to
respond to the customer’s voice, the
supplier will prefer the customer to
‘exit’.
Hirschman
nuances
his
argument through the use of the
concept of ‘loyalty’. He argues that
The IMP Journal
Volume 2, number 1
“the likelihood of voice increases with
the degree of loyalty” (p.77). ‘Loyalty’
he argues arises when a customer has
a considerable attachment to a
product or an organization and in
consequence will wish to influence the
supplier rather than ‘exit’ - especially
when the supplier moves in what the
customer believes is the wrong
direction with regard to their joint value
enhancing activities. He reasons that
not only does ‘loyalty’ limit the
tendency of customers to ‘exit’ when
dissatisfied with the relationship but
that loyal customers will remain in a
relationship
in
the
“reasoned
expectation that improvement or
reform can be achieved ‘from within’.”
(p.79) but that ultimately loyalty that is
not acknowledged by the supplier will
result in the customer seeking to ‘exit’.
Hirschman points out that
loyalty raises “the cost of exit” (p.80)
for the customer and accepts that, if a
supplier recognizes this, it may
therefore take action to encourage
such ‘loyalty’. Indeed he would concur
with the statement that suppliers:
“…have an incentive to adopt
strategies that make established
customers unwilling to incur the time,
trouble, and expense of collecting
information from other suppliers.”
(Okum, 1981, p.170) However, the
interesting contradiction arises that, if
a supplier can encourage a customer
to be loyal, then this reduces the
likelihood that the customer will
consider ‘exit’ and thus the need for
the supplier to respond to the
customer’s ‘voice’.
2. Limitations of Hirschman’s
analysis for business to
business markets
Hirschman’s analysis has been
found to provide valuable insights into
the dynamics that can arise within
business to business interactions (e.g.
Gassenheimer at al., 1998; Ping,
1997, Johnston et al., 2006; Johnston
and Hausman, 2006; Kingshott, 2006).
Yet, although Hirschman recognizes
that there are some markets “where a
4
few buyers account for a significant
proportion of total sales…” (p.41), his
analysis was for the most part
developed in the context of the
behaviour
of
individual
small
consumers buying in competitive
supply markets. In particular the effect
of “large buyers” on the analysis,
though mentioned, is given minimal
attention.
His assumption that the
customer
has
access
to
a
considerable number of alternative
suppliers is one of the three significant
problems which arise when seeking to
apply Hirschman’s ideas to business
to business exchanges. The second
problem is that Hirschman says little
about the financial implications for
either the customer or the supplier of
the customer’s decision to: ‘exit’;
exercise ‘voice’; or, show ‘loyalty’. The
third issue is that Hirschman’s work
concentrates on the customer’s
behaviour and gives minimal attention
to the supplier’s actions. Each of
these three problems will now be
considered.
The availability of alternative
suppliers: In Hirschman’s analysis a
dissatisfied consumer can easily and
without incurring many costs switch to
an alternative supplier. Indeed he
argues that “the sheer number of
available goods and varieties in an
advanced economy favours exit over
voice, …” (p.41). Yet, as was pointed
out above, an essential element in his
argument is that “the effectiveness3 of
the voice mechanism is strengthened
by the possibility of exit” (p.83) and so
where, a supplier judges that a
customer’s threat to ‘exit’ is not real, it
is less likely to respond to the
customer’s
‘voice’.
While
generalizations are always risky, it is
arguably the case that most businessto-business markets are closer to
being oligopolies than competitive
markets and the availability of spare
competitive capacity at any time will be
more limited than assumed by
Hirschman. A customer’s assessment
of a situation may of course be
different from that of its supplier – for
The IMP Journal
Volume 2, number 1
example the supplier may believe that
there is no spare capacity within its
industry but the customer may have
either made a different judgement or
have already secured a commitment
from a competitive supplier. Whatever
the reasons for such differences in
perception it remains possible that a
customer may threaten ‘exit’ but on
receiving no adequate response from
the supplier still remains a customer
because they have no alternative.
This might be ascribed the label
‘blocked exit’ and defined to be: the
unsuccessful use of ‘voice’ but still no
recourse to ‘exit’ 4.
The financial implications of
‘exit; voice or loyalty’: The second
problem arises because Hirschman
does not explore the financial
implications of decisions to exercise
‘exit’, ‘voice’ or ‘loyalty’.
Because
Hirschman assumes that customers
confront a number of suppliers offering
similar products. So, if a consumer
decides that its current supplier is
unsatisfactory, then pursuing an ‘exit’
strategy involves nothing more radical
than moving to an alternative supplier
of a comparable product.
For
Hirschman ‘exit’ involves little cost for
“In the absence of feelings of loyalty,
exit per se is essentially costless,
except for the cost of gathering
information about alternative products
and organizations.” (pp.82-3)5.
In
addition
Hirschman’s
analysis
assumes that the loss of a single
customer is a matter of little
importance to the supplier because
each customer is assumed to be
small.
Hirschman states that a
customer deciding whether to use the
‘voice’ or ‘exit’ option will take into
account the chances of persuading the
supplier to respond to its ‘voice’. It will
thus be judging whether it is sensible
to exchange the current known
situation for the relative uncertainty of
the consequences of ‘exit’. However
Hirschman does not explore what by
what criteria a firm might determine
whether or not to ‘exit’ is the best
solution. To be able to do this the
5
customer will need to consider the
probability
of
encountering
the
following financial effects:
a/ The financial implications of
‘exit’. The costs here include:
the need to find an alternative
supplier; the risk that the new
supplier may be no more
accommodating
than
the
existing one; and, any costs of
bedding down the smooth
running of the new relationship.
These costs must set against
any benefits expected to be
achieved by changing supplier.
b/ The financial implications of
using
‘voice’
successfully.
These
are
the
benefits
expected to result from the
supplier’s changed behaviour
against which must be set the
costs of managerial time
expended
persuading
the
supplier
to
change
its
behaviour.
c/ The financial implications of
demonstrating ‘loyalty’. These
are the costs of managerial
time set against the benefits
gained from persuading the
supplier
to
change
its
behaviour. These costs will be
extended over a longer period
than ‘voice’ and, after some
period, the strategy will switch
to either ‘exit’, although the
customer may find their ‘exit’
blocked.
d/ The financial implications of
‘blocked exit’. These include
the cost of the management
time used in expressing ‘voice’
to no effect. Furthermore there
is the risk of it becoming
industry knowledge that it is a
firm
which
has
been
unsuccessful in a negotiation.
The response of suppliers to
the ‘exit, voice or loyalty’ of a
customer:
The third limitation of
The IMP Journal
Volume 2, number 1
Hirschman’s work, when applied to
business to business exchanges, is
that it concentrates on the customer’s
behaviour.
However, since its
inception the IMP Group has
emphasized that it is the interaction
between customer and supplier which
is important (Hakansson, 1982, p.1).
Furthermore, in business-to-business
markets the supplier is as likely as the
customer to initiate changes in its
exchange activities and, for example,
a supplier is as likely as a customer to
decide to ‘exit’ a relationship. Yet
Hirschman represents the supplier as
merely responding to a customer’s
behaviour, such as the threat of ‘exit’,
rather than ever being the initiator of
such behaviour. Indeed, Hirschman
does not explore in any detail the
supplier’s response to a customer’s
use of ‘voice’ or its threat of ‘exit’. He
goes no further than to imply that a
supplier is more likely to respond to a
customer’s ‘voice’ if it believes that the
customer’s threat of ‘exit’ is real,
suggesting that “it appears that the
effectiveness3 of the voice mechanism
is strengthened by the possibility of
exit.” (p.83.). He also fails to discuss
any second order effects even though,
for the supplier in the case of business
to business exchanges, these may be
substantial.
More attention should be given to the
supplier’s behaviour not least because
it is reasonable to assume that any
response to a customer’s actions will
result in the supplier incurring some
costs against which it must set any
benefits that it believes will, as a
consequence, gain. Furthermore, as
the two cases outlined below show, no
matter how probable it seems to the
supplier that the customer will ‘exit’,
the supplier may believe that the
financial implications of responding are
so great that it cannot afford to
respond to the customer’s ‘voice’ and
therefore has to accept a customer’s
‘exit’.
It is unreasonable to assume
that a supplier, when determining how
to respond to the customer’s ‘voice’,
6
will not seek to assess the financial
implications on itself:
a/ of the customer ‘exiting’.
These costs will primarily be
the subsequent loss of revenue
over a period of time. Where
the supplier has assets that are
only used for supplying this
specific customer then the
financial
implications
will
include not only the costs of
lost revenue but also the costs
of lower than expected asset
utilization. There may also be
second order effects.
For
example, if the customer’s exit
becomes public knowledge
there may be a negative impact
on the supplier’s share price
and this can result in the
attention of the supplier’s
management being distracted
by fears of take-overs, etc.
Furthermore, other existing
customers
may
see
an
opportunity to take advantage
of a weakened supplier and
any potential new customers
may assume that they are
negotiating with a weakened
supplier.
b/ of responding satisfactorily
to the customer’s ‘voice’.
These
will
include
the
implementation of any changes
sought by the customer plus
the recurring costs resulting
from these changes (for
example, the consumer may be
seeking a lower price and/or a
change in quality). In addition
there may also be significant
second order issues for, if the
supplier
accedes
to the
customer’s ‘voice’ requesting,
say, a lower price, then there is
a risk that other customers will
demand similar reductions.
c/
of
the
customer
demonstrating ‘loyalty’. These
arise (assuming that the
supplier’s management does
The IMP Journal
7
Volume 2, number 1
not totally ignore the customer)
from the costs of management
time in, at least: listening to the
customer; explaining why it
(the
supplier)
will
not
immediately respond to the
customer’s
‘voice’;
but,
eventually
making
some
response acceptable to the
customer for otherwise the
customer may ‘exit’.
d/ of not responding to the
customer’s ‘voice’ yet the
customer still does not ‘exit’.
The
customer
will
be
dissatisfied with the outcome
and there may consequently be
a need for the supplier’s
management to be especially
sensitive
to
any
further
demands from this customer.
A second order effect may be
the customer’s use of Negative
word-of-Mouth (Ferguson and
Johnson, 2007).
By bringing together the
financial
implications
of
these
strategies for the customer and for the
supplier (see Table 1) it is clear that
the supplier’s response to the
customer is more complex than that
implied by Hirschman.
Indeed it
implies that this is an interactive
situation in which the reaction of the
supplier will be determined by its own
assessment
of
the
financial
implications for it of each of the
customer’s possible strategies. For
example a supplier may perceive that
the financial implications of it
responding to the customer’s voice are
far more onerous than allowing the
customer to ‘exit’ or for itself to exit the
relationship. It may then refuse to
respond to the customer’s ’voice’ and
accept that as a consequence the
relationship will be terminated by the
customer ‘exiting’.
Table 1
The financial implications of exit, voice and loyalty
Customer’s
strategy
‘Exit’
Successful
use of ‘voice’
Demonstrate
‘loyalty’
‘Blocked
exit’
Customer
Benefits arising from dealing
with new supplier less costs of
management time finding new
supplier and setting up new
supply arrangements.
Benefits arising from the
successful use of voice less
cost of management time in
achieving it.
Belief that benefits will arise
from the use of voice less cost
of management time in
achieving it.
Cost of wasted management
time.
Loss of reputation in the market.
Supplier
Loss of revenue. Costs of
lowered asset utilization.
Position as a supplier weakened
due to public knowledge of loss
of business.
Costs of management time and
of implementing changes in
response to ‘voice’ plus the
recurring costs of these
changes.
Reactions of other customers.
Costs of management time and
ultimately costs of response to
customer’s ‘voice’.
Costs of management time.
Costs of disaffected customer.
Note: Items in italics are second-order effects.
The IMP Journal
Volume 2, number 1
3. Assessing the financial
implications
It may be possible for an
observer to gain through study of
press comment, some idea of the
impact on both customer and supplier
of the implementation of the strategies
listed in Table 1. However, press
comment of this type tends to be
restricted to the behaviour of larger or
significant companies and even this is
often limited to assessments of the
short-term impact of the first order
effects. For example, following the
announcement of a customer’s ‘exit’,
the press may give an estimate of the
supplier’s loss of revenue in the year
of the event. However, the loss of
revenue may extend over a longer
period of time and, as was pointed out
above, there may be significant
second-order effects. To be able to
obtain estimates of the full financial
effect on a supplier of, say, one of its
customer ‘exiting’ a researcher would
need to gain the type of access to a
firm which few researchers are able to
obtain.
However, the impact of firmspecific strategic events on a firm’s
value can be assessed by “event
studies” (McWilliams & Siegel, 1997).
Event studies are based on the
efficient market hypothesis that
“securities’
pricing
depends
on
investor
expectations
and
that
investors make good use of available
information
in
forming
these
expectations.” (Milgrom and Roberts,
1992, p.467).
In essence event
studies estimate how a share price
would have moved over some period
in the absence of new information and
then compare this to the actual price
during the period in which some event
occurred or information was released.
Once an estimate has been made of
the change in the share price that has
arisen as a result of the “event” then
the stock market’s assessment of the
change in the company’s value that
has resulted from the “event” can be
calculated.
Recently a number of
marketing studies (e.g. Agrawal et al.
8
2006; Cavusgil and Talay, 2006;
Talay, 2006; Wiles, 2007) have used
event studies to estimate the financial
impact of marketing decisions. These
studies use econometric models to
evaluate the effect of ‘events’ and the
movements in share prices which are
measured are typically very small with,
for example, Geyskens et al. (2002)
reporting that announcements of the
establishment
of
an
internet
distribution channels resulted in
increased returns of only 0.36% while
Wiles (2007) found an increase of
1.09% following announcements of a
retailer’s customer service strategy.
When discussing the two cases
below, event studies will not be used
in the formal sense of building
econometric models because the size
of share price movements observed
was so large as to make the use of
econometric measures redundant.
Nevertheless the concept of using
changes in share prices consequent
upon publicity regarding a firm’s
marketing actions can be used to
impute the impact on a firm’s value of
some of the entries in Table 1. For
example,
examination
of
the
movement of a supplier’s share price
when a customer’s ‘exit’ has become
public knowledge may give some
guide as to the financial implications of
‘exit’ as the two illustrations below
demonstrate.
Tesco and Dairy Crest In 2004
Tesco (the UK’s largest supermarket
chain with approximately 30% of the
UK market) was renegotiating its
contracts with its three milk suppliers
and in August 2004 it was announced
that Tesco was not renewing its longstanding contract with Dairy Crest (one
of the three largest UK suppliers of
milk). The contract was said to be
worth £60 million a year and its loss
reduced Dairy Crest’s share of the milk
sold in all UK supermarkets from 26%
to 18%. The prediction was that this
loss of business would reduce Dairy
Crest’s annual profits by £12 million.
The contract ran to April 2005,
but when on 28th August, 2004 the
loss of the Tesco contract was
The IMP Journal
Volume 2, number 1
announced, Dairy Crest’s share price
fell by 18% while Tesco’s share price
rose by 0.6%. This represented an
estimated fall in the stock market’s
valuation of Dairy Crest of £86 million6.
That is more than seven times the
estimated reduction in Dairy Crest’s
annual profits for 2005. This multiple
indicates the financial market’s
assessment of the consequences of
the loss of the Tesco contract. These
included, in addition to the loss in
revenue, Dairy Crest’s weakened
position when seeking to negotiate
contracts to replace the Tesco
business because it was now public
knowledge
that
it
had
spare
processing capacity.
It was also
assumed that this problem would also
arise when Dairy Crest renegotiated
any existing contracts.
Dairy Crest would have been
aware that Tesco’s threat to ‘exit’
could be implemented as both Tesco
and Dairy Crest knew that in the UK,
there was excess production of farm
milk and excess bulk milk processing
capacity.
However, Dairy Crest
appears to have determined that the
financial costs it would incur of
responding to Tesco’s voice would
have been greater than those it would
face if Tesco ‘exited’.
Tesco and Entertainment UK
(EUK) In the second half of 2005
Tesco sought to renegotiate the terms
relating to the third year of a contract
with EUK (a subsidiary of Woolworths
plc) for the supply of all of its needs for
CDs and DVDs.
Sales to Tesco
represented half of EUK’s turnover
with a further 40% coming from
supplying Woolworths. Tesco argued
that there had been deflation in the
market for entertainment software and
that it therefore needed EUK to lower
its prices. As a result of extensive
negotiations new terms were agreed.
However, EUK announced that the
contract was now unprofitable and that
during the final year of the contract the
new terms would reduce its profits by
at least £10 million on an annual
turnover of £450 million. Furthermore,
EUK stated that it did not, as a
9
consequence of the renegotiation,
expect there to be an agreement for
an extension of the existing contract
when it ended in February 2007.
Woolworths, because of the
significant impact of the changed
contract on its profits, was obliged to
issue a profit warning for the current
financial year - that is a formal
statement that earnings for a specified
future period will fall short of current
expectations (Bulkley & Herrerias,
2005, p.605). This led to a 12% fall in
Woolworths’ share price – the largest
fall on the London Stock Exchange on
that day while Tesco’s shares price
remained
unchanged
which
represented a decrease of £63 million
in the stock market’s valuation of
Woolworth plc6. The stock market’s
view would have taken account of the
immediate loss of Tesco’s business
plus the seriousness of EUK’s
situation which was emphasized by
press comment such as: “Replacing
Tesco, with its huge 30.5% share of
Britain’s supermarket sales, will be all
but impossible.” (Daily Mail, 2006,
p.19).
When dealing with EUK Tesco
used ‘voice’ to renegotiate the terms of
its existing contract. It seems that
EUK responded to ‘voice’ because the
threat of Tesco to ‘exit’ was perceived
as real and because such an action
would have left EUK with 50% spare
capacity and also reduced its
bargaining power with its suppliers
with regard to the remainder of its
business.
However,
as
its
announcement at the time of the
renegotiation made it clear, EUK
expected that, when the contracted
came to an end in twelve months time,
it would neither be able to afford to
continue to meet the requirements that
Tesco had ‘voiced’ nor did it anticipate
being able to negotiate a satisfactory
extension of its contract with Tesco.
As a consequence EUK decided that
to ‘exit’ the relationship with Tesco
was the least costly option.
The IMP Journal
Volume 2, number 1
4. Comment
The examples of Dairy Crest
and EUK are perhaps atypical in that
for two reasons they were both
relatively high profile ‘exit’ situations.
First, both were large companies
actively traded on the London Stock
Exchange. Second, any activity by
Tesco which appears to disadvantage
its suppliers or its customers, attracts
considerable media attention because
it is the UK’s largest retailer,. This was
so in these two cases with
newspapers headlines such as:
“Tesco Tactics” and “Tesco shrinks
Woolies” appearing plus editorial
comments to the effect that:
“Woolworths was all but screwed to
the ground when it negotiated a three
year deal with Tesco…” (Daily Mail,
2006, p.19).
The implication of these two
examples is that the financial
consequences for both Dairy Crest
and EUK of agreeing to the new terms
that Tesco was seeking through the
use of ‘voice’ would have been more
adverse than those arising from
Tesco’s ‘exit’. In other words both
suppliers perceived that, given the
new terms that Tesco was requiring
them to meet, ‘exiting’ the relationship
with Tesco would result in less loss of
value than remaining within it.
Furthermore, it is worth noting
that, although the consequences for
these two suppliers of Tesco ‘exiting’
their relationship were similar in that
both were substantially weakened
financially, there is a fundamental
difference in the type of product
involved. In the case of Dairy Crest
the product was a commodity i.e. milk
supplied in standard packs identical to
those used by Tesco’s two other milk
suppliers which involved ownership
specialist processing plant and fleets
of vehicles. In comparison, EUK was
Tesco’s sole provider of a unique
supply service which required the
ownership of warehouses and delivery
vehicles which could be used to
handle other products. This difference
in the products may explain why the
10
fall in the Woolworth’s value looks
small, even after allowing for the
difference in the level of the two
companies’ sales to Tesco, in
comparison with the effect on Dairy
Crest of its loss of Tesco’s business.
What is significant is how
asymmetrical the effect of Tesco’s
‘exit’ was, with Tesco suffering no
impact on its share price but
Woolworths
(as
EUK’s
parent
company) and Dairy Crest both being
considered as possible take-over
targets in the aftermath of the large
falls in their share prices.
From
Tesco’s point of view the financial
consequences of ‘exit’ were less
severe than either ‘voice’ or ‘loyalty’
and in its pursuit of the ‘voice’ option
Tesco would have been well aware of
the importance of its contracts for both
Dairy Crest and EUK and may as
consequence, and as Hirschman’s
analysis would have predicted, have
anticipated
them
being
more
responsive. In considering the risks of
the ‘exit’ option Tesco would have
been aware that there were other
potential suppliers of milk and that
capacity in the milk industry was far
from tight. Tesco would therefore
probably have regarded the possibility
of Dairy Crest ‘exiting’ as involving it in
little risk. In the EUK case, while
Tesco may have had no alternative
supplier immediately available, the
dispute with EUK occurred twelve
months prior to the end of the contract.
This clearly gave Tesco plenty of time
to find a new supplier and therefore
was also seen as exposing it to little
risk.
What is also noteworthy is the
existence of another asymmetry for,
although both EUK and Dairy Crest did
later gain new contracts from other
customers, the announcements of
these new contracts led to very small
increases in their share prices in
comparison with the falls which had
followed from the loss of Tesco’s
business. In Dairy Crest’s case this
perhaps reflects the press comment
that Dairy Crest would now need “to
bid aggressively for new customers so
The IMP Journal
Volume 2, number 1
at least the bulk of the lost Tesco
profits have gone for good.” (Urry,
2004, p.24).
Similar comments
followed, with an emphasis on the
lower turnover involved rather than its
profitability when, in January 2007,
EUK won a large contract that
replaced most of the lost Tesco
business. In fact the contract was not
quite as big as that with Tesco and
was only achieved by buying out an
independent wholesaler for £20
million. Indeed Woolworth’s share
price rose by only 3% when the deal
was announced.
5. Conclusions
Hirschman’s analysis of the
relationship between ‘exit; voice and
loyalty’ is powerful and has provided
many useful insights into the interplay
of these three strategies. However,
this paper has suggested that his
analysis has assumed that the supplier
is relatively passive but within
business to business markets this is
often not the case and therefore his
analysis needs extension. The paper
specifically proposes that Hirschman’s
analysis would benefit by:
giving more attention to the
financial implications for both
the customer and for the
supplier of the other’s view of
the choice between ‘exit, voice
and loyalty’;
taking account of second-order
effects may be significant and
should be factored into the an
analysis; and, that observation
of share price movements;
and,
recognizing that ‘exit’ may not
always be a realistic option.
Finally through the use of the
concept of event studies the paper
questions Hirschman’s claim that:
“Voice is most likely to function as an
important mechanism in markets with
few buyers or where a few buyers
11
account for a significant proportion of
total sales, …” (p.41). Indeed this
paper suggests that, on the contrary,
allowing a customer to ‘exit’ may
sometimes be less threatening to the
supplier than responding to a
customer’s ‘voice’.
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Cavusgil, E., & Talay, M. B. (2006).
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(2007). Customer Response to
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Gassenheimer, J. B., Houston, F. S., &
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Hirschman, A. O. (1970). Exit, Voice
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Decline
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Cambridge: Mass.
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Gassenheimer,
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Kingshott, R. P. J. (2006). The impact
of psychological contracts upon
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McWilliams, A., & Siegel, D. (1997).
Event studies in management
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Milgrom, P., & Roberts, J. (1992)
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analysis,
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Ping, R. A. (1997). Voice in Business
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Urry, M. (2004). Dairy Crest sees
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1
Where words and phrases are in single
inverted commas this is because they are
being used in the specific manner used by
Hirschman.
2
All unattributed quotes are from
Hirschman (1970).
3
Italics in the original.
4
As the definition of loyalty on p.3 makes
clear, this is not the same as ‘loyalty’.
5
However he had earlier also commented
that in the case of ‘exit’ allowance should
“be made for the possible loss of loyalty
discounts …” (p.40)
6
The figures below in these Cases are
the best estimates of a non-accountant
based on data in the two companies’
annual reports
The IMP Journal
Volume 2, number 1
13
When Resource Interfaces Are Neglected: Lessons
From History
Alexandra Waluszewski a and Martin Johanson b
a
b
Centre for Science and Technology Studies, University of Uppsala, Sweden, e-mail: [email protected]
Department of Business Administration, University of Uppsala, Sweden, e-mail: [email protected]
Abstract
This paper examines the issues of business resources and resource interfaces by presenting a longitudinal case
study of a company coping with the transition from a centralised Soviet economy to a more conventional situation.
The paper draws distinctions between different interaction patterns: those dominated by indirect interaction
inspired by hierarchical thinking; very “thin” interaction inspired by traditional market theory, or “thick” interaction
inspired by insights on what can be reached through resource combining effects. The case study shows how the
kind of interaction pattern that a company is embedded in will determine its way of functioning. The case
company’s struggle with its resource interfaces also highlights what constitutes “normality” in business
landscapes characterised by a “thick” interaction pattern, or a decentralised way of handling resources interfaces.
The case also highlights what is required for processes where both efficiency and effectiveness can be created
through dealing directly with resource interfaces. Finally, the experiences of the case company can also be seen
as arguments for considering what effects more minor variations in an economic landscape have for the
possibility of creating effectiveness and efficiency through direct interaction around resource interfaces. If the
overall economic landscape is dominated by some few owners (whether families, multinationals or governments)
with short-term profit focuses and/or by a “top-down” management style, there are reasons to believe that this will
have negative effects on the way resource interfaces are dealt with and consequently on effectiveness and
efficiency issues. Contrariwise, if an economic landscape has a more interactive nature, i.e., if it is dominated by a
heterogeneous ownership structure, by decentralised management style and technologically skilled and engaged
people, this will probably have positive effects on effectiveness and efficiency issues.
Key Words: Business relationships, History, Interaction, Resources, Resource interfaces, Soviet Union,
Transition.
1. Highlighting The Value Of
Interaction With The Help Of An
Absence Of Interaction
The focal company in this paper
can be viewed in two ways. On the one
hand, we see a company struggling with
resource
interfaces
as
a
typical
representative of the business life of a
middle-sized company, located some 200
hundred kilometres from one of Europe’s
larger cities. There is nothing special
about the focal company itself; it has
delivered to its largest customers for more
than four decades and used its main
suppliers for about the same length of
time. Furthermore, it does not differ much
from other companies engaged in the
same businesses in terms of its use of
technological
and
organisational
resources.
On the other hand, we see
something very special about the focal
company and its counterparts. The
company is forbidden to have any direct
interaction with its counterparts. It cannot
decide which supplier to buy from, which
users to sell to, and consequently it cannot
initiate discussions with its counterparts on
the supplier and user sides concerning
how to develop resource interfaces. All
such issues are handled on another level,
and it is these organisations our focal
company must turn to in all issues that
concern its supply and use of resources.
Depending on what we consider as
normality in a business landscape, our
focal company will appear as either very
typical or very odd. If normality is a
The IMP Journal
Volume 2, number 1
business landscape where questions
concerning how to relate to suppliers and
customers are devoted to management,
government, or a private owner, our focal
company’s way of struggling with its
resource interfaces will appear as a typical
example of what happens when there is
no direct interaction. If normality is a
business landscape where questions
concerning how to relate to suppliers and
customers are decentralised, our focal
company’s way of struggling with its
resource interfaces without any direct
interaction with related counterparts will
more or less appear as mission
impossible. From this perspective, our
focal company’s endeavours to cope with
its resource interfaces will reveal how
much efficiency and effectiveness issues
are dependent on direct interaction.
However, there is also a third view with
which to consider our focal company’s
struggle with resource interfaces – from
the perspective of the traditional market
model and related approaches. It is
interesting to note that with this approach
the whole issue of how to deal with
resource interfaces becomes obsolete.
Since resources are assumed to be
homogeneous, i.e., how they are
combined with each other has no
economic effects, there is no need to
bother about resource interfaces at all.
Whether we consider our focal
company’s situation as odd or as typical,
the fact that it is not allowed to deal
directly with its resource interfaces has
something important to teach us about the
prerequisites for reaching efficiency and
effectiveness
through working
with
resource
combinations
beyond
organisational borders. The company
through whose “eyes” we will consider
these issues is Tipografiya, a mediumsized printing house located to Novgorod.
When we meet Tipografiya it is embedded
into an economic system that has decided
that all issues concerning how to deal with
suppliers and customers should be
handled by a central planning authority.
Meanwhile, Tipografiya, without knowing
very much about its suppliers and users, is
struggling with its resource interfaces, the
largest city of the region, Leningrad,
becomes St Petersburg, and one of our
14
history’s most dramatic changes in a
political and economic system takes place
(the empirical study is fully reported in
Johanson 2001). Thus, Tipografiya’s
situation before and after the transition is a
striking illustration of how an individual
company could cope with internal and
external resource interfaces when any
company was a) forbidden to have any
direct interaction concerning resource
interfaces, and b) forced to begin dealing
directly with resource interfaces without
any
earlier
practise.
Furthermore,
Tipografiya and its interaction patterns can
be regarded as an important message
about the effects on effectiveness and
efficiency that are out of reach without
direct interaction with resource interfaces.
However, before we take a closer look at
how Tipografiya struggles with its resource
interfaces, let us consider how academic
scholars, with an interactive perspective of
exchange, deal with this issue.
2. Handling Resource Interfaces – A
Key Issue In Exchange Processes
Empirical studies of exchange,
which are not, as economic anthropologist
Sahlins (2004, pp. ix-xiii) put it, burdened
with pre-supposing a “self-regulating
economic domain”, i.e., which do not make
the “ethnographic category mistake” of
filtering the empirical observations through
the traditional economic theory’s ideal,
have one thing in common. They witness
about exchange processes taking place in
contexts
characterised
by
“relative
rationalities”. (Sahlins 2004, pp. ix-xiii)
“Rather than a separate
sphere
of
existence,
economic
activity
is
perceived as encompassed
in a cultural order. Hence it
needs to be understood in
relative terms of a given
mode of human existence:
as the expression, in a
material register, of values
and relations of a particular
form of life. Here is
‘economic’ as a function
rather than a structure – let
alone the all-determining
The IMP Journal
infrastructure.”
2004, p. ix)
Volume 2, number 1
(Sahlins
The exchange that takes place
between different rationalities implies that
as soon as any exchanged good is
brought into use, i.e., when an interface is
created between its supplier and user
side, it is reacted upon. When a supply of
goods is anchored in a use, it may, as
Gudeman (2001, p. 147) puts it, have
“unintended consequences, because the
tool is responded to, interpreted, and used
in a context of relations.” Thus any
exchange good, whether it concerns
handicraft-like items in a “traditional”
community or technologically advanced
solutions in a “developed” society
becomes an interface between different,
relative rationalities. To handle all these
processes where tangible and intangible
resources are exchanged, brought into
use and develop interfaces with other
resources and are reacted upon –
relationships become essential, or, as
Gudeman 2001, p.147 underlines; “the
stuff of economy”.
It is interesting to note that in the
empirical business landscape, these
different rationalities are not always
handled through direct interaction, but
often through some opposite organising
processes. In landscapes dominated by a
centralised
economy,
for
example,
governed through a hierarchical, planned
economic system, or dominated by a few
families or large national or multinational
companies,
the
direct
interaction
concerning resource interfaces can be
more or less abandoned in favour of a
centralised rationality interpretation. Also,
there can be limitations in decentralised
landscapes. If a landscape is governed in
order to imitate the stylised model world of
economic theory, long-term interaction
concerning resource interfaces can be
legally
abandoned,
since
such
relationships can be interpreted as a threat
to the “market mechanism”. Consequently,
as Gudeman (2001), underlines, there are
similarities between hierarchy and market
theories. “Both presume that rational
control of economy can be achieved”…
“Both economic systems assume that
information is sufficient to make rational
15
decisions at a national or individual level”
(Gudeman 2001, p. 152).
Furthermore, if there are large
differences
between
how
relative
rationalities are coped with in centralised
versus decentralised landscapes, there
are also differences within these
landscapes, on an individual company
level. While some companies encourage a
decentralised way of handling resource
interfaces and can develop extensive
organisational skills in how to cope with
interactive issues, others are managed
from a top-bottom tradition, resulting in
restricted space for direct interaction
(Håkansson and Waluszewski 2002).
However, under the surface of
these
governmental
or
business
arrangements, it has usually been possible
to trace how exchange and its effects have
been handled through interaction and
relationships. Or, as Gudeman (2001)
illustrates, how interaction appears to be
common in economy, whether facilitated
or hindered by features in a centralised or
decentralised
arrangement:
“Contemporary
corporations
forge
connections with buyers, sellers and
competitors”… “In early modern Europe,
trading networks of merchants spread
across large geographical areas”…“In
many parts of Latin America small-scale
market exchanges are given stability and
longevity by being sealed to compadrazgo
(shared god-parenthood) bonds that are
formed before and after the market
relationship.” … “In the former East
Germany,
personal
relationships
–
expressed through acts of barter,
reciprocity, and gift-giving – helped assure
access to goods and resources.”….
“Stretching from Latin America to Borneo
to Africa and elsewhere, the evidence is
remarkable” (Gudeman 2001).
These interpretations are also
close to the experiences made in the IMP
setting, which is based on empirical
accounts and on theoretical inspiration
from inter-organisational theory, sociology
and anthropology and which emerged as a
“new approach to industrial marketing and
purchasing” (Håkansson eds. 1982, p. ix)
(see Johanson, Mattson 2006 and
Håkansson, Waluszewski 2002, for a
discussion of some inspiring sources).
The IMP Journal
Volume 2, number 1
Results from empirical studies of about
800 European business relationships
indicated a “quite different picture” as
compared to the traditional market
assumptions about an atomistic market,
populated by units “free and independent
to do as it wishes” (Håkansson ed. 1982,
p. 2). A picture emerged of exchange as
an
interactive
process,
concerning
resources that are unknowable in any total
sense, or heterogeneous (Penrose 1959).
Over time, these interactions create
imprints in terms of interdependencies
between human and physical resources,
often depicted as network structures. In
this “challenge to conventional wisdom”
(Snehota 1990, p. 7), or at least to
traditional economic thinking, a basic
observation is that no goods, whether
presented in terms of products, processes,
or services, will ever be met by any
claimless demand (Håkansson eds. 1982).
Instead, any exchange process occurs in
an economic landscape full of already
activated tangible and intangible resources
that are also related to each other in
intricate patterns, which stretch over time,
place and organisational borders.
Furthermore, what is emphasised
in the IMP setting is that as soon as any
exchanged goods become part of
exchange processes, they gain direct
interfaces with at least some other
resources already in use. Each interface
between
tangible
and/or
intangible
heterogeneous
resources
is
a)
unknowable
and
unique,
and
b)
represented by at least two actors – a
supplier and a user. Thus, to cope with
interfaces is always to move in a “rugged
landscape” (van de Ven et al, 1999). It will
always be impossible to fully know what is
happening in each interface – and each
will be dealt with by actors with different
images of what is happening in the
interface and how to create benefits from
it. Thus, any exchanged goods, whether
new or old is constantly reacted upon. This
implies that there only exists one general
mean in an economic world characterised
by different rationalities and that is
interaction. (Håkansson, Waluszewski
eds. 2007)
16
2.1 Coping with resource interfaces
when they are hierarchical rather
than market organised
How to cope with resource
interfaces during the Soviet era was an
issue to be dealt with in a “well-defined
hierarchy” (Johanson 2001, p. 81). The
Soviet system “emphasised vertical control
and flows of information as opposed to
horizontal
connections
to
market”
(Gudeman 2001, p. 152). The basic idea
was to replace private interests with a
state-owned industry, guided through a
central planning and control system. In
contrast to what is assumed in traditional
economic theory, both allocation and
development of resources should take
place within this economic system. This
meant that the planning system was
responsible for the interface between each
resource; how the resources combined in
supplier-user
interfaces
should
be
allocated, developed and used (Ericsson
1991). Thus, how resource interfaces were
going to be organised was not a question
to be dealt with directly among related
suppliers and customers, but an issue that
is “determined by someone else, who, in
turn, has the authority and power to do so”
(Johanson 2001, p. 82).
If the organising of interfaces
between resources was a recognised task
to be taken care of by the planning
function in the Soviet hierarchical
economic model, how was this issue
organised in the transition to a market
economy? An interesting detail is that in
the recipe that was introduced, traditional
market theory, the issue of how to
organise interfaces between resources is
more or less obsolete. This question was
thought to be solved through the market
mechanism – a process where agents with
the same economic rationality “allocate
scarce resources to different possible
ends” (Wilk 1996, p. 30). Thus, in an
economic model where the exchanged
resources
are
assumed
to
be
homogeneous and the development of
resources takes place outside the
economy, the only question to cope with to
get this stylised economic world running is
the price of the exchanged resources (Wilk
1996). However, in the empirical part of
The IMP Journal
Volume 2, number 1
this paper we see that, whether
recognised or not in the model and
political world, for the individual company,
how the interfaces to suppliers’ and
customers’ resources are organised is a
highly relevant question.
Theoretical and methodological
underpinnings
The empirical part of this paper is
based on a PhD research project reported
in Johanson 2001, where the theoretical
underpinnings and method applied in
collecting and analysing the data is fully
presented. In short, a key starting point for
the work was the resource heterogeneity
assumption (and how it has been used by
Alderson 1965; Alchian, Demsetz 1972;
Penrose 1959; Richardson 1972; Hägg,
Johanson 1982; Snehota 1990 and
Håkansson, Johanson, 1992). With these
assumptions at hand, a company appears
as dependent on others, and thus has a
need to interact with others. But how are
interactive issues handled in a system that
assumed away the need for direct
supplier-customer relationships? This was
one of the key empirical issues of the
thesis, which focuses on Tipografiya´s
network before and after the transition.
The data collection, which is based
primarily on interviews with 35 of
Tipografiya’s staff members, took place
between 1996 and 2000 and stretches
from the mid 1980s to 2000. In the
following discussion the focus has been
directed to how interfaces between
tangible and intangible resources related
to Tipografiya’s supply and customer side
were organised during the planned
system, and in the following transition.
3. Organising Resource Interfaces In
The Soviet Economy
Organising resource interfaces in
the Russian context during the Soviet
economy could not be developed by a
company from the perspective of its own
and its counterparts’ interest. Instead,
there was an elaborate institutional
framework
regulating
the
relations
between companies and, not least, their
relations to the planning authorities. The
17
Soviet institutional framework regulated
almost the whole economy, and each
company had to live with centrally planned
production
volumes,
qualities
and
standards, as well as centrally fixed prices
and costs. The planning authorities’
responsibility included both allocation,
development, and use of resources.
However, the economic system was
organized according to a separation of
change and development of technology on
the one hand, and implementation and use
of the new technology, on the other. The
development
of
new
technological
solutions was an issue for planning
authorities, while embedding the outcome
into resource interfaces was an issue for
each company to carry out by itself.
(Berliner, 1976, Ericson, 1991, Gudeman,
2001, Nove, 1984)
An important ingredient in how
resource interfaces were handled in the
planned Soviet economic system was
price. During this era, prices were mainly
used as control mechanisms. They were
stable and fixed by planning authority
GOSKOMTSEN – and could not be
affected by the companies themselves.
This meant that the main function of prices
was for planning, control, accounting, and
measurement purposes. Prices were set
on cost-plus basis and included profits,
turnover taxes and handling charges. They
were aimed to cover average costs in
each branch of the economy, with the
intention was that each firm should be selffinanced. (Berliner, 1976, Ericson, 1991,
Nove, 1984)
In practice, this meant that
company interaction was an affair between
the planning authorities and the individual
company. All issues concerning how an
individual company should relate to its
customers and suppliers were handled
indirectly through the planning authorities.
When companies were engaged in
product
or
process
development
processes, these issues were carried out
in relation to the planning authorities and,
consequently,
coloured
by
this
perspective. Thus, which technologies
should be developed and how this
development would affect a producing
company, its suppliers and customers
The IMP Journal
Volume 2, number 1
were questions interpreted and preceded
by the planning authorities.
For an individual company, this
meant that both the quality of its input and
output were regulated through GOST, a
governmental standard. The individual
company had no direct influence over
choice of supplier or the quality and price
of deliveries. If it still managed to increase
the quality of the output, this had no direct
economic effects on its wellbeing. It could
not increase the prices of the output, it
was not allowed to search for new
customers that better fit their production
and it could not increase deliveries to
existing customers. Thus, any change in
the production process would only have
internal effects. On the other hand, each
firm had to fulfil the quality standards set
by GOST, otherwise the buyer could reject
the output. Rejections were deducted from
the firm’s production and could lead to
failure by the buyer in fulfilling its plan.
Despite GOST, the firms often had to give
priority to the production of quantity at the
expense of quality. (Berliner, 1976,
Ericson, 1991, Nove, 1984)
Running a company during the
Soviet economy was in other words not
mainly an issue of how to relate to
customers and suppliers, but how to relate
to the plans delivered by the planning
authorities. In parallel to companies there
also existed a number of governmental
organizations with the task of planning the
development and use of economic
resources. In total, over 20 State
committees and other agencies with
ministerial status answered for some
specific aspect of the development and
use of economic resources. For instance,
GOSPLAN had the task of developing a
general plan and the methods and means
to implement
it. GOSSNAB was
responsible for the physical distribution of
products and controlled the fulfilment of
the plans. GOSPLAN did the planning all
the way down to the production level, but it
was the ministries that had the actual
executive power and made the plans for
each firm concrete. Thus, the ministries
had extensive power over both the supply
and use of resources, and the individual
company’s possibility to exert influence
18
over this was limited. (Berliner, 1976,
Ericson, 1991, Nove, 1984).
Consequently, the knowledge that
should be used by the companies was
decided by authorities in a linear and
hierarchical process. Planning for and
developing new technologies were the
authorities’ task and using them was the
companies’ task. This meant that
development
of
new
technological
solutions was usually isolated from
practice; i.e. from the resource interfaces
where the new practices were supposed to
be embedded. The formal research and
development were performed by the
Academy of Science, the ministries or
state committees and was remote from
problems the companies and their
counterparts experienced and, most
importantly,
from
the
economic
consequences of the new technology.
Development of new technology was
based on the assumption that central
planners had the knowledge about
societies’ needs, and the innovation
process was based on the assumption that
perfect knowledge existed. Those who
planned change also knew perfectly how
the new technology should be used and
the consequences of doing this. Thus, the
main role of the company in development
issues was to implement the innovations
commanded
from
the
authorities.
However, in practice the exclusion of both
the focal user and its suppliers and
customers from the development process
meant that the outcome was difficult to
embed into these actors’ contexts. As a
result, companies became reluctant to use
new knowledge or new technological
solutions. How could an individual
company then handle resource the
interfaces it was dependent on; with its
suppliers and its users; in such economic
system? In the following, we will consider
these issues through the life of
Tipografiya. (Johanson, 2001)
Tipografiya, located to the City of
Novgorod, is an old firm and was
established before the Russian revolution.
When we first meet Tipografiya, in the mid
1980s, it was formally owned by the
regional
district
administration,
Oblispolkom. Tipografiya’s activities were
organised around the production of forms
The IMP Journal
Volume 2, number 1
and local newspapers – a direction given
by the planning authorities. Forms
constituted the most important product that
Tipografiya produced and sold from the
middle of the 1980s until 2000. It is also
forms that are in focus of our analysis of
how an overall economic system affects
how
companies
handle
resource
interfaces that stretch across company
borders. A main issue concerns how
knowledge was acquired and embedded
into resource interfaces related to the
supply and use of Tipografiya’s products,
when the main interaction around these
was directed in one way, from the planning
authorities to each company.
The paper is organised in the
following way. In the first section we will
consider how Tipografiya was involved in
handling resource interfaces during the
planned economy. The focal product is
presented and some critical resource
interfaces are identified. Then we will
make a brief overview of the changes in
the economic system that occurred during
the transition, which took place during the
first half of the 1990s. The final part of the
chapter concerns the handling of resource
interfaces in the transition economy.
3.1 Tipografiya’s organizing of
interfaces during the planned
economy
The vast majority of the forms
Tipografiya printed were for the regional
branches of the Soviet Post Office
Administration and Tipografiya supplied
these over the whole period of the planned
economy. However, Tipografiya had no
influence of what products, of what quality,
to what customers it should produce.
Instead, its production of forms was
standardised by the planning authorities in
terms of the quality of the paper, its size
and layout and these standards did not
change over the years. All regional
branches of the Post Office Administration
in the Soviet Union were governed by
Lensvyazsnabkomplektatsiya
(LSSK),
which also was responsible for all
allocation of forms. The Soviet Post Office
Administration used about 60 different
types of forms, but Tipografiya only
supplied ten of these, while other printing
19
houses printed the remainder. It was
LSSK’s decision that Tipografiya should
print these ten types of forms, and they
were annually depicted in the Ministry of
Transport
and
Communication’s
catalogue.
The
regional
branches
specified the volumes of each type of form
for the coming year and sent it to LSSK.
Tipografiya was then allocated production
plans by LSSK at the beginning of the
year. These specified what products and
quantities should be produced. The plan
also included decisions about what
salaries the employees of Tipografiya
should get, as well as the prices of its
inputs and outputs. However, although the
planning authorities decided what quantity
and quality Tipografiya had to produce, the
company could decide how this production
should be distributed over the year.
When LSSK sent the plan to
Tipografiya, it was received by the plan
and
production
department.
The
production of forms started when one of
the three employees in this department
gave the production specification to the
printing shops. Tipografiya’s plan and
production
department
was
also
responsible for ensuring that the
production took place according to
timetable.
Before the forms were printed, the
composition room prepared the matrices,
which were used in the process. The
preparation of lead printing blocks was
done manually. The composition room
was a large part of Tipografiya and was
also the most intense and lively
department of the company. It worked in
two shifts. Composition also included
preparation of the right quality and quantity
of the paper that was going to be used in
production. Paper was stored in a special
stockroom where one employee worked.
She
reported
to
the
accounting
department and calculated and estimated
the paper used in production. She also
took the paper to the printing shop.
The forms were printed almost
exclusively on the relief printing presses
as they were usually standardised and did
not require any adaptations.
But
sometimes towards the end of the 1980s,
offset machines were used. The relief
printing shop was situated partly on the
The IMP Journal
Volume 2, number 1
first floor, but there was also a room with a
few printing presses on the ground floor.
Altogether, Tipografiya had eight relief
printing presses, which had been supplied
before 1986. A critical resource both for
composition and printing were the
employees involved in the production. It
was not unusual for there to be a shortage
of staff, which partly influenced the quality
of the forms printed and partly meant that
Tipografiya sometimes had difficulties in
producing on time. In such cases it
happened
that
Tipografiya
used
typesetters from other printing houses.
After the forms were printed, they
were brought to the bookbindery, which
was equipped with paper cutters (without
computer programming) and equipment
for bookbinding. The equipment was
exclusively from a producer in the Ukraine.
After the forms were cut, they were taken
to the stock of finished products, which
was located to the first floor. One
employee managed the stock of finished
products.
3.2 Organizing interfaces in relation to
suppliers during the planned economy
The
interfaces
between
Tipografiya’s and its supplier’s resources
were almost exclusively handled by
Lensvyazsnabkomplektatsiya (LSSK), the
authority responsible for the planning of all
branches of the Soviet Union’s Post Office
Administration. Tipografiya’s main input
products were paper, inks and material
needed for composition. LSSK sent orders
to suppliers; the pulp and paper
kombinats, and to ink and matrix
producers, which specified the quality and
quantity of products to be supplied to
Tipografiya. When the paper was
delivered to Tipografiya, it was LSSK and
not the paper producer that received the
payment.
The writing paper Tipografiya was
supplied with was the standard used for
production of forms, and it was mainly
either DAO Bumaga Arkhangelsk or
Syktyvkarskiy TBK, which supplied the
paper. The most traditional supplier of inks
was Torzhorskiy Zavod Krasok, located in
the neighbouring district of Kalinin (which
in the 1990s changed its name back to
20
Tver). Poligrafresursy had supplied
matrices and Leningradskiy Shriftoliteyny
Zavod had supplied lead for a long period.
One of the most import materials in
Tipografia’s production; paper, was also
one of the products that caused most
trouble in production. It was the
responsibility of the paper and pulp
kombinats to transport the paper. The
paper was usually transported by train,
and Tipografiya received the deliveries a
couple of days after it was informed that
the paper was on its way. When the paper
was delivered, Tipografiya did not even
know what paper mill had been
responsible for the actual delivery.
However, Tipografiya’s employees had
learned over time to identify the
differences in quality between the paper
from the various suppliers, and how to use
these in production.
The fact that Tipografiya could not
influence the supplier, or the quality, the
quantity, or the transportation of the paper
caused problems both for Tipografiya and
its customers. Tipografiya had to live with
a constant shortage of paper, and had to
be satisfied if it had a sufficient quantity of
paper in stock. This meant that Tipografiya
preferred to receive as large a quantity of
paper as possible and to keep it in stock
for long periods. The paper supplier
delivered paper adapted to the quality
standards set by the planning authorities
and both Tipografiya and customers, the
Soviet Union Post Offices were excluded
from this process. The pulp and paper
kombinates supplied the paper according
to the plan orders they got from LSSK, and
neither LSSK, the pulp and paper
kombinates nor the post offices’ had any
knowledge about how much paper was left
in Tipografiya’s stockroom.
Altogether this often resulted in
situations where there was either too large
or to small volumes of paper in stock at
Tipografiya. Having too little paper meant
that Tipografiya could not start production
at the correct time. Having too much
paper, which from Tipografiya’s production
point of view was considered as a
strength, also meant that the paper was
piled in a room where the temperature and
humidity could not be regulated. When
taken to the relief printing shop for
The IMP Journal
Volume 2, number 1
production the paper was therefore usually
yellow, instead of white, and wavy, which
affected
the
interface
with
inks,
stereotypes and printing press and also
the interfaces between the finished forms
and the users.
The supply of resources related to
composition was handled in much the
same way as the paper supply. When
Tipografiya
needed
material
for
composition, it had to turn to KPI (Komitet
po pechat i informatsii), which was a
committee at Oblispolkom (the District
Administration), with responsibility for
dealing with issues related to the printing
industry and mass media. KPI made
centralised inquiries and was completely
responsible for the supply of consumables
such as inks, and stereotypes, but the
goods were delivered direct from the
producers. Tipografiya often had to wait a
long time for deliveries even though they
had already paid the money. However KPI
actually had a small stock of various
consumables such as inks and Tipografiya
collected directly from this stock. However
more commonly, KPI’s inquiries were sent
to Moscow, turned into production orders,
and distributed to the producers. Although
there was a shortage of these
consumables as well, they were not as
critical as that of paper. They could easily
be kept in stock for quite a long time
without losing quality. The consumables
used in the composition were kept in stock
in the composition room.
If Tipografiya wanted to make any
investments, it had to turn to its formal
owner,
Oblispolkom
(the
District
Administration), which handled this issue.
The
allocation
of
resources
for
investments was the only role Oblispolkom
had in relation to Tipografia. These
decisions were tied to political priorities or
centralised decisions made in Moscow.
However, it was KPI, the committee at
Oblispolkom
and
the
District
Administration,
which
financed
the
investment in new equipment such as
printing machines. Tipografiya had no
possibility of saving any money for
investments in the future, since all profit
was transferred to the government as
taxes.
21
3.3 Organizing interfaces in relation to
customers during the planned
economy
No one at Tipografiya knew what
happened to the forms after they had left
the finished products stockroom. The
company had in general no direct contacts
with its customers. Despite the fact that
Tipografiya had delivered forms to regional
branches of the Soviet Post Administration
for decades, none of these were ever
visited.
The deliveries of forms from
Tipografiya
to
the
Post
Office
Administration were handled by the
railway company in containers. At the
beginning of each month, Tipografiya gave
information
about
volumes
and
destinations to the railway and the railway
company then required Tipografiya to fulfil
deliveries to this timetable.
The Post Office Administration did
not pay when products were delivered, but
when they were produced and no credit
was given. The price that the Post Office
Administration had to pay only included
expenses in terms of physical work carried
out by Tipografiya. Expenses for insert
material, such as paper and ink, were
covered by LSSK. Despite the lack of
direct interaction between Tipografiya and
the Post Office Administration, the latter
did not have any complaints about
Tipografiya.
4
Severe Changes In Tipografiya’s
Economic Landscape
The “transition” to the dismantling
of the Soviet economic planning system
began around 1990. Tipografiya faced a
dramatic change in the economic
landscape. As well as the major transition
from planned economy to market
governance, Tipografiya’s business life
was also affected by the abolition of entry
barriers, liberalisation of foreign trade and
last, but not least, of the change of
corporate governance.
Tipografiya was transformed into a
leasing company in 1991, one year before
the large-scale privatisation of Russian
enterprises started in 1992. In 1993
Tipografiya became a joint stock company
The IMP Journal
Volume 2, number 1
and the employees acquired the stocks
from the state. Thus, from being controlled
by its owner, the regional district
administration, Oblispolkom, and its
committee KPI, Tipografiya had to be
managed in the same way as any
traditional private company. However, in
practice it was the same people that
managed Tipografiya before and after the
transition, and it was also this
management that became responsible for
the privatization of the company.
Relations with the main customer
group, the regional branches of the Post
Office Administration, were still handled
through LSSK. However, now LSSK
worked as an intermediary providing
services that Tipografiya had to pay for.
Some years after the transition, in 1994,
Tipografiya
perceived
that
LSSK’s
importance for the relationships with the
regional Post Office branches was
negligible. The contacts with LSSK were
terminated and Tipografiya started to
interact direct with its customer group. In
practice this meant that Tipografiya
negotiated an agreement with each
regional branch once a year.
The transition also had other
effects on Tipografiya’s exchange patterns
in addition to its ability to deal directly with
its customers. When it became possible to
reassess
exchange
partners,
a
widespread dissolution of relationships
occurred in the Russian business
landscape.
This
development
was
strengthened by the liberalisation of
foreign trade and the abolition of entry
barriers. More Russian firms, both
reconstructed and new, as well as foreign
companies entered the business world
and a more complex structure of both
competing and co-operating companies
evolved. New printing shops emerged; at
least one in Novgorod were Tipografiya
was situated, and in other regions.
Furthermore, the new business landscape
was also affected by the companies’ ability
to determine prices. Tipografiya for
example lost a number of its old
customers to Polex from Nizhny
Novgorod, a trading company which
engaged in printing activities in the middle
of
the
1990s.
Besides
offering
Tipografiya’s old customers’ lower prices,
22
this company also took care of the
transport of the forms.
In the mid 1990s, Tipografiya had
lost 45 of 75 regional branches to other
suppliers. One of the 30 regional branches
that continued to conclude agreements
was the Leningrad (St Petersburg) district,
one of Tipografiya’s most important
customers during the planned economy.
Another important customer during the
planned economy, the Yekaterinburg
district, gradually decreased its purchased
volumes. The Kemorovo district and the
Lipetsk district represented an opposite
development. They first increased their
volumes over the previous five years, but
in 1998 the Kemorovo district chose not to
buy from Tipografiya. The same thing
happened with Vladivostok (Elektrosvyaz
Primorskiy
Krayi),
UPFS
in
the
Arkhangelsk district and UFPS in the Komi
Republic. Altogether the 1990s meant that
Tipografiya lost the main part of its
customers’ among the Post Office’s
regional branches. Three of Tipografiya’s
seven biggest customers’ preferred to buy
forms from other suppliers, and the
produced volumes decreased significantly.
4.1 A slowly emerging interaction
between Tipografiya and its customers
Despite the fact that Tipografiya
started to interact directly with its
customers, and despite that many
customers left because they perceived
that they were getting better service from
other suppliers, the printing house did not
change its way of relating to the users in
any significant way. Although forms were
still Tipografiya’s most profitable product,
the printing house regarded the production
as simple and standardized from a
technical point of view and saw no need to
adapt in relation to its customers. The
design of the forms was still standardized
and depicted annually in the Ministry of
Transport
and
Communication’s
catalogue. The layout of the forms had not
changed since 1992, but during 1997–98
there were some small changes in the
design:
the
logotype
and
the
organisation’s name were replaced.
Although Tipografiya had started to
interact direct with the Post Office
The IMP Journal
Volume 2, number 1
Administration regional branches, the way
it related to customers was similar to that
in the planned economy tradition. The
yearly negotiations with the regional
branches of the Post Office Administration
were close to LSSK’s tradition. Tipografiya
distributed a standardised contract, where
the price was stipulated to the regional
branches. If the customers intended to use
Tipografiya as a supplier for the following
year, they specified, signed, and returned
the contract. When the customers had
signed the contract, it was still Tipografia’s
plan and production department, now
called production and finance department,
that was in charge of reception of orders,
preparation of price lists, control of
production times, invoicing, and follow-up
of price calculations.
However, in 1997 Tipografiya reorganised its activities relating to forms for
the regional branches of the Post Office
Administration. The responsibility for all
the regional branches was moved to the
newly-established business centre. The
main idea behind the business centre was
to create a better match between
Tipografiya’s production planning and its
suppliers’ and customers’ activities. The
business centre co-ordinated supply with
orders to the composition room and the
printing shops. It also monitored the
production and registration of incoming
and outgoing orders, prepared invoices
and received the payments. The business
centre was located on the ground floor and
had its entrance from the street.
The
transition
also
meant
Tipografiya took over the responsibility for
the transportation of forms to its
customers. The deliveries were made in
the same way as during the planned
economy; in containers sent by train, and
in some occasions deliveries were made
in packages sent by mail. One customer,
the Leningrad district, regularly sent a
driver to pick up the forms. After 1992, the
deliveries began to take place once a
month, but in 1996 Tipografiya took over
the responsibility for the transportation to
this customer and used its newly bought
van.
4.2 A slowly emerging interaction
between Tipografiya and its suppliers
23
The transition did not only affect
Tipografiya’s interaction with counterparts’
on the user side, but also to the supplying
side. New suppliers appeared, for instance
of paper. However, the most significant
change was that Tipografiya was allowed
to interact directly with its suppliers.
Although Tipografiya was owned by its
employees, decisions of what to buy
became a top management issue. The
managing
director took
over
the
responsibility for purchasing paper. The
emerging
purchasing
strategy
was
strongly coloured by Russia’s financial
crises. When Tipografiya was starting to
purchase insert materials by itself, it was
the ability to reduce the price and not to
affect the quality that initially attracted its
interest.
From a cost point of view, paper
remained the most important product
bought; the costs of paper were
approximately 75 % of purchases. Paper
was also one of the most important
products from a quality point of view, with
a strong influence on the characteristics of
the finished forms. Due to the managing
director’s strong attention to keeping the
costs low, the production staff could not
influence the choice of paper or of
suppliers. Although less important for the
finances, the chief engineer was in charge
of the purchasing of consumables and it
was not possible for setters or printers with
experience of the effects of different
qualities to influence his decisions.
Thus, Tipografiya’s purchasing
strategy during the transition became a
search for the cheapest paper available
and to buy large volumes. The supply of
paper was also characterised by an
increasing variety because both fixed
prices and most governmental standards
concerning
paper
qualities
were
abandoned. In the mid 1990s Tipografiya
developed its low-cost strategy further and
switched to a printing paper of lower
quality and lower price. This was intended
to allow Tipografiya to decrease the price
of the forms which was welcomed by its
customers.
Paradoxically, Tipografiya’s lowcost strategy resulted in the same quality
situation as during the planned economy:
The IMP Journal
Volume 2, number 1
It maintained a large, slow-moving stock
which meant that much of the forms were
printed on wavy and yellow paper.
Tipografiya’s management regarded a
large stock as a strength, although now for
different reasons; the ability to purchase
large amounts of paper led to lower prices.
Paper was still stored in the stockroom
and kept there until it was taken to the
printing shop.
Despite decreasing production
volumes, Tipografiya still bought wagonloads of paper and used the railways for
deliveries. In the beginning of the period,
Tipografiya continued to buy from the
same kombinats as during the planned
economy, but in the middle of the 1990s it
changed
suppliers,
when
several
intermediaries entered the business
landscape. The intermediaries offered
lower prices than the producers of writing
paper and Tipografiya began to buy from
them instead of buying directly from the
producers. In 1996, Tipografia had moved
almost all of their paper purchases to
intermediaries. One of the new suppliers
was the intermediary Nevskaya Bumaga,
which had managed to cut its costs and
consequently the price of the paper. An
additional big advantage was that
Nevskaya Bumaga did not require
prepayment.
Besides paper, inks continued to
be the biggest products in terms of
volume. Inks were stored right in the
printing shops. Tipografiya bought all its
inks for the relief printing from Torzhorskiy
Zavod Krasok, one of its traditional
suppliers. A few times a year, inks were
collected by Tipografiya in its own van.
However, due to Tipografiya’s decreased
production, and due to the fact that more
of the production was carried out on the
offset machines, the quantities of inks
purchased from this supplier gradually
decreased. Ink for offset printing was
purchased from Heidelberg or Ipris in St.
Petersburg. Tipografiya continued to buy
matrices
from
Poligrafresursy
and
sometimes from Shadrinskiy Zavod
Poligraficheskikh Mashin in Kurgan. The
increased use of the offset printing meant
also meant an increased use of offset
plates. Until the mid 1990s offset plates
was bought from Poligrafresursy, but then
24
Tipografiya started to by also these from
Ipris.
It was partly the ability to achieve
higher quality in the forms, but also the
decreasing production volumes that was
behind Tipografiyas movement of the main
production of forms form the relief printing
shop to the offset equipment. Small
batches made it more worthwhile to print
forms on the offset presses rather than on
relief presses. Printing on the offset
presses also meant that the composition
could be made on computers.
The first offset machine had been
delivered in 1977, but it had been used
solely for production of other products.
When the changes in the economic
system began, Tipografiya had eight offset
machines. The first computers had
appeared already in the end of the
planned economy. Tipografiya bought
three new computers in 1991, and in the
mid 1990s Tipografiya bought seven new
computers. After the production the forms
were still cut in the bookbindery by the
same equipment and taken to the room for
finished products.
5
Doing Business In A Context
Affected By Planned Economy
Thinking – Effects On Resource
Interfaces
Typografiya’s business life is a
good illustration of how much an overall
economic system affects an individual
company’s interaction patterns and its
ways of coping with direct resource
interfaces. Tipografiya’s way of handling
resource interfaces, both during the Soviet
era and during the following transition,
also stands out in distinct contrast to what
is presented in empirical studies carried
out landscapes characterized by a
decentralized economy. The empirical
areas that are generally studied in the IMP
setting concern almost any business
activity, from manufacturing to service and
science-based industries, but have the
decentralized economy as common
denominator. In these, the way that
resource interfaces are coped with can be
considered as variations on a theme:
Interfaces are in general developed in
direct interaction with those representing
The IMP Journal
Volume 2, number 1
related resources, almost regardless if
these were located within or over company
borders.
Furthermore,
business
relationships stretching over one or
several decades, including direct and
indirect related counterparts in the supplier
and user side in technological and
organizational development are nothing
unusual, with significant economic effects
for the involved parties and the larger
business landscape.
Almost no direct interaction with
counterparts
representing
resource
interfaces stretching over company
borders took place in relation to
Tipografiya’s production of forms. Instead,
all technological and organizational
interfaces related to the supplier and user
side were handled through a “middleman”; the planning authorities. Also, what
Tipografiya actually could communicate to
this “middle-man” was affected by the
overall economic system. Although
Tipografiya had a particular interaction
with the planning authorities and could
bring up issues like the need for new
equipment or input materials, the lack of
its own experiences of the counterparts’
total resource structures meant that
Tipografiya only had a very general
knowledge about what could be achieved
in relation to others. Tipografiya was
treated as if it was an island, by the
planning authorities, by its customers and
suppliers and last but not least, by itself. If
there were any dialogue around the
features of inputs and outputs, this was
between Tipografiya and the planning
system, not between those producing and
using these. The setters at Tipigrafiya had
particular knowledge about how the
interfaces between resource such as
paper, ink and printing machines could be
developed in order to increase both
efficiency and quality of the output. But
this knowledge was never used in direct
interaction with those representing these
resources. Instead the development of the
resources became an issue for the
planning authorities. Changes in both
inputs and outputs, in terms of qualities,
quantities and prices were designed by the
planning authorities. What Tipografiya
actually could do, besides communicating
their experiences to the planning
25
authorities and waiting for effects, was to
engage in internal interface development
process, as long as the result did not
interfere with what was stipulated by the
planning authorities. Thus, Tipografiya’s
activities became directed to internal
production management and to protecting
its internal functioning, for example
through holding a large stock.
The planning authorities accessed
this internally developed knowledge about
how resource combinations functioned
from their own production perspective
through interaction with Tipografiya and
other companies. This meant that the
interfaces between Tipografiya’s and its
counterparts’ resources where organized
from a particular perspective, that of the
planning authorities’ perspective of how
the resources could be combined.
Through combining and bridging each
company’s
“island”
perspective
of
resource
interfaces,
the
planning
authorities designed what was assumed to
be the “right” interface pattern.
Thus, the interaction pattern
created during the planned economy
affected Tipografiya in terms of who it
interacted with and in terms of what
problems
and
opportunities
were
addressed in the interaction. In other
words, the planned economic system gave
each single exchange episode that
Tipografiya was involved in a specific
content, by determining who was
interacting and what was their perspective
and knowledge.
5.1 Tipografiya’s way of handling
resource interfaces after the transition
Tipografiya experienced problems
because of the generally static level of
economic activity and its own lack of
development. These were in line with the
overall drawbacks associated with the
planned economic system by Western
economists. This diagnosis led to the
commonly articulated prescription that
what Russia needed was a market
economy; i.e. an economic exchange
system which allowed flexibility and where
resources where allocated through the
price mechanism.
The IMP Journal
Volume 2, number 1
For Tipografiya the transition to a
market economy began when LSSK and
KPI lost the influence over Tipografiyas
and its counterparts’ business life.
Tipografiya became employee-owned and
received a new management that was
dedicated to utilizing the flexibility of the
new economic system. However, this
management focused on how to utilize the
freedom to exchange resource, not on
how to develop resources. Thus, the
management’s behavior became very
close to that depicted in the economic
theory’s characterization of the interplay
between the “market” and the “economic
man”. The managing director and the chief
engineer developed a strategy in line with
the assumption that all necessary
information
about
the
exchanged
resources is contained in the price. Their
purchasing strategy was characterized by
buying from the supplier that offered the
best price, and trying to play-off
competitors against each other. This
meant that purchasing became an issue
between the management and the
suppliers. In the same way as during the
planned economy, none of the personnel
responsible for the production and use of
the purchased resources became involved
in these discussions. Thus, what
Tipografiya got during the transition was a
management that focused on short term
efficiency issues; i.e. that acted as if the
exchange resources were homogeneous
and as if there was no need to consider
neither internal nor external resource
interface development.
An interesting observation is that
when Tipografiya was managed with a
market perspective, the effects on its
development were almost the same as
those caused by the planned economy.
Neglecting the resource interfaces in favor
of short term efficiency issues again
resulted in a large stock, with quality
consequences such as paper which is
yellow and wavy when it arrives for
production. When LSSK and KPI withdrew
as planning authorities, Tipografiya and its
suppliers and customers also lost some
influences that actually demanded a
certain quality standard for the exchanged
resources. And since no new interaction
pattern had emerged which could replace
26
these quality demands, such as direct
interaction between customers and
suppliers, the new flexibility initially had
negative effects on quality. Thus, the
transition from a planned to a market
system gave no immediate benefit in
terms of quality development. Instead of
having a planned system that actually
handled certain development issues, the
price mechanism that was assumed to
provide resource development did not
deliver any such effects automatically.
Contrariwise, the initial effect was a lower
level of focus on quality and interface
development.
The new flexibility of the economic
system did however gradually make
Tipografiya aware of the need for
development in both cost and quality
dimensions. Tipografiya lost the main
parts of its Post Office customers and its
competitors not only offered lower prices
but also better solutions in terms of more
precise
and
adapted
deliveries.
Tipografiya’s development of a new
organizational unit can be regarded as a
sign of an increasing awareness of the
need for resource interface development.
The aim of the new business centre was to
create a closer coordination between the
customers’ requirements and Tipografiya’s
supply and production. However, the role
of the business centre in interface
development continued to be rather
immature. The supply of paper and
consumables was still managed by the
managing director and the chief engineer,
and although they did not have any
background in the printing industry they
preferred to make all these decisions. The
experience of the personnel involved in
handling the interfaces where these
resources were activated was not
considered by the management, in the
same way as during the planned
economy.
Thus, what the life of Tipografiya
before and after the transition illustrates is
that knowledge about how to develop
resource interfaces is no something that a
change in the overall economic system
rapidly can supply. Instead, it only appears
as the result of conscious interaction
between
directly
related
exchange
partners over time, in a context that
The IMP Journal
Volume 2, number 1
rewards not only the utilization but also the
development of resources.
Thus, the fact that it takes such a
long time for Tipografiya to start to interact
with its counterparts has probably both
internal and external explanations. Firstly,
before Tipografiya could start to interact
with its external counterparts it has to
create an internal organization that is
aware of and can handle such an
exchange pattern. It has to develop an
internal organization that can handle
extended interaction and that can utilize
the experience acquired through these
processes. As long as Tipografiya has no
internal organization for how to utilize
others’ knowledge, then it does not matter
how much it starts to interact externally,
that interaction will still not have any major
effects on the company. However, with an
increased awareness of what can be
achieved through interaction with external
counterparts, the external interaction
pattern will affect the way the company is
organized internally. Thus, a company’s
way of using its external interaction pattern
has to be mirrored through its internal
organizational design. This mutuality
between
external
and
internal
organizational design can only be
developed over time.
Secondly, it is not just our focal
company Tipografiya that needs time to
develop an internal organization adapted
to direct interaction with external
counterparts, but also the counterparts
have to go through the same process
(given that they are coming from the same
business landscape). However, even if the
counterparts are grounded in another
business landscape, i.e. in a Western
economy, they will still need time to
develop knowledge about how to interact
with this changing partner. This cannot be
expected to occur in a short time period.
6
Conclusion
Tipografiya’s life before and after
the transition illustrates how its first
indirect, and then more-or-less absent way
of dealing with resource interfaces, meant
that it was unable to achieve efficiency
and effectiveness in its operations. It is
also interesting to note that Tipografiya’s
27
way of dealing with resource interfaces
was coloured by the economic landscape
in which it was embedded. When we first
met Tipografiya, it was embedded in a
landscape that had devolved all kinds of
effectiveness and efficiency issues into a
hierarchical planning system. When we left
Tipografiya it was embedded in a
landscape that had devoted these issues
to a “market mechanism” that only existed
in a hypothetical world. Thus, Tipografiya’s
struggle with its resource interfaces
illustrates that any company’s interaction
pattern is formed by the overall economic
system in combination with the company’s
own experiences of how to organise
internal and external resource interfaces.
The interaction pattern that each company
develops influences both how it identifies
problems concerning resource interfaces
as well as the opportunities to solve them.
Thus, each company is embedded
into a “normal” interaction pattern. This
may be dominated by indirect interaction
inspired by hierarchical thinking; it may be
very “thin” interaction inspired by
traditional market theory, or it may be
“thick” interaction inspired by insights on
what can be reached through resource
combining effects. The kind of interaction
pattern that a company is embedded in will
determine its way of functioning. It will
have a strong impact on how problems
and opportunities concerning resource
interfaces are considered. To challenge
and break such normality is never easy,
whether it is an individual company in a
decentralised economy that is moving
from a top-down to an interactive way of
relating to its counterparts, or if it is many
companies, as in Tipografiya’s context,
that are forced to adapt to changes in the
economic landscape. Any such change
will affect each company’s and its
counterparts’ ways of coping with resource
interfaces and thus issues related to both
development and economic outcome.
Tipografiya’s
struggle
with
resource interfaces has also highlighted
what constitutes “normality” in business
landscapes characterised by a “thick”
interaction pattern, or a decentralised way
of
handling
resources
interfaces.
Tipografiya also highlights what is required
for processes where both efficiency and
The IMP Journal
Volume 2, number 1
effectiveness can be created through
dealing directly with resource interfaces:
A first prerequisite for reaching
efficiency and effectiveness in working
with
resource
interfaces
over
organisational borders is a business
landscape that allows representatives of
resource interfaces on the supplier and
user side to interact directly. A second
prerequisite is awareness of the
possibilities of creating efficiency and
effectiveness by working with resource
interfaces over organisational borders
(See e.g. Håkansson ed. 1987; Gadde,
Mattsson 1987; Waluszewski 1990;
Lundgren 1995; Laage-Hellman 1997;
Holmen 2001; Wedin 2001; Håkansson,
Waluszewski
2002;
Baraldi
2003;
Bengtson
2003;
Forbord
2003;
Gressetvold 2004; Jahre et al. 2006,
Harrison, Waluszewski, 2008, for studies
concerning what can be achieved through
direct interaction of resource interfaces
over organisational borders).
Tipografiya’s experiences can also
be seen as arguments for considering
what effects more minor variations in an
economic landscape have for the
possibility of creating effectiveness and
efficiency through direct interaction around
resource interfaces. If the overall
economic landscape is dominated by
some few owners (whether families,
multinationals or governments) with short
term profit focuses and/or by a “top-down”
management style, there are reasons to
believe that this will have negative effects
on the way resource interfaces are dealt
with and consequently on effectiveness
and efficiency issues. Contrariwise, if an
economic landscape has a more
interactive nature, i.e., if it is dominated by
a heterogeneous ownership structure, by
decentralised management style and
technologically skilled and engaged
people, this will probably have positive
effects on effectiveness and efficiency
issues. One interesting example of the
latter, also well recognised after it was
awarded the Nobel Peace Prize in 2006
“for their efforts to create economic and
social development from below”, is the
28
Grameen Village Bank.1 This construction
challenges both the hierarchical and
market thinking concerning how to
organise resource interfaces – and it was
also shunned by development agencies
and governments, including the World
Bank. It builds on creating direct interfaces
between the provider of micro loans, the
emerging company, and its counterparts
involving
co-operation
between
impoverished women who have some kind
of skill on which supply and use of
resources can be created (see Counts
1996
and
Gudeman
2001,
www.nobelprize.org)
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30
The IMP Journal
Volume 2, number 1
31
Business relationships and resource combining
Lars-Erik Gadde a and Håkan Håkansson b
a
Professor of Marketing, Department of Technology Management and Economics, Chalmers University of Technology,
S-412 96 Göteborg, Sweden, e-mail : [email protected]
b
International Management, Norwegian School of Management, Oslo, Norway, e-mail: [email protected],
Abstract
The increasing significance of relationships is acknowledged by various schools of thought.
Despite the fact that these approaches describe and explain business relationships somewhat differently,
they seem to share the view that there is a strong association between a company’s business relationships
and its use and control of resources. The aim of this paper is to explore the role of business relationships in
systematic combining of resources. We begin with an illustration of resource combining across firms’
boundaries in the steel industry. On the basis of this example we make a distinction between resource
combining within relationships and between relationships and explore the characteristics of the two. This
section is followed by a framework for analysis of resource combining building on four categories of
resources. The framework is then used to exemplify systematic resource combining in three different
dimensions: primary, secondary and tertiary. Finally, we conclude by interpreting the role of business
relationships in systematic resource combining.
From the organizational theory perspective it is claimed that the processes of building interorganizational relationships can be regarded as a flow of resources between organizations (van de Ven
1976). In transaction cost analysis ‘asset specificity’ is a central concept denoting resources dedicated to
specific business partners. According to Dyer and Singh (1998) a firm may consciously seek advantages by
designing resources that are specialized in conjunction with those of a customer or supplier. Once a high
degree of asset specificity is established business exchange is best supported by organizational forms
enhancing cooperation and proximity between the partners (Dyer 1997).
Key words: resources, resource combining, categories of resources, business relationships
1. Introduction
Business relationships are key
ingredients
in
today’s
economic
landscape. The increasing significance
of relationships is acknowledged by
various schools of thought. Despite the
fact that these approaches describe and
explain
business
relationships
somewhat differently, they seem to
share the view that there is a strong
association between a company’s
business relationships and its use and
control of resources. From the
organizational theory perspective it is
claimed that the processes of building
inter-organizational relationships can be
regarded as a flow of resources
between organizations (van de Ven
1976). In transaction cost analysis
‘asset specificity’ is a central concept
denoting resources dedicated to specific
business partners. According to Dyer
and Singh (1998) a firm may
consciously seek advantages by
designing resources that are specialized
in conjunction with those of a customer
or supplier. Once a high degree of asset
specificity is established business
exchange is best supported by
The IMP Journal
Volume 2, number 1
organizational
forms
enhancing
cooperation and proximity between the
partners (Dyer 1997).
From a resource-based view
business relationships are crucial since
‘strategic alliances’ are considered
means to access valuable resources
that firms do not own themselves
(Barney 1991). Moreover, it is
suggested that “the rationale for
alliances is the value-creation potential
of resources that are to be pooled
together” (Chen and Chen 2003:5).
Finally, advocates of the industrial
network approach argue that the
adaptations of resources in business
relationships are significant since they
connect the two companies. It is, in fact,
“in and through relationships to
suppliers, customers, and others that
resources are accessed, provided and
developed” (Håkansson and Snehota
1995:133).
The review above illuminates the
central role of business relationships in
accessing,
designing,
and
using
resources. This common understanding
provides the background for our paper.
Business relationships provide ample
opportunities for efforts where resources
are consciously designed and related to
fit with each other. Our point of
departure is the assumption that the
value of a resource is determined
through its interplay with other
resources (Penrose 1959).
The
underlying processes of companies’
efforts in this respect are identified as
‘systematic combining’ of resources
across firms’ boundaries. In the paper
we investigate the role of systematic
combining in terms of its function and
effects. Our exploration of systematic
combining
builds
on
previous
contributions within the industrial
network approach: the centrality of
adaptations in business relationships
(Håkansson, ed, 1982; Håkansson and
Snehota 1995), and the view of
relationships as investments (e.g. Hägg
and Johanson, 1982; Johanson and
32
Wootz 1986; Ford et al 2003). Over time
these, and other, contributions have
provided
an
understanding
that
business relationships are important
resources
in
themselves
(e.g.
Håkansson and Waluszewski 2002).
2. An
illustration
of
combining
in
relationships
resource
business
In order to illuminate the role of
resource
combining
across
the
boundaries of firms we rely on an
example involving a Swedish supplier of
steel (Skarp, 2006). The company
(SSAB) is quite small in comparison with
its large scaled competitors and it is
thus difficult for SSAB to be competitive
on highly standardized products, which
are produced and supplied in large
volumes.
Therefore,
SSAB
has
prioritized the development of unique
and customer-adapted niche products of
specialized steel qualities. It is a
drawback for SSAB, however, that each
of these customers account for a minor
volume of steel only. This is problematic
because economic exploitation of the
manufacturing facilities of a steel
supplier is extremely dependent on
capacity utilization. In order to make the
most of this potential, SSAB has
developed a basic standard product that
can be manufactured at reasonable
economies of scale. This standardized
product is then adapted to the specific
contexts of potential customers. Each
buyer has its particular requirements in
terms of special product features owing
to the variety among the user contexts,
thus making adaptations complex.
In some cases it is possible for
SSAB to adjust the standard product by
recombining its own resources, for
example by shifting from one of its
internal sources of raw steel to the
other. In most situations however,
adaptations
require
the
active
participation of the customer in frequent
meetings
and
discussions.
This
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Volume 2, number 1
interaction involves commercial and
technical expertise from different
functions in the two organizations.
Within this business relationship a
series of testing procedures are needed,
building on, and resulting in, mutual
adjustments between the two firms.
Such experimental conditions where
resources
are
combined
and
recombined seem to be the normal case
since “the possible interactions between
products and their use environments are
sometimes too complex to be predicted”
(von Hippel and Tyre 1995:9). A typical
outcome of these experiments is the
joint adjustments of the features of
SSAB’s product and the customer’s
manufacturing facility where the product
is used as one of the inputs.
Sometimes the joint efforts of
SSAB and the customer are not
sufficient to adapt the product to the
user context. In these situations other
relationships have to mobilized. Figure 1
illustrates the organizations involved in
the process of adjusting the features of
33
the standard product to the user context
of a subcontractor to a large OEM in
Germany.
Adapting the steel product to the
facility of the German subcontractor
required the active participation of the
subcontractor’s organizations in the UK
and USA. Moreover the customer of the
subcontractor was represented by the
German and UK operations of the OEM.
Various functions within SSAB were
mobilized in the adjustment processes.
A steel-service centre was needed for
local processing of steel, and a press
shop was involved in manufacturing
applications and sub-assembly on the
account of the customer. These
operations required specific production
tools to be supplied by a German
toolmaker. SSAB had to establish
contacts with all these firms in order to
ensure that technical, administrative and
logistical issues could be solved
satisfactorily. Since the other firms had
limited knowledge of the particular type
Figure 1
Business relationships involved in resource combining (Skarp 2006: 107)
The IMP Journal
Volume 2, number 1
of steel numerous meetings, seminars,
and tests were needed. It would have
been extremely costly – and unprofitable
– both for SSAB and the subcontractor
to make these adaptations entirely on
their own. However as this case shows,
other means of resource combining may
became a viable option in such
situations. Careful scrutinizing of
existing resource combinations in the
surrounding
network
provided
opportunities for adaptations of the
product. By using others’ resources not
fully exploited in their current settings,
SSAB and the subcontractor managed
to adjust the features of the
standardized product at reasonable
cost. These additional resources
included, for example, application
knowledge residing in other companies,
and facilities that could be used for
refinement of the physical features of
the product. In some cases these
resources were accessed via existing
relationships of SSAB or the customer,
while
in
other
situations
new
relationships were established jointly.
3. Systematic resource combining
across the boundaries of firms
By systematically combining
resources available in the network,
SSAB was thus able to adapt its
standardized product to a variety of
customer needs at the same time as the
benefits from large-scale manufacturing
could be continuously reaped. In these
efforts business relationships played an
important role. As shown by the
example it might be useful to make a
distinction between two types of
resource combining: the first related to
combining within a specific business
relationship, the second dealing with
resource
combining
between
relationships.
3.1
Resource combining within a
business relationship
34
A business relationship has a
dual role in resource combining. Firstly,
a relationship becomes established
when the resources of two organizations
are connected. This means that the
relationship is a result of resources
combined across the boundaries of two
firms. Secondly, as illustrated by the
steel example, a relationship is the
resource that makes combining across
organizational boundaries possible. As a
relationship evolves the resources in the
two business units become tied to each
other
through
these
intertwined
processes. The further development of
the relationship requires the two firms’
joint combining and recombining of
resources to continue. As soon as one
of the companies takes a new direction
in this respect the relationship will lose
some of its features as an active
resource. A relationship is therefore a
vulnerable resource contingent on the
joint
achievements
of
the
two
companies.
The benefits from a relationship
are in this way strongly dependent on
how the two organizations manage to
combine their resources. A relationship
can function in two ways in relation to
other resources on the two sides of the
dyad. First, it can contribute to facilitate
the exploitation of variety in other
resources, by operating as a means for
exploration
of
new
resource
combinations. The second, and partly
opposing, function is that a relationship
can absorb potential problems owing to
changes in other resources. This
absorptive capacity makes it possible to
make modifications in a particular
resource combination – at the same
time as its main features may be
maintained.
A business relationship is a
flexible and multidimensional resource
involving design and redesign of single
resources
and
combinations
of
resources. Such activities can be
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initiated from any of the two sides and
may include systematic combining of
resources currently engaged in the
relationship as well as those that it is
possible to involve. Because of the
substantial value a relationship resource
represents it must be ‘managed’
appropriately.
Increasingly,
the
responsibility for handling these tasks is
designated to ‘key account managers’.
3.2
Resource combining between
business relationships
The second dimension of
systematic combining is concerned with
attempts to connect what takes place in
different
relationships.
In
these
situations the ambition is to utilize a
particular resource better – or to get
more value out of that resource. It is in
the interest of both companies to
develop the relationship in such a way
that it better suits their other
relationships. Each of the companies
thus will try to connect the focal
relationship with other relationships.
Such efforts might generate conflicts,
because they impact on the systematic
combining within the relationship.
However, these attempts to improve the
linkages between relationships from
both sides also provide opportunities
since they relate resources in novel
ways.
Therefore,
connecting
relationships by combining resources is
a central issue due to its contribution to
relationship dynamics. There are always
benefits
to
gain
from
these
developments as illustrated by the steel
case.
Relationships are connected not
only
through
their
organizational
linkages. In some situations a physical
resource can play an important role for
systematic
combining
between
relationships. For example, physical
resources, such as SSAB’s production
facility, can be designed for utilization in
several relationships. Moreover, groups
of business partners may be influenced
35
to use a standardized solution, which is
also an example of resource combining
between relationships. These attempts
represent means of economising on
resources initiated by the parties in the
relationship.
Therefore,
resource
combining
focused
on
physical
resources, but directed toward business
relationships, signifies a considerable
potential for systematic combining
between relationships. Handling these
issues is not a suitable task for key
account managers who always must
give
priority
to
the
individual
relationships for which they are
responsible. Instead, these tasks should
be allocated to people responsible for
the physical resources in question.
The design and the development
of the total resource base of a company
are closely intertwined with the ways the
business relationships with important
suppliers and customers are handled
and how they evolve. Too large diversity
in the features of the business
relationships makes it problematic to
combine relationships with
other
resources. On the other hand, if the
relationships become too standardized
the resource combining efforts will not
exploit the potential benefits of the
variation among the resources of the
business partners. In this situation
resource combining may become too
one-dimensional
and
stereotypical.
Thus, systematic combining in business
relationships must balance between
these two aspects and we will come
back to this issue below.
4. A framework for analysis
resource combining
of
For further examination of
systematic resource combining we need
a framework based on a categorization
of resources. There is no common
understanding concerning resource
classification. Within the resource-based
approach Grant (1991) made a
differentiation between tangible and
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intangible resources. Barney (1991)
distinguished between physical capital
resources, human capital resources,
and organizational capital resources,
while Das and Teng (1998) identified
four types of resources: technological,
physical, financial, and managerial.
Within the industrial network approach
various classifications have been used
such as: technical resources, input
goods, marketing resources, personnel,
capital (Axelsson and Håkansson 1979);
manpower, technical facilities, knowhow, financial resources, materials
(Håkansson and Snehota 1995). This
minor exposé shows that there is no
general agreement concerning resource
classification.
The
appropriate
categorization depends on the purpose
of the resource analysis.
Our framework builds on a
distinction between two main types of
resources: physical resources and
organizational resources. Both resource
types showed to be central in the steel
supplier case and appear also in the
discussion
above.
The
same
classification, (distinguishing between
two categories within each type) has
been used in a number of recent studies
of resource development (see, for
example, Håkansson and Waluszewski
2002; Wedin 2002: Baraldi 2003;
Bengtson 2003; Gressetwold 2004;
Jahre et al 2006).
The first category of physical
resources is identified as facilities,
represented
by
plants,
logistics
infrastructures, production machinery,
warehouses,
vehicles,
information
systems, various types of equipments,
etc. The features of these facilities are
important in resource combining since
they set some of the prerequisites for
what combining is possible. Moreover, a
specific facility affects the development
of other resources involved in a
particular combination. At the same time
these other resources affect the
development of the facility. The second
category of physical resources includes
36
the products that are designed,
manufactured, distributed, and used at
the facilities. There is an obvious
connection between the features of
products and the features of facilities. At
a
specific
point
in
time
the
characteristics of the facilities to a large
extent determine the attributes of
products,
while
the
long-term
development of facilities is affected by
expectations concerning future product
characteristics.
Physical resource combinations
do not evolve spontaneously – they
always involve an organizational
content. Resource combining and
resource
utilization
call
for
organizational resources since both
these processes are based on
interaction, within and between firms.
The knowledge and competence
required for resource combining is
generated and refined through these
interaction processes and is thus
embedded
into
the
resource
combination.
This
organizational
capability resides in the first category of
organizational resources - the business
unit (a firm, a part of a firm, or several
firms together). The business unit as an
organizational resource is crucial
because it is in fact involved in active
‘resourcing’ through its continuous
resource combining efforts (Jahre et al
2006). Finally, business relationships
constitute the second category of
organizational
resource.
Resource
combining efforts most often cross the
boundaries of firms and we have
illustrated the crucial role of business
relationships in these processes through
the steel supplier case.
A business relationship is an
important resource because it can be
used for resource combining in various
value
generation
processes.
By
connecting the resources of two
companies a business relationship can
improve operational efficiency, as well
as contribute to innovation and
development. For example, the value of
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a product exchanged in a specific
business relationship can be increased
through changes in the ways it is
combined with other products and/or by
fitting it better to the facilities where it is
manufactured and used. Moreover, its
value can be enlarged through
upgraded competence and ability of the
people in the business units supplying
and using the product. The business
relationship is the organising unit where
these interfaces are brought together
and
successively
formed
in
collaboration. In this way the business
relationship connects the use of a
particular physical resource, such as a
facility, to the facilities of the
counterpart, to products exchanged
between the two parties, and to the
capabilities inherent in the business
units. Thus, the values of single physical
and organizational resources in different
firms are all dependent on the business
relationships’ connecting function. Any
business relationship is thus an indicator
of ongoing value generation processes
across the boundaries of the two firms.
Similarly, the occurrence of a
business relationship is an indicator of
systematic combining of resources. In
these processes business relationships
are crucial as they are mechanisms for
directing the future development of
resource
combinations.
Therefore,
resource combining efforts are never
‘neutral’ – in some way they are always
related to the dynamics of current
resource combinations and thereby the
development of single resources. In this
way resource combining and resource
development represent ‘systematic’
efforts over time. In the section below
we investigate systematic resource
combining in more detail relying on
examples from a recent study dealing
with logistics resources (Gadde et al
2002; Jahre et al 2006).
5. Systematic resource combining
37
We explore the characteristics of
systematic combining by making a
distinction between three ‘levels’ of
resource combining. We rely on these
levels for analytical purposes while they
in reality are mixed and applied
simultaneously or in arbitrary order. The
ambition of the analysis is to illuminate
how a specific resource becomes
‘patterned’ through its interfaces with
other resources in primary, secondary
and tertiary combining.
5.1 Primary combining
The analysis on the first level is
identified as ‘primary combining’. In
primary combining one specific resource
is focused – either it is a product, a
facility, a business unit or a business
relationship. We then identify which
specific resource in the other categories
that is central for its use. The notion
‘primary’ is used because we claim that
any resource has to be closely related to
some other resources in order to be
valuable. ‘Primary’ also implies that
there are some resources that are more
important than others for the combining
of each single resource element.
One of the examples in Jahre et
al. (2006) illustrates the primary
combining of a “roll- rack” used by the
Norwegian dairy company Tine. The
roll-rack is used in Tine’s milk
distribution system. The capabilities
residing in the business unit Tine BA
were used to create an efficient facility
for the distribution of the standard 1 litre
milk package supplied by Tine. To be
functional in these operations the design
of the roll rack had to take into
consideration the features of other
production and distribution facilities in
Tine’s distribution network. The roll-rack
is used through the entire supply chain
for storage and transportation from the
dairy to the retail stores. It is designed to
function also in the operations in the
store where it is useful not only for
physical handling but also as a facility
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for exposure of the milk packages in the
cold chamber. This means that the
features of the roll rack have been
strongly affected by the content of the
business relationships between Tine
and the major retail chains in Norway.
One of these chains was particularly
involved in this primary resource
combining illustrated in Figure 2.
The
example
demonstrates
two
important consequences of primary
combining. The first is that the roll-rack
facility generates additional value when
it can be used in the operations of both
Tine and retailers. The interaction in the
business relationship between Tine and
the retail chain made it possible to
incorporate the requirements of the
stores as input into the primary
combining activities. The second
consequence is that owing to the
adjustments within this relationship the
roll-rack facility will function less well in
other relationships where the business
partners’ resource structures are
different. These conditions, we argue,
are typical effects of well developed
business relationships. A relationship
tends to pattern other resources of the
two companies owing to the adaptations
made. Consequently, resources used in
relation to other firms over time will get
‘a relationship content’. Products,
facilities, and business units become
38
successively
patterned
by
their
combining with specific business
relationships. Therefore the value of
these resources will vary with regard to
different business relationships.
The above example indicates
that the actual primary combining
involving a specific relationship is
crucial, because it sets some central
conditions for the further use of the
resources. The purpose of primary
combining is to enlarge the value of the
resources through mutual adaptations.
Efficiency and effectiveness in this
current combining is thus dependent on
the nature of the interfaces evolving
among the resources involved. The
more ambitious the resource combining
within one relationship – the better the
performance in that relationship will
become. On the other hand, the more
efforts that are put into the combining in
this specific relationship, the more these
attempts tend to “lock in” the resources
involved. Systematic combining of
resource elements on this primary level
makes it possible to improve the
performance of the resources and
thereby increasing their value in the
specific setting. The more specific the
adaptations among the resources
become, the greater the efficiency in
that particular combination will be. But
these
same
conditions
make
FACILITY
PRODUCT
Roll-rack
1 litre standard milk
BUSINESS UNIT
BUSINESS RELATIONSHIP
Tine BA
Tine – Retail Chain
Figure 2
Primary combining around a facility resource
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adaptations
to
other
resources
increasingly difficult and costly.
Several conclusions arise from
the above discussion of primary
combining. First, a business relationship
is a central ingredient in resource
combining. Through its connection to a
specific relationship the actual resource
combination will be useful for each of
the two involved companies. Second,
resource combining on this primary level
will
have
important
“external”
consequences since both companies
are involved in other relationships.
Therefore, through its relationship
connections a resource that seems to
be internal will get a specific orientation
in relation to the network in which the
two parties are involved. A relationship
will thus provide direction to the impact
of a particular resource combination.
5.2 Secondary combining
Primary combining is focused on
some few physical resources that are
systematically related to a business
relationship from the perspective of one
of the business units involved. However,
Combining involving
Business units BU1-BUn.
P and BR constant
39
any resource is connected also to other
resources on other analytical levels,
since it is involved in various forms of
‘secondary
combining’.
On
the
secondary level it is related to resources
from other primary combining sets. In
the discussion above we departed from
a specific facility – the roll-rack - and
analyzed how it is used in relation to
one product, one business unit and one
business relationship. In secondary
combining, following our previous
example, the focal facility and two of the
other resources involved in the primary
combining are held constant. This set of
three resources is then combined with
the alternatives available when the
fourth resource category is allowed to
vary. This leads to three types of
secondary combining (Figure 3).
We argued above that the
emphasis on primary combining will
impose constraints on the combining
outside this resource setting. For
example, there are a number of other
products than the 1 litre milk package
that are supplied by Tine and delivered
to the same retailers. It is a problem
when it comes to logistics efficiency that
Combining involving
Relationships BR1-BRN
P and BU constant
Figure 3
Principles of secondary combining of a focal facility
Combining involving
Products P1-Pn.
BU and BR constant
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the volumes of these products have
expanded, since they have other
physical features than the milk package.
The physical characteristics of these
products make the roll rack less efficient
for this distribution. Moreover, Tine’s
distribution facilities are increasingly
used for products from other companies,
owing to joint logistics agreements with
a meat supplier and a poultry supplier.
These cooperative arrangements have
been established in order to improve the
scale in the distribution operations since
the other firms also supply the same
stores as Tine. However, the additional
products and packages emanating from
these new relationships were originally
designed to fit with other distribution
facilities. Therefore, the roll rack is not
an efficient facility for these operations
because the products of the new
partners had been subject to primary
combining efforts in other constellations.
The analysis of secondary
combining uncovers tensions and
potential conflicts as well as new
opportunities for systematic combining.
These tensions and possibilities arise
when various principles for primary
combining are confronted on this
secondary level. Problems may appear,
for example, when the features of
different
physical
resources
are
confronted. Physical resources form
aggregate technical systems in which
resources are successively adjusted to
each other. This means that what has
been done in terms of primary
combining of physical resources in
relation to one business relationship
impose restrictions for secondary
combining in relation to other technical
systems and business relationships. A
representative example is the roll rack
that was designed to be used in relation
to specific products and specific
counterparts. As soon as there are
changes in any of these two categories
of resources, problems will appear.
40
Understanding the implications
of secondary combining is important to
any firm. For example, principles of
secondary combining demonstrate the
possibilities
to
connect
primary
combining related to a specific business
relationship with what is ongoing in
other relationships. Dealing with these
issues may require various forms of
experimentation in order to find out how
changes in the combinations of the
three other resources may affect the
relationship. Secondary combining is
thus concurrent with primary combining
and the two processes affect each other
– implying both constraints and
opportunities also for tertiary combining.
5.3 Tertiary combining
In secondary combining three
resource categories are held constant
while one is allowed to vary. In tertiary
combining at least two of the resources
vary at the same time (in principle this
means that it also covers all examples
where more than two of the resources
are varied). Tertiary combining of
resources thus leads to a number of
potential
combinations.
Figure
4
illustrates
the
three
possible
combinations when the facility is held
constant.
Tertiary combining introduces
two new aspects in comparison with
secondary combining. The first is that
systematic combining now becomes a
multifaceted issue since an increasing
number of organizational and physical
resources become involved and related.
The main concerns identified for
secondary combining are supplemented
with the further effects arising from the
increasing number of connections.
Moreover, the potential for tensions and
conflicts escalates, because the latent
confrontations multiply. At the same
time, however, the opportunities to
identify
new
and
innovative
combinations are enhanced.
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Combining involving
BU1-BUn and BR1-BRN
P constant
Volume 2, number 1
Combining involving
P1-Pn and BU1-BUn
BR constant
41
Combining involving
P1-Pn and BR1-BRn
BU constant
Figure 4
The principles of tertiary combining of a focal facility
The second aspect concerning
tertiary combining is that intentionally
generated network effects will appear.
On the tertiary level systematic
combining efforts of several business
units become connected, in turn
introducing
indirect
effects
that
materialize through the network of
relationships. A typical example is when
a current business partner adjusts its
operations in relation to another
company. What takes place in these
other exchange processes may have
considerable impact in relation to the
focal business relationship in terms of
tertiary combining. It is a key issue for
any company to try to systematically
connect
physical
resources
with
business relationships, and also to
combine its relationships systematically
with each other.
6. The role of business relationships
in resource combining
Our exploration of systematic
resource combining illuminates the
double-faced
role
of
business
relationships in these processes. On
one hand a business relationship is a
result of resource combining across the
boundaries of two firms. On the other
hand it is an important means for
making such combining possible, since
it binds together knowledge and
experiences of two organizations. These
characteristics influence the long-term
development of both single resource
elements and resource combinations.
As
argued
previously,
physical
resources and other organizational
resources are successively provided
with relationship content and thus given
a specific relationship imprint. At the
same time a business relationship is
patterned through its combining with
specific products, facilities, business
units and other relationships. For the
outcome of these intertwined processes
the nature of the interaction in business
relationships in terms of learning and
teaching is crucial (Gadde and
Håkansson 2007).
The IMP Journal
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Business relationships evolve
through
interaction
processes.
Understanding resource combining and
the impact of business relationships
thus calls for closer examination of this
interaction. Interaction in a business
relationship is strongly associated with
time. At a specific point in time the
interaction between two firms is dealing
with some particular issues. These
matters may be related to rationalization
of day-to-day activities, or joint attempts
to
exploit
potential
innovation
opportunities. Such efforts are thus
concerned with current time and the
current situation of the two organizations
but are affected by a more extended
time horizon. Both parties link the
current issues to their experiences of
past interaction and the expectations
concerning future interaction. Interaction
is thus strongly connected to time there is always a history with its
memories, and there are expectations
concerning the future. It is most likely
that the two parties make different
interpretations of both the past and the
future, which in turn cause ambiguity in
the assessment of the current potential
and principles for resource combining.
Figure 4 illustrates the above discussion
with regard two firms, which in turn are
involved in simultaneous interaction
concerning resource combining with
other firms.
Current interaction regarding
resources is thus contingent on previous
interactions. The particular resource
combining
evolving
from
these
interaction processes is perceived
differently by the two focal actors.
Therefore, from the perspectives of
these two firms, two ‘different’
combinations of resources will appear
where individual resource elements hold
specific
positions.
Through
the
interaction process these combinations
are challenged – and these challenges
will be perceived differently by the
involved firms. The potential problems
and opportunities related to combining
and
recombining
are
further
Previous
interaction
Current
interaction
Future
interaction
Interaction in focal relationship
Firms
42
Interaction with others
Resources
Figure 5
The impact of time on interaction in business relationships
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accentuated by the fact that both
companies are simultaneously involved
in resource combining in other business
relationships. Figure 5 indicates that the
potential for recombining is multiplied
through these indirect connections. The
actors involved do their best to change
the current resource combinations
owing to their perceptions of their own
and others’ resources - at the moment
and for the future.
Several important consequences
materialize through this perspective on
resource combining. One set of
consequences relate to the single
company and its ambitions. The single
company is all the time involved in
numerous
resource
combining
processes. It is a crucial issue to decide
what efforts to put into each of these
processes – in turn determining the
priority given to different resource
elements. In some situations companies
deliberately choose between potential
alternatives, but in most situations the
priorities are less clear and evolve
gradually over time. Irrespective of what
conditions are at hand, systematic
combining always is about giving priority
to specific resources and counterparts.
Therefore, a crucial aspect in
these assessments is the balance
between standardization and variety.
There are good reasons for a company
to promote variety in its relationships.
Stimulating variety and experimentation
is favourable to innovation and
dynamics because of the multitude of
experiences and learning effects offered
(Gadde and Håkansson 2001). On the
other hand, focusing on a more narrow
range of relationships makes it easier to
exploit economies of scale in the
utilization of a company’s physical
facilities. In the same way the
competences and capabilities of a
business unit
will
benefit
from
specialization. In this respect, therefore,
large variation in the set of business
relationships will cause problems for
43
systematic resource combining. For
example, too much variety in the
requirements of steel users would make
it difficult for SSAB to economize on the
standard feature of the product, the
capacity of the steel facility, and the
application competence residing in the
business unit.
The economic forces discussed
above have obvious effects for the
principles of resource combining in
business
relationships.
Therefore,
despite the broad scope of opportunities
for systematic combining (indicated in
Figure 5) companies normally tend to
recombine and modify their resources
within quite a constrained range. This
option is considered beneficial because
it makes possible the joint economizing
on both physical and organizational
resources.
Systematic resource combining,
and especially the constraints identified
above, have also important network
effects.
Since
relationships
are
connected these constraints create
network effects since they disseminate
among companies.
In this way
networks of relationships can become
increasingly connected over time,
making the density of resources
increasingly robust in relation to some
specific
combinations.
These
combinations of resources may evolve
around key products and lead to what is
identified as dominant design (Utterback
and Abernathy 1975). They may be
formed around large-scale operating
facilities like ports, or pave the way for
dominant design of facilities such as
containers
and
assembly
lines.
Constellations of combined resources
may be created also around capabilities
related to specific technologies or
industries, like biotech or automotives.
In some cases these capabilities have a
clear
geographical
orientation
exemplified by Silicon Valley and the
Boston
area.
Large
resource
constellations may be grouped also
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around individual business units, such
as General Electric, Toyota and IKEA,
where the capabilities of these
companies are spread to their suppliers
and customers. Finally, a business
relationship may be the breeding ground
for major constellations of resources, for
example, the relationship between IBM
and Microsoft and its impact on other
companies in this industry. All these
examples of large constellations involve
a multitude of resource combinations
and are the effects of systematic
combining in networks. Together they
create incredibly complex patterns that
are vital to consider for anyone wanting
to add, change or affect in any way.
Such
constellations
are
always
dominated by some specific interfaces
between the resources. However,
through the multitude of connections
there are always a huge number of
possibilities to impact on these
constellations. The total impact of many
minor attempts to change the large
constellations over time leads to
changes in the total pattern that
sometimes may be quite dramatic.
Systematic
combining
in
networks involves several firms with the
aims of relating to each other both
physically and organizationally. This
means that a large number of different
resources are combined and built
together from various angles. Resource
combining attempts must to great extent
be mutually based in several business
units and performed more or less jointly
and
simultaneously.
Systematic
resource combining efforts in networks
are therefore dynamic and multifaceted
processes of substantial economic
importance. The resulting resource
combinations become connected by
strong forces through the inherent
interdependences
in
networks.
Therefore, fundamental changes of
these combinations take time and
require substantial efforts.
44
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The IMP Journal
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Chichester: Wiley.
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Routledge.
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The IMP Journal
Volume 2, number 1
46
Pictures At An Exhibition Of Business Markets: Is
There A Case For Competition?
Malcolm T. Cunningham
Emeritus Professor, Manchester Business School, University of Manchester, U.K.
Acknowledgements: The author is grateful to several anonymous reviewers of an earlier version of this paper. Additionally, thanks
are due to Thomas Ritter and Per Freytag for their helpful comments and criticisms.
The data collection for the case study was by semi-structured interviews of suppliers and customers’ personnel. Secondary sources
and company records were also used. This was carried out by Nigel Campbell as the PhD student of the author.
Abstract
This paper has uses the phrase ‘pictures at an exhibition’ as a metaphor for the research studies presented
at the annual conference on business markets by the IMP group.
The early IMP ‘pictures’ of business-to-business relationships, dyadic interactions and markets as networks
have had a major influence over the past 30 years on European research. However, the increasingly dominant
research focus upon cooperative relationships has been at the expense of research into various facets of competition
and the competitive behaviour firms. This paper suggests that many ‘art critics’ have expressed concerns that the
research pictures at the IMP exhibition have become somewhat stereotyped and would benefit from inputs of ideas
and concepts emerging in relevant fields of literature.
This paper concentrates on several neglected pictures of competition in business markets. It presents a
sketch of the dynamic competitive environment and displays various studies of competitive strategies to demonstrate
how firms actually compete. It is argued that ‘relationships’, interactions and network positioning should be seem as
essential steps in developing competitive strategies at the level of the individual firm.
An in-depth picture of the activities of a “tribal group” in the German packaging industry is presented as a
case study. The analysis of the case study draws upon several concepts of competition and competitive behaviour
arising in the earlier sections of this paper. Suppliers within the tribal group were shown to act in a complex mixture of
cooperative, transactional, competitive and collusive modes of behaviour.
Keywords: Competitive Strategies, IMP Group, Stereotyping
1. Introduction
Painting pictures gives the artist
scope for the selective transforming of
reality. Likewise, it is no surprise that the
nature and functioning of markets can be
transformed into 'theories', ' perceptions'
and 'pictures' which are held by its
participants. There is no single, objective
representation of how market relationships,
networks or competition actually work (Ford
2003). Yet the different pictures created by
people have a major influence on the
behaviour of firms and individuals. These
pictures are formed by the beliefs and
experiences about how the activities of
customers, suppliers and other competitors
impinge upon their own firm's marketing
strategy and competitive behaviour. As
greater
knowledge
and
experience
accumulates, so will these market pictures
evolve over time. Yet they still retain their
diversity. But they will remain as pictures or
representations in the absence of any
grand, robust and testable theory.
The IMP Journal
Volume 2, number 1
This paper uses the metaphor of
‘pictures’ or ‘paintings’ to represent the
network studies carried out by a European
group of academics, known as the IMP
Group 1. To elaborate upon this metaphor,
these IMP research “pictures” are displayed
as presentations at exhibitions, otherwise
known as the annual IMP research
conferences.
2. The Annual Exhibition
The object of an exhibition is to
display the pictures created by artists.
Mussorsky, the Russian composer, wrote a
brilliantly orchestrated piece
entitled
‘Pictures at an Exhibition’. The music brings
to
life
and
portrays
the
unique
characteristics
of
each
individual
masterpiece and artist in the exhibition
gallery. Likewise, the IMP exhibition is a
collection of outstanding merit; all the
pictures having been created during the
past 30 years. What are these pictures?
They are all representations of the
characteristics of
business-to-business
markets as interpreted by the research
artists involved.
Initially, in 1976 a new international
group of artists emerged, sketching and
then painting pictures of business marketing
and purchasing. They called themselves
the IMP group.
Their first major picture was based
upon their extensive observations and
insights of industrial markets and it
portrayed
Relationships
between
organisations (Ford (1980)).
Soon
afterwards, a more complex picture was
created, depicting Interactions between
firms in business markets (Turnbull and
Cunningham 1981, Hakansson (1982). This
picture had more depth and unique features
than their earlier work and included a model
(not unusual for artists!). The merits of
these pictures were soon attracting
audiences among both academics and
practitioners. When the third major picture
in the IMP tradition emerged from
1
The IMP (International Marketing and Purchasing)
group comprises academic researchers at many
universities throughout Europe, the USA and
Australasia et.al. The author is a founder member of
the IMP Group.
47
Scandinavian artists, its impact was
immediate.
It was called Markets as
Networks (Hakansson and Johanson, 1992,
Johanson and Mattson, 1992, Hakansson
and Snehota, 1990) and it focussed upon
embedded relationships in a network of
actors, resources and activities. These
three illuminating portrayals of business
markets proved distinctive enough to attract
large gatherings at the annual exhibition of
the now-established IMP school of modern
painters.
When shown alongside more
traditional pictures of markets painted by
Kotler, the American marketing guru, and
his
colleagues,
the
IMP
pictures
demonstrated the stark differences and by
inference, the superior characteristics of the
IMP approach.
The post-Kotlerian style of painting
by IMP artists was established and widely
acclaimed initially in Europe and throughout
the Western world.
Many other artists have been
sufficiently inspired by the IMP style to have
joined the group, but they have worked in
their own studios in their home countries.
The
three
IMP
masterpieces
of
Relationships, Interactions and Markets-asNetworks are considered to be innovative,
imaginative and intellectually challenging.
Many other distinguished pictures by
various members of the IMP group have
been added to the exhibition.
"To have a good idea is nothing remarkable;
but to carry out an idea and make
something great of it, that is the most
difficult thing. That is, in fact, Art"
Antonin Dvorak (Czech Composer 18411904)
However, the IMP pictures are not
immune from some concerns and dissenting
comments which have surfaced in recent
years. In highlighting these concerns and
critical comments, one is reminded of the
warnings of the Irish poet W.B. Yeats.
"Tread softly, lest
someone's dreams".
you
trample
on
The IMP Journal
Volume 2, number 1
3. The Art Critics
As so often happens, praise
precedes doubts and criticisms. What do
the doubters and critics say?
(1)
Because the IMP masterpieces are
between 15 and 25 years old, they may be
gathering dust and losing their freshness.
Perhaps some new creative initiative is now
needed
(2) Amidst all the acclaim, there are
anxieties
concerning
the
increasing
uniformity, repetition and stereotyping of the
IMP style in recent years (Cunningham in
Young, 2003).
(3) There is scope for learning from other
groups of artists external to the IMP genre.
Increasing attention could be focussed upon
the development in marketing coinciding
with the decline of Western Europe's
traditional industrial markets. Other schools
of
artists
have
emerged,
notably
Relationship Marketing and Services
Marketing. Contemporary developments in
Business Strategy and Organisational
Behaviour also have relevance. Some of
this work resonates with the IMP style and
draws upon certain of its concepts.
(4) Many researchers appear to have lost
sight of the key roles of inter-firm
relationships
and
network
interdependencies
in
determining
a
company’s competitiveness. The impetus
for the original IMP research project
emanated from concerns in Sweden, the
U.K. and France to improve upon their
country’s competitiveness in domestic and
export markets. (Hakansson, 1982, Turnbull
and Valla, 1982). Running parallel to the
first IMP project was the evolution of the
‘markets as networks’ concept.
This
emphasised the need for competitive
strategies for operating in complex network
interdependencies.(Hammarkvist et.al, 1982
and Hagg and Johanson, 1982).
(5) IMP pictures have been strongly
differentiated from American, and especially
Kotler's, portraits of marketing. This is now
less valid. Critics point out that many
contemporary marketing researchers in the
48
U.S.A. have espoused the post-modern
philosophy (Cova and Salle, 2003). These
authors assert that Kotler's text book ideas
no longer represent the dominant theory of
marketing, but just a moment in history of
the discipline.
(6) There is evidence of an American fightback against the increasing dominance of
the relationships paradigm governing
exchanges
between
suppliers
and
customers in business markets. American
authors such as Sharma and Pillai (2003)
express
concern
that
transactional
exchanges have been relegated to being
undesirable. They question whether the
shift of emphasis to relationship exchanges
has improved company performance.
Unfortunately, many American authors
seem incapable of distinguishing between
normal relationship exchanges and life-long,
or very long term relationships between
suppliers and customers. These authors
(Sharma and Pillai op cit) offer an up-todate critique of the current debate in the
USA of the merits of both transactional and
relational
exchanges
in
marketing
strategies. This debate confirms the need
for IMP artists to re-examine the
opportunities
for
more
pictures
of
transactional (competitive) exchanges as
distinct
from
relational
(cooperative)
exchanges.
(7) The long established IMP focus on
business markets has not incorporated
many of the developments in consumer
marketing which have occurred in the past
decade. Some contemporary consumer
marketing now has features which resonate
with business marketing. One particular
development stresses the micro-social level
of consumption and deals with interactions
between people.
Consumers are not
viewed as passive but are highly involved in
consumption experiences; going out,
searching, planning, discussing purchases
and interacting with the product (or service)
provider. Social networks are activated and
the concept of tribes or communities has
been introduced into the marketing literature
(Cova and Cova, 2002).
(8) Finally, there is a danger that IMP artists
will become too inward-looking, with their
The IMP Journal
Volume 2, number 1
annual exhibition being too stylised and
ritualistic. It relies heavily on the features of
a tribal gathering (Cova and Salle, 2003). It
depends almost exclusively upon pictures of
co-operative relationships and networks of
co-operative
interactions.
Competitive
behaviour and independent actions by firms
are too often neglected.
At the IMP
exhibition in Lugano in 2003 only 3 pictures
of competition were portrayed out of 174
pictures (research papers) on display.
4. A Picture Gallery Of Competition
To redress the imbalance of IMP
pictures at the exhibition, a selection of
other paintings is now offered, depicting the
various facets of competition, competitive
behaviour and the perceived structures of
B2B markets. The subsequent sections of
this paper cover the following paintings.
• A background sketch which sets the
scene of competing in a dynamic market
and
technological environment.
• The restoration of some older, neglected
pictures representing how firms actually
compete.
• A panoramic view of the competitive
arena in which firms operate, showing
images and patterns of how competitors
are perceived. These are illustrated by
strategic groups and competitive groups.
• Portraits of tribes and tribal groups as a
competitive force in consumer and business
markets.
• A case study, as a close up portrait, of a
tribal group in the German packaging
industry.
This draws together and
integrates into a composite picture several
aspects of competitive
behaviour.
5. Adapt Or Perish: A Sketch Of The
Competitive Environment
The
search
for
competitive
advantage takes place within the context of
shifting patterns of competitive rivalry.
Whilst survival, growth and wealth creation
are the spurs to competitive behaviour, the
market niche which the firm occupies rarely
endures.
Core competences become
eroded and the firm may not have the
49
flexibility and skills to adapt to a changing
environment. New entrants from a variety
of backgrounds are attracted to a profitable
market and the "rules of the competitive
game" change. (Cunningham and Culligan,
1988). The challenge to the firm is to
translate its unique competences into the
market place.
Organisational learning
becomes
of
paramount
importance.
Technological developments by competitors
change the market structure. Competition
occurs for dominance of the various
technological trajectories being pursued by
competitors. Uncertainty and risk provide
an often anarchic context for firms seeking
to
differentiate
themselves
from
competitors.
It is over 30 years since early IMP
researchers
argued
that
"industrial
marketing is an organisational problem".
(Hakansson and Ostberg, 1975). In his
unique longitudinal study of firms by case
study method Pettigrew (1985) stressed that
competitive strategy is a process of
managing organisational change in a
dynamic environment. Organisation issues
dominate the agenda and managerial
processes. Hence strategic action is to be
seen as a political activity and phenomenon,
closely linked to the Behavioural Theory of
the Firm. Competitive strategy emerges by
balancing organisational coalitions within
the firm. 'satisficing ', rather than 'optimising
' behaviour prevails.
The experience of many firms is that
any major technological or radical marketing
initiative demands a radical rethink to
organisational development, together with
the acquisition of new resources. This may
take place through co-operative interactions
in the market network, but may have to be
achieved through the more aggressive
exercise of power and the use of both
transactional and relational exchanges with
suppliers and customers.
It has been
argued that in co-operative interactions,
both can gain, whereas in competitive
interactions the relevant goals of both
parties cannot be simultaneously satisfied
(Wilkinson and Young 1994). An alternative
view is that cooperation and competition
can and do co-exist. One example of this
occurs when companies jointly seek to
develop a market, but compete within it
thereafter for shares of the spoils of their
The IMP Journal
Volume 2, number 1
success. Cooperation between competitors
was well researched by Easton and Araujo
(1988). Cooperation took on both a formal
and informal style and could be unplanned
or carefully managed. Competing firms
were found to frequently cooperate to
prevent certain undesirable forms of
competitive behaviour, usually in the form of
price wars, injurious to the parties
concerned.
This
background
sketch
of
competition leads to a close examination of
research on the topic 'How do firms actually
compete?’
6. How Do Firms Actually Compete? :
Restoration Of Neglected Pictures.
IMP pictures of competition and
competitive strategies have evolved in
parallel with the development of strategic
planning over the past thirty years. Ansoff’s
rational analytical, corporate management
approach of relating the firm to its
environment has been superceded by
Mintzberg’s
“grass
roots”,
organic,
incremental approach.
In the latter
approach, patterns of strategic behaviours
emerge and are discernible over time as
having some structure. The IMP pictures of
competitive strategy now resonate more
closely with Mintzberg.
Strategy within IMP is perceived as
interactive
behaviour
with
major
counterparts within a network of interorganisational relationships. Organisational
learning, network positioning and accessing
the resources of partners are key issues.
Although competition takes place through
interaction and network positioning, it is also
a social process, being dependent upon
managers’ perceptions of competitors and
their activities.
Additionally, regulatory
institutions and self regulation by firms
affect
their
competitive
behaviour.
Obviously there are many modes by which
firms compete.
The following section
elaborates and develops these issues.
(1) Pictures of Interaction Strategies
Cooperative
and
Competitive
behaviour are both founded upon the
knowledge that suppliers and customers are
frequently involved in complex, inter-
50
dependent relationships. An acceptable
match between the needs of the customer
and the capabilities of the supplier is
accomplished over time through interaction.
Adaptation to each other's technical,
financial and service requirements will
probably have occurred.
The original
objective may have been to establish a new
and mutually beneficial relationship but it
might also be to break old ones and change
the nature of the relationships. Competitive,
cooperative and transactional relationships
frequently coexist between partner firms
and these may change from one mode to
the other over time or with changing
circumstances.
Hallen
and
Johanson
(1985)
summarise the options for competitive
interaction strategies of suppliers as: A
pricing strategy, a technical/quality strategy,
an adaptation strategy and a joint
development
strategy.
Multiple
relationships are invariable acquired by
suppliers and by customer firms to avoid
over-dependence on one relationship.
Portfolio theory, applied to managing
relationships with customers, has offered
valuable insights into managing the
complexity of a disparate set of
relationships. This is based on the
recognition that all such exchange
relationships
have
widely
differing
characteristics in terms of risks, rewards
and resources. With some customers a lowresource transactional exchange strategy
may be adequate; with others an involved
relational exchange may be necessary,
involving extensive allocation of resources.
(2) Pictures of Network Strategies
Complementary to single dyads of
suppliers and customers are the wider
aspects of networking or network strategies.
These act as the contextual framework for
the dyadic relationships. The need for
developing better or different competitive
positions in the market network arise as a
market evolves, relationships develop and
the supplier firm perceives that customer
relationships are embedded in a complex
network of interlinked relationships with
different organisations.
Competitive network strategies may
be seen to comprise two capabilities;-
The IMP Journal
Volume 2, number 1
First, the capability to create a network of
relationships with the potential for cohesive
and complementary action.
Second, the competence to harness the
synergistic potential of that network of
relationships in pursuit of a competitive
goal. (Cunningham, 1985).
Network strategies figure strongly in
the ideas of Johanson and Mattson (1992).
Strategic actions are efforts by 'actors' to
influence (change or preserve) their
positions in networks.
Objectives are
defined in terms of desired network
positions and changes in the network
structure. Actions may mean changing the
actors' pictures or theories of how the
network functions and whether relationships
are viewed as cooperative or competitive.
Thus, network positions, network resources
and network pictures are not unrelated.
(3) A Social Process Picture of Competitive
Strategies.
In their study of competitive
processes Easton and Araujo (1986) set out
to answer, in a pragmatic way, how firms
actually compete. Their approach had the
central focus that competition is in part, a
social process which is measured by means
of the perceptions of the managerial
participants. Such perceptions, or 'pictures',
are one determinant of the firm's actions. If
a firm does not perceive another firm as a
competitor, it is unlikely to treat it as one.
The authors propose two models which
describe the phenomenon:
First, the
attenuation model, whereby a firm may
perceive competitors to a greater or lesser
degree, rather than a dichotomous
'competitors or not?'; Second, a sectoral
model, whereby a sub-group, segment or
sector of the market in which the firm
operates determines whether or not they
perceive firms as competitors, only if the
operate in that same sector.
(4) Modes of Competitive
Perceptions and Impressions
Behaviour:
Easton's research (1988) moves the
understanding of competitive processes
51
beyond the simple dichotomy of competition
or cooperation as an explanation of how
firms actually compete as argued by
Wilkinson and Young (1994).
Easton
identified five modes of behaviour as
perceived by managers of firms within the
same industry.
Conflict : Firms seek to destroy competitors
or drive them out of direct competition.
Competition: Firms engaged in parallel
striving with the same, but often mutually
exclusive aim of winning, but recognizing
that others may win.
Co-existence: Competing firms behaving
independently of others and seeking to
minimise their continuing competitive interdependence. Firms may recognise other
competitors but choose to ignore their
actions
Cooperation: Joint action by firms in pursuit
of inter-dependent goals.
Collusion: Covert cooperation among
competitors aimed at damaging a third
party.
From this classification of behaviour,
it is feasible to picture an industry in terms
of a complex mix of goals and actions. The
primary mode is usually competition in
many areas, but co-existence with other
firms, depending on specific circumstances
and then cooperation with some firms on
topics where resources may have to be
shared, or where the "rules of the
competitive game" dictate it.
(5) Regulatory
Institutions
and
Self
Regulation of Competition: A Brief Sketch
Gummerson (1997) introduces the
notion of competitive marketing equilibrium
where dynamic balance (or equilibrium) is
achieved because three major forces are at
work; competition, collaboration and
regulation. He bases his argument on the
notion that Western Economies are not free
competition economies, but mixed ones.
Collaboration occurs and there are
regulatory bodies (institutions or selfmanaged by participants). Regulation is
The IMP Journal
Volume 2, number 1
needed to suppress or eliminate anti - social
or monopolistic behaviour.
A dynamic
balance is struck to reconcile these three
forces and some optimal combination
occurs. No one force dominates or is
unduly powerful for long periods.
Gummerson also introduces the
concept of hyper-competition (comparable
to Easton's term 'conflict') in which a firm
deliberately sets out to disrupt the status
quo and any competitive advantage enjoyed
by another firm. Interaction and network
strategies emphasise cooperation, stability
and progressive change, through long-term
relationships. But hyper-competition strives
for continuous disruption and break down in
an anarchic manner.
7.
Structures And Patterns Of The
Competitive Arena
The competitive arena is a picture,
not a territory nor a boundary of an industry.
It is the perceived system within which a
firm operates and from which likely threats
and opportunities emerge.
It is not
necessarily identical to the market, the
industry sector or the immediate network of
the firm. The picture of the competitive
arena will likely comprise patterns and
clusters of competing firms in some
structured form.
Easton
(1988)
argued
that
competitive activity is conditioned by the
perceptions of patterns of rivalry and the
structure of the competitive arena which are
held by participants. So, a cognitive map
may be drawn by the firm to plot its position
relative to those of its competitors. This
allows an assessment of the firm's
intentions (strategic purpose) and those
conjectured for its competitors.
This
cognitive map has resonance with the
notion of the network structure and the
firm's network position.
Two structures and patterns of
competitive rivalry in markets are now
presented as pictures for the exhibition.
(1) Strategic
Competitors.
Groups:
An
image
of
The
original
conception
of
homogeneous groups of competitors has
been largely discarded in favour of a view
52
that identifiable groupings of competitors
exist.
It is argued that the nature of
competition is dependent upon the group of
competitors to which the firm belongs.
Competition will depend upon the size and
distribution of these groups in a marketnetwork or competitive arena. The concept
of strategic groups thus emerged. The early
propositions by Caves (1980) and Porter
(1980) that such groups could be delineated
by reference to their common corporate
strategies did not hold sway for long. How
one can identify and summarise corporate
strategies of competing firms as a basis of
comparisons has never been made clear.
Newman (1973) used the criterion "highly
symmetric corporate strategies" as his
proposed
measure
but
never
operationalised it successfully.
Many
studies have used dimensions that have
only tenuous links with strategic behaviour
and the goal became finding structures of
any kind.
The structural patterns (or pictures)
which emerged were attempts to translate
'sources of advantage' (competence and
skills) into 'positional advantage' that are
indicators of competitive advantage. (Day
and Wensley, 1988). There is no clear
agreement as to the appropriate dimensions
to be used in group construction (McGee
and Thomas 1986) yet the various pictures
proposed retain some attractions for
strategists.
(2) Competitive Groups: An alternative
image of competitors.
This term was proposed in an
attempt to avoid the trap of relying on the
perceived strategy of competitors as a
dimension for structuring the competitive
arena (Cunningham and Culligan, 1988).
They argued that any dimension which was
meaningful to the firm when plotting the
map of competitors in the arena, network or
market was worth using. In these authors'
study of competitive groups in the on-line
data industry, they identified clusters of
competitors
by
reference
to
their
technological commitment to a position or
level in the value-added chain of data
generation to supply. Firms competed with
other firms in the same value-added level
but also sought to compete by attempting to
The IMP Journal
Volume 2, number 1
move up or down that chain. The objects
were to occupy more powerful or profitable
levels in the chain than the one in which
they existed. Clusters of competitors were
also identified by their size and scale of
operations (a proxy for resources) and
further clusters emerged according to the
market niche or type of customer being
served.
Clearly competitive groups are
distinguishable on several dimensions and
the firm may use several maps to determine
its competitive position vis-à-vis different
clusters of competitors.
Competition is
multi-faceted; by no means an original
concept! The perceptual maps are pictures,
not necessarily measurable nor logically
proven to be inviolate.
8. Tribal Groups: A Speculative Picture
Of The Competitive Arena
Stability
and
change
are
characteristics of the competitive arena. In
the short term, the complex networks of
interlocking relationships between suppliers,
customers and other parties settle into a
state of comparative equilibrium. The status
quo of established market shares and
dominant firms is accepted in preference to
instability, destructive competition or costly
short-term gains.
It is reasonable to
speculate that several firms in the market
arena will act in concert as a tribe to
preserve this stability against any newcomer
or threat to the existing relationships and
power structures of the market.
The idea to investigate the possible
relevance of Tribes and Tribal Groups (see
section 3.7) to competitive behaviour arose
from the somewhat inconclusive discussion
of strategic and competitive groups. (see
section 7.1 and 7.2).
From its origins in consumer
marketing and anthropology, the potential
for tribes and tribal groups to be applied to
business markets will now be explored.
Additionally, a case study is presented as a
picture of the competitive and co-operative
behaviour of a tribal group of suppliers and
customers in the German packaging
industry.
53
The concept of tribes and tribal
groups of consumers has been highlighted
to demonstrate contemporary developments
in consumer marketing which have
relevance to IMP research (Cova and Salle,
2003). Tribes or communities are defined
as groups of individuals who are not
necessarily homogeneous (in terms of
objective social characteristics), but are
inter-linked and capable of taking collective
action. It is more than a simple aggregate,
it is a group forged by interdependence
between its members. At this micro-social
level of the market, social links are created
through their common experiences of
consumption and it is here that the concept
of tribes, as identified by Cova and Cova
(2002) has been introduced. Members of
the tribe communicate with one another
about their beliefs, interests and loyalties to
particular products or forms of consumption.
They search, plan, day-dream and enjoy the
sensation of buying. They also recall their
consumption experiences with others in the
group.
The tribal marketing approach, as
reported by Cova and Cova (2002) has
turned away from such concepts as life
styles, consumer segments etc. that
underpin the Kotlerian approach. The tribes
exercise power through collective action.
The marketing companies recognise that
tribes are a source of competences which
force the companies to establish partnership
with the tribe. The tribe is no longer seen
and treated as passive consumers.
If one considers the tribe or
community as being able to perform the role
of an individual actor, capable of collective
action, such as applies in industrial market
networks, it is possible to incorporate the
tribal experiences into the company model
(Cova and Salle 2003)).
(2) Anthropological
Tribes
Concerning
Aside
from
marketing,
anthropological studies of tribes in societies
point to their having certain characteristics
among which are the following:o
(1) Tribes in Consumer Marketing
Issues
Complex and
relationships.
close
interlocking
The IMP Journal
o
o
o
o
o
o
o
Volume 2, number 1
A culture which is preserved through
bonding rituals and practices.
A strong community spirit and loyalty
to each other, amidst regulated
competition and rivalry.
Collective defence of territory
against intruders.
Preservation of order and discipline
through leadership of elders and
a tribal chief.
Enjoyment of shared benefits and
security through a strong sense of
belonging.
Negotiated settlement of disputes.
Distinguishable characteristics from
other tribes.
(3) Tribal Groups in B 2 B Markets
Is it feasible to transfer the concept
of tribes and communities to business
markets? Do such groups exist and what
might be the competitive issues that they
raise? Extrapolating the anthropological and
consumer tribal characteristics to the realm
of B-2-B markets provides a challenging
picture of possible tribal groupings. The B 2
B tribe will be a community of individual
firms
with
complex,
interlocking
relationships. They may be located in a
geographical region but more importantly,
will share many common competences and
experiences of exchanges in technologically
similar products or services.
There is
considerable shared knowledge and
perceptions of who is and who is not a
member of the tribal group. The group is
compact and self- governing and is
distinguishable from other firms in the
industry on certain characteristics. Interdependence will be strong and the 'rules of
the competitive game' will be recognised
and usually adhered to. There will be
competition with other members, but also an
atmosphere of 'live and let live' (or
competitive co-existence) may occur.
Hierarchical power relationships will prevail,
sometimes regulated by leading firms of
'tribal elders'. Regulation may take the form
of covert meetings to resolve conflicts and
achieve a share out of the market on
generally agreed terms. The tribal group
operates to avoid destructive competition
with its attendant reduced or unpredictable
54
reward in terms of profit levels. These
benefits or rewards, account for the bonding
of firms into the tribe.
It is argued here that the tribal group
need not be confined to suppliers but can
conceivably draw together customers and
suppliers in a common, interdependent set
of relationships. This group will collectively
defend their common territory against
intruders and invaders who pose a threat to
the status quo. This capability to take
collective action will be helped by effective,
if
covert,
communications
between
disparate tribal members.
(4) The German Packaging Industry: A
Case Study Portrait of a Tribal Group
This case study is not only an
exposition of data collected by research, it is
presented to raise two important issues:
First, to what extent, if at all, are the
'pictures' of competition developed earlier in
this paper, applicable to an industry setting?
Second, what competitive strategies might
an outside supplier, who is not a tribal
member, adopt to successfully enter the
territory of the tribal group? A possible
example of a tribal group can be found by
binding together into a distinct community
both suppliers and customers in the
German speciality packaging industry, as
follows:
The total industry is heterogeneous
comprising packaging for pharmaceuticals,
toiletries, cigarettes, detergents and readyto-eat foods etc. This case study focusses
on the detergent packaging sector for the
domestic market.
Intense international
competition occurs amongst customers
(detergent distributors) and to a letter
extent, between German-based packaging
suppliers. Customers and suppliers form a
closely knit interlocking tribal group of 4
customers and 7 suppliers. The technology
of the packaging is in board, paper, plastic
and also photographic and printing
illustrations of the branded packaged good.
External to the tribal group are
hundreds of retail customers of all 4
detergent distributors. Of these retailers, 20
major ones account for over 50% of the total
packaged detergent market.
The
accompanying
figures
and
tables
The IMP Journal
Volume 2, number 1
summarise the key features of the tribal
group.
55
The varying power of customers in their
market is reflected in their contrasting
market shares of 50%, 25%, 19% and 6%.
For brevity, the shares of packaging
purchases of the largest customer are
shown, where its suppliers get 48%, 22%,
12%, 10% and 8% respectively in this multisourcing situation.
No customer single sources its packaging
supplies.
4 of the 7 suppliers have a single
customer.
3 other suppliers have between 2 and 4
customers each.
Customer A
THE TRIBAL GROUP
B
Supplier 7
C
D
Supplier 6
Supplier 1
Supplier 5
Supplier 4
Supplier
1
2
3
4
5
6
7
7 packaging suppliers
Customer D
Customer C
Customer B
Customer A
2 suppliers
1
3 suppliers
1
4 suppliers
1
5 suppliers
A 48% share
3
3
4
4
2
D 12% share
E 22% share
F 8% share
7
Supplier 1 has four customers
G 10% share
A
Supplier 2 has one customer
Supplier 3 has two customers
B
C
D
D
Supplier 4 has three customers
A
Supplier 5 has one customer
Supplier 6 has one customer
A
A
Supplier 7 has one customer
A
B
C
B
C
The IMP Journal
Volume 2, number 1
9. Analysis Of The Case Study
Within the tribal group of customers
(detergent manufacturers) and suppliers
(packaging specialists) a number of
competitive and strategic issues arise.
These lend some support to the idea that
the suppliers and customers belong to a
tribal group.
1. As participants in the tribal group, the
packaging suppliers pursue a range of
complementary competitive behaviours,
which bear a close resemblance to those
identified earlier by Easton in his research
studies. (see section 6.4) The dominant
behavioural modes are competitive and coexistence, which occur simultaneously: the
balance between these modes changes
with the changes in customer purchasing
behaviour. Other modes are also found.
Suppliers
behave
Co-existence:
independently of other suppliers as far as
possible and avoid disrupting the status-quo
in the short term.
Competition : Suppliers are involved in
parallel striving but constantly attempt to
improve their market share in the medium
term. They recognise that any gains made
from one customer may be offset by loss of
business from another one. Technological
development
and
improvements
in
packaging
designs
and
production
processes accompany cost efficiencies.
Cooperation: Close cooperation between
suppliers and customers is vital. Also joint
cooperative action between competing
suppliers takes place if a threat from outside
the tribal group is imminent.
Collusion: A limited but persistent form of
collusion occurs between suppliers. The
collusion is covert and is to prevent
destructive price competition.
Suppliers
belong to the same trade association which
facilitates information exchange on prices,
capacity and technical standards.
Hyper-Competition: Very rarely destructive
competitive behaviour may occur, (see
56
section 6.5) such as when a potential rival
packaging supplier from outside the tribal
group emerges as a threat to all. This takes
the form of conditional and temporary price
reductions to loyal customers.
2. Technological development of packaging
between a customer and one of its suppliers
often
stimulates
technological
development by other customers. This is
done by imitation or differentiation in
packaging design. These developments
cascade down to all other packaging
suppliers under pressure from competitive
buying by customers.
In his way
innovations diffuse rapidly in the tribal
group.
3. The basis of competitive behaviour by
suppliers is on three major dimensions:(a)
Joint
technical
development in cooperation with selective
customers.
(b)
Service, especially speed
and reliability of delivery.
(c)
Price.
As one might expect, these dimensions
mirror those interaction strategies identified
by Hallen and Johanson. (1985)
4.
Self-regulation occurs among the
packaging suppliers as was proposed by
Gummerson. (1997).
Customers also
indulge in more limited self-regulation
related to environmental, safety and health
issues in the manufacture and packaging of
detergents.
10.
Competitive Challenges.
Entry into an established market
poses a major challenge to a new supplier.
But how may that supplier deal with a strong
tribal group, connected by a network
linkages of relationships? The proposed
entry will involve understanding and
crossing tribal boundaries. The supplier
should define who are the key players and
which firm is the tribal leader, in order to
identify the best access points. Thereafter
The IMP Journal
Volume 2, number 1
the supplier must attempt to interact with
those key firms or the weaker ones who will
‘break ranks’ and accept a new entrant. To
create a competitive advantage, the supplier
needs to mobilise those resources which
are difficult for intended competitors to
replicate. It will not be possible to control
the response of the tribal group, but it must
anticipate a counter attack by the tribal
group. The imponderable issue is ‘for how
long can a closely-knit tribal group of
customers and suppliers remain intact and
cohesive?’
11. Summary
It was argued at the opening of this
paper that:'Painting pictures gives the artist
scope for the selective transforming of
reality'.
Likewise:'The nature and functioning of markets and
competition can be transformed into
'pictures' and 'theories' which are held by
participants'.
This paper has used the phrase
‘pictures at an exhibition’ as a metaphor for
the research studies presented at the
annual conference on business markets by
the IMP group.
The early IMP ‘pictures’ of businessto-business
relationships,
dyadic
interactions and markets as networks have
had a major influence over the past 30
years on European research. However, the
increasingly dominant research focus upon
cooperative relationships has been at the
expense of research into various facets of
competition and the competitive behaviour
firms. In section 3 of the paper it was
argued that many ‘art critics’ have
expressed concerns that the research
pictures at the IMP exhibition have become
somewhat stereotyped and would benefit
from inputs of ideas and concepts emerging
in relevant fields of literature.
This paper has concentrated upon
several neglected pictures of competition in
business markets. First, a sketch of the
dynamic competitive environment was
57
presented. Subsequently, various studies
of competitive strategies were displayed to
demonstrate how firms actually compete. It
is argued that ‘relationships’, interactions
and network positioning should be seem as
essential steps in developing competitive
strategies at the level of the individual firm.
A broad panoramic view of the
market arena and perceived market
structures was shown, with cameo portraits
of two competitive groupings in the markets.
An in-depth picture of the activities
of a tribal group in the German packaging
industry was presented as a case study.
The analysis of the case study drew upon
several concepts of competition and
competitive behaviour arising in the earlier
sections of this paper. Suppliers within the
tribal group were shown to act in a complex
mixture of cooperative, transactional,
competitive and collusive modes of
behaviour.
Under
certain
infrequent
circumstances, where the status quo of the
market is threatened, the whole tribal group
of suppliers and customers acts in a way
which resonates with the behavioiur
suggested in section 8.3. The community of
firms has interlocking and complex
relationships.
They share common
experiences of exchange in technologically
similar products.
There is a shared
knowledge of who is and who is not a
member of the tribal group. The group is
compact, self-governing and the ‘rules of
the competitive game’ are recognised and
adhered
to.
Hierarchical
power
relationships determine who is (or are) the
tribal leaders. Covert meetings take place
to regulate and share the market. Collective
defense of the territory occurs.
These
group
characteristics
distinguish the tribal group from a standard
network of firms with their interdependent
relationships.
The tribal group can be
mobilised by tribal leaders into unified,
cohesive action to resist newcomer firms
attempting to enter the domain of the tribe
and threaten existing power relationships.
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The IMP Journal
Volume 2, number 2
1
A Letter From The Guest Editor, Hakan Hakansson
Introduction To Special Issue In Purchasing
Purchasing has always been an important field of research within IMP. One reason for this
importance was stated clearly in the first IMP book, Industrial Marketing and Purchasing: An
Interaction Approach, published in 1982. In this book we challenged the view that
purchasing was different from marketing. Another more practical reason for its importance in
IMP work is that companies are generally more open to discuss and document how they
work with suppliers compared to how they treat their customers. But independent of these
reasons, our studies of purchasing has forced us into an interesting theoretical question:
What is “purchasing”? This is a simple but at the same time a very essential question. We
probably all have the same picture when presented with this question: In order to make a
good purchase we need to have some alternatives. Purchasing is about selecting! But in
contrast, if we pose a similar question about selling then the answer is not all about selecting.
Selling is about convincing!
I would argue that the focus on selection is one of the major problems that those who seek to
develop purchasing in companies struggle with. This problem is illustrated in the second
article of this special issue about purchasing. But, the same basic theme can also be found
in the other two articles. All three articles are to a very limited extent dealing with choice
between alternatives. Instead the focus in each is on the interaction that takes place
between the customer and supplier companies. The main issue in each of the papers
concerns how the two sides can develop an interaction that solves the problems that both
companies face and at the same time is efficient.
In the first article by van der Valk et al the interaction concerns business services purchased
by an oil company based in the Netherlands. The authors use this case study to investigate
four interaction processes between this customer and four suppliers covering three types of
business services. One of these is a semi-manufactured service – a drilling service. Two of
these concern instrumental services – one is an engineering/construction service and the
other involves the management of a stock of piping materials. The final process relates to a
consumption service in terms of waste management. The authors find that the interaction
processes in these cases are different from each other in a systematic and predictable way.
The authors’ conclusion is that the ongoing interaction is a vital part of the selling and buying
of business services and that the process will be closely related to structural aspects such as
key objectives, functional representatives and organizational capabilities.
Interaction becomes an even more accentuated aspect in the second contribution by
Bocconcelli & Håkansson. This paper is based on a case study of the motorbike producer
Ducati. The authors concentrate on the important interplay between internal organizational
attributes and external interaction. In the case study, Ducati has financial problems and
needs to improve both efficiency and effectiveness and to change its supplier relationships.
As more than 80% of the value of Ducati’s final product is produced by suppliers, its
suppliers have to be involved in the change process in order to achieve a turnaround in the
company’s fortunes. The interaction between Ducati and its suppliers has to be intensified in
order to find better solutions from the perspective of efficiency and innovation. One internal
change was to create purchasing teams with a much broader competence, but also to
The IMP Journal
Volume 2, number 2
2
change the name of the responsible unit from “purchasing” to “supplier development”. These
actions were done both to signal a new way to behave both internally and toward the
suppliers but also to try to convince the latter to develop their own way of functioning in order
to facilitate interaction. The case is an interesting example of how much there is to be done
in terms of increasing the capability to interact in order to develop much more efficient
production and logistic structures. In the third article by Pedersen et al both the customer
and supplier sides of relationships are treated in a truly interactive way. Both sides are
described in terms of how the focal interaction is part of a larger pattern of interactions. The
two parties and their contexts are matched in order to identify four situations of more or less
balanced character and to show the consequences of these for the interaction process. The
model developed in the paper builds on earlier research into purchasing portfolio models and
supply networks. The model is applied to a longitudinal study of a construction company and
its main suppliers. The empirical illustrations centre on company learning, capacity issues
and cost handling.
The three articles together provide an interesting picture of what can be achieved by taking
an interaction approach to purchasing. But they also show that there is a lot more for us to
learn about these issues.
Best Wishes
Hakan Hakansson
The IMP Journal
Volume 2, number 2
3
An Empirical Investigation of Interaction Processes
between Buyers and Sellers of Business Services
Wendy van der Valk a*, Finn Wynstra b and Björn Axelsson c
a
Eindhoven University of Technology, PO Box 513, 5600 MB Eindhoven, the Netherlands, [email protected]
Erasmus Research Institute of Management/ RSM Erasmus University, PO Box 1738, 3000 DR Rotterdam, the Netherlands,
[email protected]
c
Stockholm School of Economics, PO Box 6501 – S 11383 Stockholm, Sweden, [email protected]
*: Corresponding author
b
Acknowledgements: The authors wish to acknowledge the useful comments of Wilfred Dolfsma, Ferdinand Jaspers and
Thomas Ritter, and the anonymous reviewers of the journal.
Abstract
This paper presents the results of a theory-building study into processes of interaction between buyers
and sellers of different types of business services. We build on a recently developed usage-based classification of
business services which identifies four service types. Earlier studies indicated that interaction for different types of
services is associated with different key objectives, and differing functional involvement and organizational
capabilities. However, the interactive processes that take place between buyers and sellers were not included in
these studies.
The main objective of this article is to make a theoretical and an empirical contribution by 1) extending
the conceptualization of interaction by including process dimensions; and 2) empirically investigating what these
interactive processes look like for each of the four types of services. This empirical investigation is done by means
of an embedded case study.
The results of our case study suggest that different types of services are associated with differing
processes of interaction. Furthermore, we were able to replicate previous findings regarding the key objectives,
functional involvement and organizational capabilities. Additionally, we found that the level of perceived risk
associated with a service influences the extent to which interfaces and interaction processes are formally defined
and designed.
Keywords: Business Services, Interaction, Purchasing, Buyer-Seller Relationships
Introduction
The services marketing discipline
(Grönroos 2000; Lovelock 1983; 2001;
Zeithaml & Bitner 1996) has consistently
been emphasizing that (consumer)
services are produced in interactive
processes between the seller and the
buyer. Zeithaml, Berry and Parasuraman
(1988, p. 35) claim that “in most services,
quality occurs during service delivery,
usually in an interaction between the
customer and contact personnel of the
service firm”. As such, one could argue
that the success of a service is actually
established in the encounter between
service provider and buyer. These
observations equally apply to business
services, and highlight the presence of
ongoing buyer-seller interaction, or in
other words: continuous interaction during
the service delivery process.
Recently,
Grönroos
(2004)
stressed the importance of the service
encounter and the customer-service
provider interactions it comprises. This
parallels a shift in the strategy debate
towards a micro perspective on strategy
and strategizing (Johnson et al. 2003),
thereby calling for emphasis on the
processes and practices that make up the
daily activities of organizations and that
relate to strategic outcomes. Johnson et
al. (2003) argue that as the transparency
of
resource
markets
increases,
sustainable advantage remains more and
The IMP Journal
Volume 2, number 2
more in the level of detail of the buyerseller relationship. Hence, daily activities
and ongoing interaction are the ‘stage’ for
strategic behaviour.
Consequently, studies into buying
business services could benefit from
focusing more on the ongoing business
(as opposed to the ‘transactional’
purchasing process), where the design
and management of interfaces and
interaction processes are an important
determinant of the actual outcomes of the
customer-supplier
relationship.
Unfortunately however, researchers in the
area
of
Purchasing
and
Supply
Management (PSM) have not fully
acknowledged this typical aspect of
services, and have largely focused on the
initial phases of the purchasing process,
such as supplier selection (Day &
Barksdale 1994). An exception is Mitchell
(1994), who briefly touches upon problems
and risks in the buying process for
consultancy services and includes project
management and performance evaluation
in addition to the stages comprising the
up-front decision-making process.
In order to investigate this notion of
ongoing
interaction
from
a
PSM
perspective, Wynstra, Axelsson and Van
der Valk (2006) recently proposed a
classification of business services based
on how the service is used/ applied by the
buying company. They furthermore
identified several dimensions in terms of
which patterns of interaction can be
described and found variation on these
dimensions in their exploratory studies.
However, as acknowledged by Wynstra et
al. (2006), this conceptualization of
interaction is rather static, since it involves
only structural dimensions. Furthermore, in
their exploratory studies, these authors did
not explicitly address sampling issues or
the development of research instruments.
The purpose of this paper is twofold. Firstly, it extends the conceptual
framework provided by Wynstra et al.
(2006) by adding process dimensions to
the set of dimensions originally used to
describe patterns of interaction. According
to Whetten (1989), identifying how a
proposed change in the number of
variables affects accepted relationships
between the variables is a good way to
4
demonstrate the value of this change.
Secondly, we empirically investigate
ongoing interaction by conducting a single,
theory-building case study aimed at
understanding
what
processes
of
interaction look like for each of the four
types of business services. This case
study draws on theoretical selection
criteria (Dul and Hak, 2007), as well as on
a case protocol and an interview guide,
thereby preventing the limitations that
characterized the dataset of Wynstra et al.
(2006). Conclusions are drawn and
suggestions for future research are
developed.
Usage as a driver for variation in
ongoing interaction
Most firms nowadays tend to
engage in a limited number of long-lasting
relationships. As a result, the ongoing
interaction in these business relationships
has become highly important. The
Industrial Marketing and Purchasing (IMP)
Group was one of the first scholarly
groups to acknowledge the importance of
the ongoing business relationship and the
interactions
involved
(Ford
2002;
Håkansson 1982). In ongoing business
relationships, buying companies and
suppliers
interact
during
exchange
episodes and as part of the long-term
relationship (across exchange episodes).
Effective of functional interaction between
buyers and sellers is required to ensure
the successful ongoing exchange of
business services.
In order to determine what a
functional pattern of interaction looks like,
the
IMP
Group
has
extensively
investigated ongoing interaction between
buyers and sellers of industrial goods.
They identified variation in interaction and
found that the type of application of a
purchased good is the main determinant of
buyer-supplier interaction (Håkansson
1982). Based on this attribute, Håkansson
(1982) distinguishes three classes of
goods: capital equipment, raw and
processed materials and components
(note that services are not explicitly
accounted for in this classification). The
classification resembles the classification
The IMP Journal
Volume 2, number 2
of industrial goods brought forward by
Robinson et al. (1967), who make a
distinction between product constituent
transformers
(components),
product
constituents
(semi-manufactures),
production facilities (investments goods/
instrumental services) and production
services (MRO goods/ consumption
services). Similarly, Jackson and Cooper
(1988) identify three classes containing
both products and services: 1) capital
products (major equipment); 2) operation
products (minor equipment and MRO
services); and 3) output products (raw
materials/ components and ‘production
services’ purchased for the final product)1.
Building on the classifications of
Håkansson (1982) and Jackson and
Cooper (1988), Wynstra et al. (2006)
propose a classification of business
services, based on how the service is
used/ applied by the buying company, and
claim that this usage dimension is one of
the main factors affecting the appropriate
(effective) design of customer-supplier
interfaces and interactions. Four types of
services can be identified: component
services, semi-manufactured services,
instrumental services, and consumption
services.
Component services are, without
transformation by the buying company,
passed on to the end-customer. Examples
are subcontractors for a cleaning
company, or (inbound) call centre services
for
a
telecom
company.
Semimanufactured services are transformed by
the buying company before being passed
on to the final customer; these services
are primarily used as an input by the
buying organization for particular offerings
to final customers. An example is
outsourced market research, which is then
used by a marketing and advertising
company to develop a marketing plan for a
client. Instrumental services directly affect
how the buying company’s primary2
1
MRO services are purchased by an organization to run
its operations (f.e. maintenance, but also legal services)
while production services become part of the production
process for a particular (set of) product(s) (Jackson,
Neidell and Lunsford, 1995).
2
By primary processes we mean those processes aimed
at fulfilling customers needs and wants (value-creating
processes). Secondary processes refer to those processes
5
processes are carried out (they are not
delivered to end-customers). An example
is subcontracted ICT services to support
the operations of a logistics service
provider. Finally, consumption services do
not directly affect how the buying
company’s primary processes are carried
out. An example is the cleaning of office
buildings for a consultancy agency.
This
classification
has
several
important benefits. Firstly, it focuses
specifically on business services, which
according to Boyt and Harvey (1997) and
Jackson and Cooper (1988) have received
far less attention than consumer services.
Secondly, it takes into account services
that are being passed on to (business)
customers: these services have largely
remained
unaddressed
in
services
marketing research (Jackson & Cooper
1988). Thirdly, it takes on a buying firm’s
rather
than
a
service
provider’s
perspective. Finally, it enables the
identification of similarities between
services that are technically speaking of a
different nature. Whereas business
services are usually classified with regard
to the nature of the service (IT, HRM), the
service providers or the stakeholders
involved (Agndal et al. 2006), this
classification draws attention to the
importance of an individual service for the
buying firm, for example for customer
satisfaction or for the continuity of the
buying company’s primary processes.
Similarly, Fitzsimmons et al. (1998) argue
that it is important to identify who or what
is the recipient of the service (people,
things or processes), since this provides
an understanding of the nature of the
service being offered and the required
interactions. Focusing on what they
can/should do with the service and its
provider rather than on the service itself
enables buying companies to think about
what functional aspects are crucial and
consequently who should be involved to
what extent in the purchasing decision
process and the exchange process that
follows thereafter. These issues are
that enable and support the primary activities (Porter,
1985).
The IMP Journal
expected to be equally
business service providers.
Volume 2, number 2
relevant
for
Developing the concept of interaction:
adding process variables
Exploratory case studies into
service
procurement
indicate
that
differences exist with regard to the key
objectives
of
interaction,
type
of
representatives involved and required
buyer and supplier capabilities (Table 1)
(Wynstra et al. 2006). For example: the
key objective for component services is to
have the service fit with the buying
company’s existing offerings, whereas for
instrumental services, the service should
result in the desired effect on/ change in
the primary processes. These key
objectives have certain implications for the
resources required from buyer and seller
(Cunningham & Homse 1986).
On the one hand, the key objective
of interaction is reflected in the type of
functional representatives involved in the
ongoing interactions. For component
services, for which the end-customer plays
an important role, this involvement comes
from people representing the end
customer (often the marketing function) or
perhaps even the end customers
themselves. The fact that instrumental
services affect the buying company’s
primary processes results in the
involvement of business development and
primary process representatives. Other
internal users often include general
management and service specialists (e.g.
internal lawyers in the case of legal
services).
On the other hand, different key
objectives will require differing capabilities
from both the buying and the supplying
organization. When providing component
services, the supplier has to understand
the service itself as well as how it fits with
the buying firm’s complete (downstream)
offering. Furthermore, an important
capability is to match internal capacity with
the buying company’s demand pattern.
Critical customer capabilities include the
ability to (timely) interpret, translate and
communicate (changes in) final customer
demands and the ability to synchronize
6
and coordinate the design (‘architectural
knowledge’) and delivery (‘assembly
capacity’) of the different services. For
instrumental services, the supplier should
have a thorough understanding of the
buying
firm’s
production
process.
Furthermore, since instrumental services
often have a long-term character, the
supplier has to be able to sustain and
support the service for an extended period
of time (Håkansson 1982, p. 163-192).
Critical customer capabilities concern the
ability
to
interpret,
translate
and
communicate the demands of internal
users and the capability to (help)
implement and leverage these services
within the own organization.
Although Wynstra et al. (2006)
acknowledge
the
limits
of
their
conceptualization of interaction in terms of
objectives, capabilities and interfaces and
point out that the concept of interaction
can be further developed by including
process-related dimensions, they do not
address this in large detail. This seems
inconsistent since the IMP Group has
repeatedly stressed the importance of
studying
the
interactive
processes
between buyers and sellers and identified
two
key
interaction
processes:
institutionalization and adaptation.
Institutionalization
Institutionalization occurs when buyerseller relationships are long-term: in these
relationships, conscious decision-making
may be substituted by routine behaviour
(Håkansson 1982). As such, patterns of
interaction will either be deliberately
designed or, more often, emergent.
Institutionalization may for example
emerge in the inter-organizational contact
patterns as well as the role relationships
being built up over time. Therefore, we
propose to primarily focus on ongoing
communication as an area in which
institutionalization takes place, since this is
expected to be strongly coherent with the
structural dimensions of interaction, i.e.
key
objectives
and
functional
representatives involved. Thus, we focus
on the results of institutionalization, not on
the process of institutionalization itself.
The differences in terms of key
objectives, functional representation, and
The IMP Journal
Volume 2, number 2
7
Table 1
Differences in objectives, capabilities and interfaces for the different service types
Type of service
Objectives
Critical supplier capabilities
Critical customer capabilities
Component services
The service should fit
with the customer’s
final offering
Production capacity and
quality
Development capabilities (in
case of specialized services )
Translating/communicating
final customer demands (on
ongoing basis)
Synchronizing the supply of
various service components
Semi-manufactured
services
The buying company
should be able to
transform the service
in the desired way
Production capacity and
capability to maintain a stable
quality
Innovative capabilities (when
used as an external expert
and for strategic services)
Instrumental
services
The service should
affect the customer’s
primary processes in
the desired way
The service should fit
with important
characteristics of
these primary
processes
The service should
support various core
processes
Business development and
innovation
Business and service
production design services
Translating final customer
demands
Optimizing
fit
between
internal
and
supplier’s
operations
Synchronizing suitable
contact interfaces between
internal and the supplier’s
operations
‘Implementation’ skills:
understanding what fits when,
how and for whom
Consumption
services
Ability to supply the desired
service and (if needed) adapt
it to the specific situation of
customer
Translating/communicating
internal customer demands
(on ongoing basis)
Follow up on performance
and user satisfaction
Supplier
representatives
Marketing
representatives
regarding the
supplier’s own service
‘Downstream’
specialists
(knowledgeable of the
customer’s final
offering)
‘Production planning’
and marketing
representatives
Customer representatives
Buyer specialists
regarding the service
bought, and marketing
representatives knowing
the needs of the buyer’s
customer
Production and quality
representatives
Product
representatives, often
including a team of
consultants or process
engineers
Business development
representatives and
affected internal
customers
Marketing
representatives
Buyers and internal
customers
The IMP Journal
Volume 2, number 2
organizational capabilities will obviously be
reflected in these inter-organizational
contact patterns between the buying
company and the service provider. Indeed,
Wynstra et al. (2006) found that patterns
of communication for the different service
types differed in terms of broadness and
the
high-priority
issues
addressed.
Håkansson (1982) suggests that the
frequency and form of communication in
relation to the topic discussed and the
individual that was contacted are important
dimensions when trying to understand the
information exchange between buyer and
seller, both within and across exchange
episodes. Similarly, Cunningham and
Homse
(1986)
mention
frequency,
intensity and hierarchical and functional
scope of customer-supplier contacts as
short-term aspects of the interaction
process. Building on Cunningham and
Homse (1986) and Wynstra et al. (2006),
we propose to analyze the contact
patterns in terms of hierarchical and
functional scope, since this is expected to
fit well with our analysis of the buyer-seller
interface. These dimensions are evaluated
by investigating what issues in the buyerseller dialogue are important, since this
should reflect the relevant hierarchical and
functional issues.
With regard to these process
dimensions, several propositions can be
developed. For example: for component
services, which become part of the
offerings to final customers, critical issues
in the buyer-seller dialogue are the
integration of the service into the overall
offering of the buying company, endcustomer requirements (f.e. regarding the
sourcing of the component or the desired
use of the component) and the
coordination of service production/ delivery
and consumption. In contrast, for
instrumental services, a critical issue in the
buyer-seller dialogue is how and to what
extent the service impacts the buying
company’s primary processes. Buyer and
seller
will
furthermore
discuss
developments in the supply market and
within the buying organization, as to obtain
long-term alignment. The complete set of
propositions
regarding
buyer-seller
communication of interaction is as follows:
8
Proposition 1
In the buyer-seller
communication for
a
… component services, the most
important issues are customer
requirements, the fit of the service
with the rest of the offering, and the
customers’ evaluation of the
service.
b
… semi-manufactured services, the
most
important
issues
are
customer requirements, service
transformation possibilities and the
fit between the customer’s and the
supplier’s processes.
c
… instrumental services, the most
important issues are the buying
company’s
strategy
and
developments, and the effect of the
service on the buying company’s
primary processes.
d
… consumption services, the most
important issues are internal
customer demands, the internal
customer’s evaluation of the
service and how to increase
efficiency
(f.e.
by
reducing
administrative workload).
Adaptation
Adaptations refer to any relationspecific changes or investments made by
the parties involved aimed at facilitating
buyer-seller collaboration. Brennan et al.
(2003) brought forward several areas in
which adaptation can take place when
exchanging industrial services (derived
from Håkansson (1982) and adapted to
the specific situation of services by
Brennan
et
al.
(2003)):
service
specification, service design, service
delivery processes, capacity and demand
management, administrative procedures,
financial procedures, adaptations with
regard
to
provision
of
sensitive
information, and changes to organization
structure. They furthermore pointed out
that adaptations can be unilateral (one firm
making a modification for a specific
exchange partner, without the exchange
partner making a reciprocal modification)
or mutual (reciprocal modifications).
Since demand for component
services is strongly related to the purchase
pattern of the buying companies’
The IMP Journal
Volume 2, number 2
customers, adaptations are made with
regard
to
capacity
and
demand
management. With instrumental services,
sensitive
information
regarding
for
example the buying company’s strategy is
provided to the service supplier, in order to
enable the supplier to optimally address
the developments within the buying
organization. Because of the long-term
collaboration between buying company
and
service
provider,
special
arrangements are also made with regard
to financial and administrative procedures.
We
thus
develop
the
following
propositions:
Proposition 2
Adaptations for…
a
… component services mostly
occur
with
regard
to
the
specification and design of the
service, and capacity and demand
management. Furthermore, critical
information regarding the buying
company’s value proposition will be
exchanged.
b
… semi-manufactured services
mostly occur with regard to service
delivery and capacity and demand
management. Furthermore, critical
information regarding the buying
company’s value proposition will be
exchanged.
c
… instrumental services mostly
occur with regard to organizational
structure. Furthermore, critical
information
regarding
internal
developments at the buying
company will be exchanged.
d
… consumption services mostly
occur with regard to financial and
administrative procedures.
The perceived risk framework and its
consequences for buyer-seller
interaction
In addition to variation with regard
to structural dimensions of interaction,
Wynstra et al. (2006) found that patterns
for interaction were more explicitly defined
and designed for some of the services
they studied. For example: a “qualified”
dialogue between the companies involved
could be observed for the strategic and
knowledge intensive component service,
9
whereas for the non-strategic component
services, broader patterns of interacting
people were found. Also, the variety and
number of involved specialists differed for
an advanced semi-manufactured service
versus one that is standard. Based on
these findings, they suggest that patterns
of interaction surface most clearly for
those services that are associated with a
high degree of perceived risk, or high
potential impact. We therefore deem it
important to control for risk in our analysis,
since this may explain deviations from the
expected patterns of interaction, should
they occur.
This suggests that the buying
companies
studied
designed
the
interaction with the supplier with reference
to other factors than how the service is
used/ applied by the buying company.
From their review of the three most
influential models of Organizational Buying
Behavior (OBB) (Robinson & Faris 1967;
Sheth 1973; Webster & Wind 1972),
Johnston and Lewin (1996) conclude that
much of the variation in OBB can be
related to the level of perceived risk
associated with a particular purchase
situation. Building on Bauer (1960),
Mitchell and Greatorex (1993) and Sheth
(1973) claim that perceived risk is a
combination of consequences (measured
in terms of seriousness/ importance) and
uncertainty. Indeed usually, perceived risk
is viewed as the function of two variables:
the importance of the purchase and the
level of uncertainty associated with the
outcome of the purchase (Gelderman &
Van Weele 2002; Henthorne et al. 1993;
Kraljic 1983; Wilson et al. 1991).
Importance refers to the purchase’s
impact on organizational profitability and
productivity
(McQuiston,
1989).
Importance/ seriousness can thus be
interpreted as the extent to which a
service is strategic or critical for customer
satisfaction: in the case of component and
semi-manufactured
services,
service
delivery failure has a direct impact on end
customers. The service can also be of
critical importance for the continuation of
the
buying
company’s
production
processes or result in a short-term or longterm impact on for example the primary
processes of the buying company: this
The IMP Journal
Volume 2, number 2
mostly applies to instrumental services.
Consumption services will generally be
considered unimportant for the buying
company’s
profitability,
competitive
advantage, or for the continuity of the
buying company’s primary processes3.
Uncertainty is a concept that is
usually made up of complexity and
novelty. Considering complexity, two
elements can be identified (McQuiston
1989): complexity of the purchase
situation and complexity of the product
(service) being purchased. Since we are
interested in the potential influence of
complexity (as an element of risk) on
ongoing interaction, we focus on the
complexity of the service. This complexity
depends on the inherent complexity of the
service (i.e. the extent to which a service
is advanced) and the inherent complexity
of the context in which the service is
applied (Fisher 1976, p. 30)4. Similarly,
novelty refers to the extent to which
buyers are familiar with similar services or
similar contexts in which the service is to
be applied (Fisher 1976, p. 30).
The importance of these factors is
also noted by Fitzsimmons, Noh and Thies
(1998), who point out that the importance
or criticality of the service to the buying
firm must be considered in the purchasing
decision, and by Smeltzer and Ogden
(2002), who find that the nature of the
services being purchased and their
associated complexity are major factors
for purchasers.
Regarding
the
influence
of
perceived risk on interaction, Johnston
and Bonoma (1981) and later McQuiston
(1989) demonstrate that the functions/
people involved in interactions with
suppliers vary with the novelty, complexity
and importance of a purchase. Johnston
and
Bonoma
(1981)
define
five
3
Note that a consumption service like office cleaning can
be considered highly important when regarding them from
the perspective of the internal customers/ users of the
building.
4
Fisher (1976, p. 30) furthermore proposes the level of
experience the buying company has with the technological
characteristics of the service and the level of sophistication
of the buying firm in this specific area. In our view, this
resembles McQuiston’s (1989) definition of novelty; this
latter factor therefore determines uncertainty rather than
complexity.
10
measurable dimensions of the buying
centre and find that novelty, complexity
and especially importance were very
helpful in explaining the level of
managerial involvement, the functional
disciplines involved, the number of people
involved and the degree of linkage
between members of the buying centre.
McQuiston (1989) expands on the theory
of buy classes (Robinson & Faris 1967) by
studying the combined effects of novelty,
complexity and importance and finds that
particularly the last two constructs explain
participation and influence of different
organizational functions.
Johnston and Bonoma (1981)
furthermore claim that the influence of
novelty, complexity and importance is
likely to be present in and have an effect
on both the purchase situation and the
interactions afterwards. Within the OBB
research
tradition
however,
these
interactions have not been studied in great
detail. For example: the influence of risk
on ongoing interaction may be reflected in
a higher level of managerial involvement.
Therefore, in line with the claim of
Johnston and Bonoma (1981) and the
findings of Wynstra et al. (2006), we
propose that differentiated patterns of
interaction are more formally defined and
designed
for
services
that
are
characterized by high perceived risk, since
buying companies will make more
conscious decisions about how to deal
with these services. These ideas lead to
the development of the following
propositions:
P3a For high-risk services, the extent to
which the patterns of interaction for
the four service types are really
distinct is high.
Since consumption services are
generally characterised by low risk, we
also
bring
forward
the
following
proposition:
P3b Interaction patterns for low riskservices are similar across all
service types and resemble the
interaction pattern for consumption
services.
The IMP Journal
Volume 2, number 2
A case study into ongoing buyer-seller
interaction
The propositions developed will now
be investigated by means of an embedded
case study. In this case study, i.e. the
study of one service of each service type
at one buying company, we investigate
what the processes of interaction look like
for each of the four types of services. We
thus study four cases (service purchases)
at one buying company. Furthermore,
collecting evidence on the structural
dimensions of interaction enables us to
replicate the findings of Wynstra et al.
(2006). After all, in their studies, Wynstra
et al. (2006) did not explicitly address case
selection issues or the development of
research instruments. In our case study,
we draw on a pre-determined case
protocol and interview guide5.
The case study is part of an overall
research project, in which we intend to
study one service of each type at several
companies (thus: multiple case studies).
Such an approach enables both withincompany
and
cross-company
comparisons, the results of which are used
to develop the emergent theory. We
developed theoretical selection criteria
using the following two dimensions: 1) the
type of company (service providers versus
manufacturing companies); and 2) the
type of customer of the buying company
(other companies or consumers). We
invited multiple companies in each of the
resulting categories; eventually, ten
companies agreed to participate in our
study. We expected results obtained at
different companies would be similar when
these companies are similar in terms of
the selection criteria used (withincategories); across-categories, results are
expected to differ.
From these ten companies, a Fossil
Fuels (oil and natural gas) Exploration and
Exploitation
company
(FFEE)
was
selected for this case study; the reason for
choosing this company was that it was the
5
Since in this case study we were to use our case protocol
and interview guide for the first time, this study would also
be used to evaluate the suitability and usability of our
research instruments and case protocol.
11
first company at which data could be
collected.
FFEE finds and produces oil and
natural gas in the Netherlands and the
Dutch part of the continental plate. It is the
largest natural gas producer in the
Netherlands, with annual production of
around 50 billion m³, which covers around
75% of Dutch demand. With an oil
production of 0.8 million m³ a year, FFEE
covers about 4% of the country's total oil
demand. FFEE also performs various
construction projects with differing sizes,
ranging from relatively small modifications
to the realization of complete land or
offshore installations for the extraction of
oil and/ or natural gas.
In consultation with the authors, FFEE
selected the four services (one service
purchase for each category in the usagebased classification) to be studied.
Unfortunately, we were not able to identify
a component service. This can be
explained from the fact that at
manufacturing companies, it will usually be
more difficult to identify services that move
downstream to customers: instrumental
and consumption services will be more
common. We therefore proposed to select
four services from the remaining three
categories. This resulted in one semimanufactured service, two instrumental
services and one consumption service.
In our analysis, we control for the level
of perceived risk involved with each
service to see if this helps us to
understand why interaction may not vary
as strongly as expected. The risk
associated with the semi-manufactured
service and one of the instrumental
services was considered high; the risk
associated with the other two services was
low. Thus, specifically within the category
of instrumental services, interesting
insights may be obtained. The level of risk
associated with the service purchases
reflects the level of risk as perceived by
the buying company. The services
selected and their brief descriptions, their
respective
classifications,
and
the
functions of the people interviewed can be
found in Table 2.
Each of the purchases was
studied by means of two to three in-depth
interviews of 1,5 to 2 hours each with
The IMP Journal
Volume 2, number 2
12
FFEE
Table 2
Services and informants (SEM: semi-manufactured, INS: instrumental, CNS: consumption)
Service
Informants
Type
Drilling services
Supply Chain Engineer (purchasing)
Drilling Development Team Leader
SEM
Engineering and construction Supply Chain Engineer
INS
services
Senior Project Engineer
HIGH RISK
Managing
stock
of
piping Supply Chain Engineer
INS
materials
Mechanical Engineer Piping
LOW RISK
Waste management
Supply Chain Engineer
Representative Waste Management
CNS
department
purchasers and with contract owners
and/or users. The interviews with the
purchasers focused predominantly on the
purchasing process and to a lesser extent
on the ongoing stages, whereas for the
contract owners, who were deemed to be
most knowledgeable on what happened
after the purchase, the emphasis was on
these ongoing stages (data source
triangulation; Yin (2003)). Appendix I
contains the interview guide used. In most
cases, the buyer involved was approached
first. Other informants were usually
identified by the buyer. We tried to take
the supplier’s perspective into account by
asking the buying company about supplier
representatives involved, the supplier's
actions/ behaviours, viewpoints, et cetera;
however, data was not collected at the
suppliers.
The
interviews
were
semistructured. The interview guide was based
on the interview guides used in similar
studies conducted by the IMP Group
(Håkansson 1982). Of each interview,
extensive interview summaries were made
and sent back to the informants for
verification. Approved summaries at the
informant level were merged into one
description at the case level, which was
again sent to the informants in order to
eliminate any inconsistencies and to
provide further clarification if necessary.
Furthermore, the interview results were
extensively discussed by the authors to
further enhance validity6. Table 3
6
The research team consisted of one principal researcher
and the two co-authors of this paper.
summarizes how we dealt with various
issues of validity and reliability.
Results of the case studies
We now turn to descriptions of the
four cases studied, after which we will
perform a within-case analysis and a
cross-case analysis across the three
service types. The findings for all cases
studied have been summarized in Table 4;
we will refer to this table in our analysis.
A semi-manufactured service: drilling
services
FFEE
works
with a main
contractor, which provides the equipment/
installations and the personnel to perform
the actual drilling for oil, and which is paid
a refund for its costs plus a fair profit
margin. The main contractor also
manages the contracts with third parties
(which can only be contracted in
consultation with FFEE) and carries out
some project planning activities. This
service becomes part of the customer
processes (increased speed of production
due to the use of a special drilling
technique); furthermore, demand for the
service is strongly connected to customer
demand. It is therefore considered a semimanufactured service.
The service
comprises a high risk purchase, since nonperformance of the contractor results in
substantial production (and thus revenue)
loss.
For this service, the key objective
of interaction is to integrate the drilling
service into FFEE’s primary processes.
Consequently, the supplier needs to
The IMP Journal
Volume 2, number 2
Table 3
Validity and reliability in the case studies
Type of validity
Construct validity
“establishment of correct operational
measures for the concepts being studied”
Internal validity
13
Methods of addressing this in the case studies
Triangulation of questionnaire and interview data
Triangulation of multiple informants: different internal
representatives
All informants received draft versions of the interview
report for comments
Draft versions of the complete case report were verified
with at least one key informant from each buying firm
Three research team members gave input during data
collection and analysis
Result: emergent explanations adjusted and expanded;
participants agreed to the interpretations
Use of conceptual framework
Result: relationships between the different variables
from the conceptual framework identified and
substantiated
“establishing
causal
relationships
whereby certain conditions are shown to
lead to other conditions, as distinguished
from spurious relationships”
External validity
Theoretical sampling of cases at the firm level and the
level of the service purchase
“establishing a domain in which the Result: revised framework applicable to different types
study’s findings can be generalized”
of firms and service purchases
Reliability
Development of case protocol
Development of (interview) questionnaire
“demonstrating that the operations of a Result: methodology transparent and repeatable
study can be repeated with the same
results”
Based on: Yin (2003).
understand not only its own service
delivery process, but also FFEE’s primary
processes. The fact that this contract
involves a new drilling technique puts
certain requirements on the innovative
capabilities of the supplier (further
development and fine-tuning of the
technique).
The supplier needs to
understand the safety requirements of
FFEE, as well as the impact of nonproduction on FFEE’s revenues. FFEE
has to be able to properly explain these
issues. Furthermore, FFEE should provide
a good forecast on when a drilling period
will start, as well as maintain the time
schedule (coordination of FFEE’s and the
supplier’s processes). We find the
involvement of production planners;
however, marketing involvement is
lacking. This can be explained from the
fact that production is delivered to a
company which is part of the same
conglomerate as FFEE. Formally, this
customer company is considered an
external customer. However, being part of
the conglomerate, production planners
also fulfil the marketing role. Regarding
the supplier representatives, an account
and a contract manager represent the
commercial side of the supplier. Technical
specialists are involved to plan, prepare
and
perform
drilling
activities.
Communication is intensive and concerns
production progress and deviations that
may occur. Adaptations mostly occur with
regard to the specification and design of
the service: the supplier has developed
the new technique in collaboration with
(and thus custom for) FFEE.
FFEE is satisfied with the
contractor’s performance in terms of the
service provided and the process of
service provision. The service is delivered
at the right time with the right quality and
The IMP Journal
Volume 2, number 2
14
FFEE_INS
LOW RISK
FFEE_INS HIGH RISK
FFEE_SEM
Table 4
Findings for the different types of services at FFEE
Objectives
Critical supplier
Critical customer
capabilities
capabilities
Deliver a service Understand how
Provide accurate
that enables
service contributes
forecast of
production
to revenue
demand
during drilling
generation FFEE
Maintain time
Understand
schedule (delay in
importance of
production means
safety aspects
revenue loss)
Innovativeness
Supplier
representatives
Account manager
Contract
manager
Administration
department (for
support
purposes)
Technical
specialists
(regarding
ongoing delivery)
Customer
representatives
Supply chain
engineer
(purchasing)
Technical
representatives
Contracting
Realize capital
investments in
construction as
soon as possible
(so they can
generate
revenue)
Understand how
the capital
investment fits
with FFEE’s
primary process
Understand
FFEE’s specific
requirements
Project
management skills
Clearly specify
tasks and
responsibilities of
supplier
Maintain time
schedule (delays
result in revenue
losses)
Management
team consisting
of proposal
manager and
technical
representatives
Purchasing
Technical
representatives
Tender board
Ensure timely
availability of
piping materials
to prevent
disruption of
primary process
Understand how
non-availability of
materials affects
primary process
(reliability)
Enable
Clearly specify
how they want the
supplier to
contribute to the
primary process
Clearly specify
Managing
Director
Sales/ account
manager
Engineers
Quality manager
Supply chain
engineer
Global account
manager
Mechanical
engineer
Communication
Adaptation
Production
progress,
deviations
Daily
operational
contact,
quarterly
review
meetings
Evaluation on
well-by well
basis
Feasibility of
outsourcing
scenario’s
Schedule and
deliverables
Formalized
contact points
including hold
and witness
points and
review
moments
Quality and
delivery
reliability
Frequent
communication
Specification
and design
developed by
FFEE
Cost plus
payment
Exchange of
sensitive
information
Specification
and design
customized
Fixed unit price
per m3 and
kWh output
Exchange of
sensitive
information
Service design
customized
Standardizatio
n of materials
Service centre
The IMP Journal
Volume 2, number 2
FFEE_CNS
standardization of
materials
Fulfill
governmental
requirements to
clean up waste
resulting from
FFEE’s primary
process
Understand how
service contributes
to FFEE’s license
to operate
Reduce integral
chain costs
Create process
which can pass
(environmental)
accountancy audit
15
tasks and
responsibilities of
supplier
Clearly
communicate
locations and
types of waste
Communicate
safety
requirements
Project
employees
Two account
managers: one
for contractual
and one for
commercial
aspects
Supply chain
engineer
Waste
manager
Coordination of
activities
Industry
specific safety
standards
Scorecard
results (HSE,
savings,
administration)
Transparent
pricing with
flexible
(maximized)
profit margin
Investments in
company
clothing and
containers
Supplier set up
service centre
The IMP Journal
Volume 2, number 2
there have been no major problems in the
collaboration. In a new contract however,
the focus will be more on cost optimization
issues in addition to just performing the
drilling activities requested.
A high risk instrumental service:
engineering and construction services
FFEE has started a development
project aimed at the profitable exploitation
of an oil field. Steam produced by a
hydropower plant is injected into the earth,
resulting in oil “sinking” into specially
constructed trenches (horizontal pits). The
construction and subsequent maintenance
of the trenches and the hydropower plant
have been outsourced to an engineering &
construction consortium. This service is
targeted at the buying company’s primary
processes, and represents a major
investment: therefore, it is considered an
instrumental service. The risk associated
with this service purchase is large since it
is a greenfield project involving large
investments.
The key objective is to realize the
production facilities as quickly as possible
so that FFEE can start production. This
requires the involvement of technical
specialists (people knowledgeable about
construction activities). Since this project
involves an expansion of FFEE’s business
activities,
business
development
representatives are involved. This project
involves a long-term collaboration (the life
cycle of the oil field is estimated to be 25
years); the selection of the consortium was
therefore done with the greatest care.
Furthermore, the final decision was made
by a tender board (higher management
involvement), which consisted of the
technical disciplines, finance, sales, et
cetera (all represented by someone from
the senior management level).
During
the
ongoing
service
exchange, a senior project manager and a
core team of five to six people (a.o.
engineering and quality) are dedicated to
the consortium, with purchasing in an
advisory role. The consortium is
represented by a management team
consisting primarily of a proposal manager
and technical representatives (involved
with the detailed design and execution of
the development project). Communication
16
for the engineering services is intensive
and formal and mostly concerns progress
in terms of project realization and technical
performance. The information exchanged
is critical, since the plan to redevelop an
existing oil field is considered sensitive
information from a competitive point-ofview.
At the moment of studying this
case, the project was still ongoing, and
FFEE has been confronted with a number
of delays. However, according to FFEE,
this is inherent to a development project of
this size, and FFEE claims to generally be
satisfied with the services provided and
the process of service provision.
A low risk instrumental service: managing
stock of piping materials
One of the construction activities of
FFEE concerns constructing pipelines.
Three suppliers have been contracted to
manage the inventory of the required
materials (f.e. flanges and fittings) at
FFEE’s construction sites. This service
remains within the buying company and
directly affects the (primary) construction
processes of FFEE: this makes this
service an instrumental service. Orders for
materials (this is the majority of spend)
and related services (i.e. welding,
construction or digging services) are
placed on a daily basis and vary in size
from several euros to several millions of
euros. Failure of service delivery can lead
to delays in the construction activities,
which can eventually result in claims of
customers because of discontinued
natural gas supply. The same goes for
quality deficiencies in the materials
purchased. The key objective is thus to
maintain continuity of FFEE’s primary
processes. Overall however, the risk
involved with this contract is considered
low, since the chances of a delay actually
resulting in customer dissatisfaction are
small.
This service affects the primary
process of FFEE: non-delivery or low
quality may cause delays. A mechanical
engineer (contract owner) therefore is
involved with designing the service
process and ensuring its fit with FFEE’s
primary processes. Since this purchase
The IMP Journal
Volume 2, number 2
concerns a European contract, a global
account manager is also involved. After
signing the contract, the contract owner
and the supply chain engineer conduct
quarterly review meetings with the
supplier. Since delivery reliability and
quality are important, these issues are
discussed here. The coordination of
supplies, the scope of activities and
specifications remain with the business
lines. Both FFEE and the supplier have
made adaptations with regard to service
specification and design (standardization
of Stock Keeping Units).
At the beginning of the contract
period, there were some problems;
however, these were not too serious (no
delays). The contract reviews demonstrate
increasing performance and overall, FFEE
is satisfied with the service provided and
service provision.
A
consumption
service:
waste
management
Waste management refers to the
collection of perilous waste, regular waste
(coming from on and offshore drilling
locations
and
office
buildings),
construction and demolition waste,
processing of contaminated earth and
drilling waste at various FFEE locations,
and delivering it to appropriate processors.
One service provider has been contracted
for dealing with and carrying the
administration for 80% of the waste
streams. The service remains within FFEE
and does not affect its primary processes:
it is therefore considered a consumption
service. Although the contract is critical
with regard to environmental and safety
regulations, risk is considered to be low.
The key objective here is to
support the primary process by dealing
with the waste resulting from production
and abandonment of activities in an
appropriate manner, as to safeguard
FFEE’s corporate reputation and its
license to operate. Consequently, the
supplier has to conduct these activities
efficiently, thereby understanding that
good performance is critical for FFEE’s
license-to-operate. FFEE has to be able to
clearly communicate where waste can be
found (internal demand) and the safety
regulations that apply. This is ensured by
17
allocating the role of contract owner to a
representative
from
the
waste
management department. The user has
daily contact with the supplier about for
example collecting containers. The
contract owner and purchasing have
regular contact with two account
managers (marketing representatives)
about execution of activities, the contract,
optimization opportunities, et cetera.
There have not been any critical
issues in this contract and FFEE is content
with the service provided and service
provision. The supplier has made some
relation-specific investments with regard to
clothing (because of safety regulations)
and containers (which are rented from the
supplier by FFEE). Furthermore, the
supplier has set up a dedicated service
centre, which serves as FFEE’s focal
contact point. FFEE in turn has made
some adaptations with regard to
administrative procedures.
Cross-case analyses
Looking at the observations for the
three service types, we see that the
structural dimensions of interaction differ
in line with the findings of Wynstra et al.
(2006). Note that since our dataset did not
contain component services, we were not
able to investigate propositions 1a and 2a.
Regarding
the
interactive
processes, we see that for semimanufactured services, communication
mostly concerns production progress and
deviations that may occur, since this will
immediately affect FFEE’s delivery to
customers. Customer requirements are
not
an
important
topic
in
the
communication, and we thus find that
proposition P1b is not supported. This may
be explained by the fact that FFEE’s
customer
is
part
of
the
same
conglomerate, as a result of which there is
less explicit attention for customer needs
and wants. Adaptations have taken place
with regard to service specification and
design, and sensitive information about
FFEE's value proposition has been
exchanged. This provides support for
proposition 2b.
For the first instrumental service
studied, engineering and construction
services, communication involves the
The IMP Journal
Volume 2, number 2
exchange of critical information, as well as
how the service delivered affects the
buying company’s primary processes
(continuity of primary processes/ enabling
production at new locations). We therefore
conclude that proposition 1c is supported.
Adaptations were mostly made with regard
to organizational structure. Proposition 2c
is thus supported.
For the other instrumental service,
stock management services, the exchange
of critical information was not so profound.
In this case, proposition 1c is not
supported. Adaptations mostly concerned
administrative procedures, which does not
provide support for proposition 2c.
However, this instrumental service is
characterised by low risk, which explains
why we do not observe the expected
patterns.
The
engineering
and
construction services were characterised
by high risk: when comparing these
observations to the findings for the highrisk semi-manufactured service, we can
see that the patterns observed are clearly
distinct, thereby providing support for
proposition 3a.
When examining the findings for
the low-risk instrumental service more
closely, we see that the observations
resemble
the
expectations
for
consumption services, which provides
partial support for proposition 3b (note that
since we have only one low-risk service
outside the class of consumption services,
we are not able to gather evidence
regarding the first part of proposition 3b).
Finally,
communication
for
consumption services namely focuses on
the requirement of internal customers (the
users at various production locations) and
optimization opportunities. Consequently,
adaptations are made to financial and
administrative procedures, as to increase
the efficiency of the collaboration. This
provides support for propositions 1d and
2d.
To summarise: proposition 2b
regarding
adaptation
for
semimanufactured services was supported.
Proposition 1b regarding the importance of
customer requirements in buyer-seller
communication for semi-manufactured
services was not supported; this was
explained by the fact that FFEE delivers to
18
an internal customer (part of the same
conglomerate), as a result of which there
is less explicit attention for customer
needs and wants. Propositions 1c and 2c
regarding interaction processes for
instrumental services were supported, as
were propositions 1d and 2d (interaction
processes for consumption services). The
fact that the pattern for the low-risk
instrumental service differed from the
pattern for the high-risk instrumental
service provided support for proposition
3a. The pattern for the low-risk
instrumental service resembled the pattern
for
consumption
services,
thereby
providing support for proposition 3b.
Conclusions, limitations and further
research
Research
into
buying
business
services has mainly focused on the initial
stages of the purchasing process: not
much attention has been given to what
happens after the purchase decision has
been made (Bryntse 2000). Purchasing
and supply management is however not
just a matter of completing individual
transactions, but certainly also of dealing
with supplier relationships on an ongoing
basis. This is especially true for business
services, which are characterized by their
interactive nature.
Wynstra et al. (2006) recently
brought forward a classification scheme
based on the way the buying company
uses/ applies the service and found that
ongoing interaction between buyers and
sellers of business services will vary for
the resulting four types of services. They
investigated several structural dimensions
of interaction, i.e. the key objectives of
interaction and the buyer-seller interface
(functional representatives and critical
capabilities). Processes of interaction were
not included in their study.
This article has empirically investigated
these interactive processes that take place
between buyers and sellers of business
services after the contract has been
signed. We conducted an in-depth,
embedded case study and found that for
the process dimensions of interaction
differences arise across the three types of
services studied. We can not say however
whether this variation is systematic; literal
The IMP Journal
Volume 2, number 2
replications of our study are required to
verify this. Concerning the structural
dimensions of interaction, our findings are
in line with the findings of Wynstra et al.
(2006).
Since our data-set contained
services that varied in terms of the level of
perceived risk involved, we controlled for
risk in the analysis. This was important
since Wynstra et al. (2006) found that
interaction is more formally defined and
designed for high-risk services.
Our
findings suggest buying companies define
and design interaction with providers of
high risk services more formally. This can
be explained from the fact that for high-risk
services, buying companies will think more
consciously about how they design their
interactions with providers of business
services. For service providers, an
understanding of this effect is important in
order to be able to involve the appropriate
actors and resources to deal with
representatives of the buying company.
Based on these findings, we propose
to use risk as a control variable in future
studies. We cannot use risk as a selection
criterion, since that would lead to almost
excluding (usually low-risk) consumption
services from our further studies.
Limitations and future research
Despite the contributions made by this
study, a few critical notes should be raised
here. One of these notes has to do with
the selection of the cases: we were not
able to identify component services at
FFEE. This can be explained by the fact
that we started our investigations at a
manufacturing company: component and
semi-manufactured services are more
common and thus more easily found at
service companies. This limitation could
not be overcome in this study, but future
studies should explicitly be aimed at
investigating ongoing interaction for
component services.
Another limitation concerns the fact
that data was only collected at the buyer.
In this case study, we were able to obtain
information on all the dimensions of
interaction, including dimensions that
concerned the supplier (i.e. supplier
representatives involved, critical supplier
19
capabilities). However, a concept like
interaction should be studied by means of
two-sided data collection. In future studies
therefore, data should also be collected at
suppliers.
Further research could be aimed at
replicating the patterns observed in this
case study at various other companies
(literal replication (Yin 2003)). Studying
services at many different companies will
result in the inclusion of many different
services: as such, generic patterns of
ongoing interaction across the wide variety
of services that organizations buy can be
identified, which is important according to
Smeltzer and Ogden (2002). This would
also address the observation by Agndal et
al. (2006), who conclude that purchasing
and
supply
management
research
covering different types of services is
scarce.
Since this study did not include
component services, we propose to select
service companies for the next study,
since the chances of finding both
component
and
semi-manufactured
services are expected to be higher there
than at manufacturing companies. We
suggest performing this study at a limited
number of buying companies, since this
enables making detailed cross-case
analyses. Furthermore, these studies
enable us to verify which dimensions show
consistent and strong variation; future
studies focusing on just these dimensions
can then be executed at a large number of
buying companies or can be based on
two-sided data-collection.
Although there are still many
possibilities for further research in this
area, we think this study has made an
important contribution by advancing our
understanding of differentiated ongoing
interaction between buyers and sellers of
business services.
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Management Review, 14 (4), 490-495.
Wilson, E. J., Lilien, G. L., & Wilson, D. T.
(1991). Developing and Testing a
Contingency Paradigm of Group
21
Choice in Organizational Buying.
Journal of Marketing Research, 28,
452 - 466.
Wynstra, F., Axelsson, B., & Van der Valk,
W. (2006). An Application-based
Classification to Understand BuyerSupplier Interaction in Business
Services. International Journal of
Service Industry Management, 17 (5),
474-496.
Yin, R. K. (2003) Case study research:
design and methods. California: Sage
Publications, Inc., Thousand Oaks.
Zeithaml, V. A., Berry, L. L., &
Parasuraman,
A.
(1988).
Communication and Control Processes
in the Delivery of Services. Journal of
Marketing, 52 (2), 35-48.
Zeithaml, V. A., & Bitner, M. J. (1996).
Services
Marketing.
Singapore:
McGraw-Hill Companies, Inc.
The IMP Journal
Volume 2, number 2
22
turnover and/ or profit (hardly, quite
a lot, very much)?
6) How important is the service being
Questions on the service being
exchanged?
supplied
i) In terms of financial importance:
1) What is the service that is actually
what
share
of
purchasing
being supplied (in terms of activities
expenditures is spent on this
carried out for your company,
service?
personnel and equipment supplied, et
ii) If applicable, in terms of importance
cetera)? What is the frequency of
for customer satisfaction (your
service delivery and how important is
company’s customers)
timely delivery?
7) How complex is the service being
2) What does the (simplified) supply
exchanged?
chain look like?
i) How many disciplines/ departments
are affected by this service?
Focal
Customer
Supplier
ii) What is the contribution of the final
organization
(internal/ external)
customer in the service delivery
(B2B/B2C)
process?
iii) To what extent does this service
rely on expert knowledge of
3) Could you please provide me with
employees on both the buyer’s and
some background information on the
the supplier’s side?
supplier company?
iv) To what extent does this service
You could for example think of:
depend on support from information
i) Part of the supplier company you
systems?
are dealing with
v) To what extent does this service
ii) Product/ service range of the unit
have to be integrated with/ adapted
you are dealing with
to existing systems and/ or existing
iii) Types of customers and market
service offerings?
segments the supplier services
8) How novel is the service being
4) Which people/ functions are involved
exchanged?
with this service from
i) In comparison to existing service
i) the supplier’s part?
offerings/ the offering preceding
ii) your company’s part?
this offering, to what extent is this
iii) your customer’s part?
service new to the supplier
What are their respective roles/
organisation/ employees (not at all,
responsibilities? Please distinguish
a little, very different)?
between pre-purchase and postii) In comparison to existing service
purchase.
offerings/ the offering preceding
5) What is the position of the service in
this offering, to what extent is this
relation to your organisation’s offering
service new to the customer
to its customers? Is it:
organisation/ employees (not at all,
i) Consumed
within
your
own
a little, very different)?
organisation?
ii) Transferred (either directly or
Questions on the service purchasing
indirectly) to the customer?
process
iii) What are the consequences to the
9) Which departments are primarily
customer of delivery and/ or
involved in the purchasing process?
performance failure?
i) Which
departments
are
iv) Could you give an estimate to what
represented in the purchasing
extent this service contributes to
team?
your
company’s
competitive
ii) Which functions represent these
position in terms of market share,
departments?
Which
function
Appendix
List of interview questions
I
The IMP Journal
Volume 2, number 2
carries main responsibility and/ or
has the “final word” in decisionmaking?
10) How does supplier selection take
place?
i) Is there a list of preferred
suppliers?
ii) How many alternatives are there
and what is there respective
attractiveness? What are the costs
and difficulties associated with
switching to another source? What
is the market structure/ competitive
situation?
iii) What are important selection
criteria?
iv) To what extent is the service
contract detailed before selection
actually takes place?
11) To what extent can the characteristics
of the service be determined in
advance of the purchase/ development
project?
i) To what extent can the service
concept be designed in advance of
the
purchase/
development
project?
ii) To what extent can service delivery
be designed in advance of the
purchase/ development project?
iii) To what extent can performance
characteristics be determined in
advance
of
the
purchase/
development project?
Questions on “life after the purchase”
12) What does the customer-supplier
interface look like after the purchase
has been made (communication and
coordination mechanisms, boundary
spanning
roles,
and
DMU/PSU
structures)?
i) Which departments/ functions are
primarily
involved
in
the
interactions?
ii) Which departments/ functions are
involved in managing the ongoing
supply after the purchase of a
service? How does this take place?
iii) Which departments/ functions are
involved in managing the supplier?
How does this take place?
iv) Who are the counterparts of these
functions on the supplier’s side?
23
13) What are the most important issues
discussed in the interaction?
i) What are the respondent’s contacts
with counterpart in terms of
frequency, form, topic, who was
contacted?
ii) What are the respondent’s contacts
inside the buying company in terms
of frequency, form, topic, who was
contacted?
iii) What are the contacts of others
inside the buying company with
counterpart in terms of frequency,
form, topic, who was contacted?
iv) What type of information is
requested from and provided by
the counterpart?
14) Is this relationship characterised by
frequent or little exchange? In between
exchange episodes, is the amount of
interaction considered to be low,
medium, high?
Questions
on
the
long-term
relationship
15) Could you please provide me with
some background information on the
nature of the relationship?
i) How long has the relationship been
in existence?
ii) How
was
this
relationship
established (in terms of reason for
and approach to)?
iii) What is the criticality/ overall
importance of the relationship?
16) Have any relation specific investments
been made by either or both parties to
accommodate the service exchange?
i) Have
any
special
financial
procedures been developed for the
benefit of financial exchange
between buyer and supplier?
ii) What adaptations have been made,
proposed or discussed by the
parties involved in the relationship
(for example: modifications of
product specifications, product
design, manufacturing processes,
planning, delivery procedure, stock
holding, administrative and financial
procedures)?
iii) What were the reasons for these
initiatives? What people were
involved in the development of
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Volume 2, number 2
propositions,
discussion,
and
execution of adaptations?
iv) How would you describe the social
character of the relationships
between members of the buying
and supplying organisation in terms
of trust, openness, personal
friendships, social contacts, et
cetera?
v) What is the buyer’s impressionistic
character of the counterpart?
vi) What is the buyer’s impressionistic
character of the dependence
between buyer and supplier
(mutual shares)?
vii) Have there been any critical issues
during
the
history
of
the
relationship? Please explain how
these have been solved.
Additionally,
information
will
be
gathered on the companies involved in
the focal relationship (through studying
documents, electronic sources, et
cetera):
1) Customer company:
i) Company
size
(number
of
employees, turnover, profit, size,
production technology, degree of
(international)
orientation,
organisation, competences);
ii) Product/ service range;
iii) Types of customers and market
segments;
iv) Organisation of the purchasing
department;
v) Organisation of Decision Making
Unit.
2) Supplier company:
i) Company
size
(number
of
employees, turnover, profit, size,
production technology, degree of
(international)
orientation,
organisation, competences);
ii) Product/ service range;
iii) Types of customers and market
segments;
iv) Organisation of counterpart of
Decision Making Unit.
3) Absolute and relative total value and/
or volume of business placed with the
supplier counterpart during history of
the relationship.
4) Characteristics of the individuals
involved in the interaction in terms of
24
functions,
roles,
status
levels,
education,
qualifications,
jobexperience, language competence.
5) Information on terms of trade, contract
procedures and protocols.
The IMP Journal
Volume 2, number 2
25
External interaction as a means of making changes in a
company: The role of purchasing in a major turnaround
for Ducati.
Roberta Bocconcelli and Håkan Håkansson
a
b
a
Roberta Bocconcelli, Research Assistant, Università di Urbino (or University of Urbino) Facoltà di Economia (or Faculty of Economics)
ISA-Istituto di Studi Aziendali (or Department of Business Studies)
b
Håkan Håkansson, Department of Innovation and Economic Organisation Norwegian School of Management BI, Oslo,
[email protected]
Abstract
The interplay between internal organizational factors and external interaction is in focus in this paper. The paper
describes the turnaround of the motorbike producer Ducati, in terms of how the company systematically changes this
interplay. The paper shows how Ducatti changed its internal buying organization and developed a more interaction
friendly structure. The importance of the interplay between internal organization and external interaction has become
more important as companies have become more specialized and in this way more dependent on their external
counterparties. The paper argues that the only way that such a highly specialized company can achieve a turnaround is if
they manage to get their most important counterparts to become involved in a mutual change process.
Keywords: Organisational structure, turnaround, interaction, purchasing
1. Interaction and the way a company
functions internally
The internal way a company
organizes its production, flows of material
and technical development is closely related
to the way it interacts with important
customers and suppliers. To put it differently,
the way a company is organized internally
determines how it can interact with its
counterparts. This is a crucial aspect for
management in many different situations. For
example, if the company wants to develop its
relationships with customers or suppliers, it
normally changes its way of functioning
internally. Likewise, if the company wants to
develop its internal efficiency, internal
changes have to be accompanied by
changes in the way it interacts with important
counterparts.
Thus, the influence goes in both
directions. A certain way of organizing and
functioning internally can restrict how the
company interacts, and ambitions to achieve
a certain interaction require a certain internal
organization. This general dependency will
be penetrated in more detail in this article
with the help of a description and analysis of
a company case. In this case we will see how
the interaction with customers and suppliers
is closely related to the production and
organization of an Italian motorbike producer.
The starting point for the case is the need for
a major turnaround.
2. How to create a turnaround in a highly
specialized company
Our modern economy is full of highly
specialized
companies.
Increased
specialization has been accomplished in two
complementary ways affecting both the
output and input sides of the company. One
is a concentration to a more limited range of
product or service on the output side. The
other is an increased outsourcing giving the
suppliers an increasing share of the total
The IMP Journal
Volume 2, number 2
value of creation/production. This increased
specialization creates an interesting situation
for a company that has to make some kind of
“turnaround” due, in part, to severe financial
problems. This article is about such a
situation. We will analyze the changes made
by a highly specialized producing company
facing the need to make a turnaround.
A highly specialized company with
severe economic or financial problems has
somewhat different problems compared with
a traditional producing company. A traditional
producer does a majority of the production
activities itself and a turnaround is usually
directed toward changing the internal
activities, i.e., increasing internal productivity.
This is not the case for a highly specialized
company. It is usually focused on a set of a
few products and specializes in performing
some narrow production activities (if any). It
is not possible for such a company to
turnaround by changing its internal activities
in isolation: it has to involve and interact with
external partners, often on both the customer
and supplier sides. Changes have to include
these counterparties thereby making them
modify their way of functioning. One reason
for this is that an increased specialization
goes hand in hand with an increased
activation and utilization of resources outside
company boundaries.
Making such a turnaround is certainly
not an easy task. One major challenge is
mobilizing all of the external counterparts with
which the company interacts to become
involved in a change process. They have to
be approached and convinced that it is in
their interest to change the way they interact
with the focal firm. This is to argue that the
earlier interaction methods have some
important weaknesses and the new way can
result in something more positive for both
sides. Another related problem that is a
prerequisite for handling the first one is for
the company to get the personnel within the
focal firm to change their way of working in a
relevant and coherent way. One reason for
this is, of course, that the previous way of
behaving in the interaction by the focal firm
has to be changed. This is difficult for all
organizations as the interaction has been
developed over many years and has become
embedded in many routines and procedures.
So, it is a problem to get its own personnel to
change, which, in turn is a prerequisite to get
26
the counterparts to change. However, in
some cases it is even more difficult as the
change involves not just breaking with the old
way of interacting but also with what is
generally supposed to be the best way to
interact. This is the case for the purchasing
side in the case that will be presented here.
The new way that the company has to
develop goes very much against the classical
way purchasing has been handled. The main
purchasing advice has been to try to
establish better “markets” for the input
products but this will not work now. This is
obvious in traditional purchasing textbooks
but can also be found in “modern” purchasing
models such as the most commonly used
one—Kraljic (1983)—and modern purchasing
books like Van Weele (2005) Furthermore, it
is also an obvious element in theoretical
approaches such as transaction cost and the
resource based view. This view is challenged
if interaction with the suppliers is put into the
focus (Gadde & Håkansson 2001, Gadde &
Snehota 2000). Then another type of
questions come into forefront such as how
should the interface with the supplier be
designed (Araujo et al 1999) or how can we
find positive cooperative possibilities in
whatever type of situation there is
(Håkansson & Persson 2007).
An interesting consequence is that the
way the company solved this situation
indicates that markets are no longer sufficient
from an efficiency point of view. There is
need for a structure where it is possible to
interact in a way other than a straight market
exchange. This interaction, it seems, can
create more cost efficient solutions for the
buying company than the market solution.
This is, of course, a very provocative
conclusion as the free market is assumed to
be the most cost efficient solution that can
exist from a buying point of view. However,
the following Ducati case gives at least one
reason to question this assumption. In this
article we will describe how Ducati made a
major turnaround through developing its way
of interacting with customers but especially
with suppliers.
3. Ducati
problems
Case
3.1. The background
–
background
and
The IMP Journal
Volume 2, number 2
Ducati is well known worldwide for its
sportive motorbikes, but it started in 1926 as
“Radio patents Ducati” with the main intent of
producing industrial components for the
growing
radio
transmissions
industry,
components that were produced thanks to
some patents by Adriano Ducati (the data
collection for the case is described in the
appendix). The first product, the “Manens”
condensator for radio apparel, followed by
other complementary products, had great
worldwide success, allowing the firm to
rapidly grow and to obtain the respect of the
international industrial community. In 1935
the company built a new and ambitious site in
Bologna (the same site is used today) with
the intent of forming an important industrial
and technological “centre” in Bologna. In the
same period Ducati amplified its international
activities and opened new offices in London,
Paris, New York, Sidney and Caracas to
ensure direct services and assistance to its
customers.
At the Milan Fair in September 1946 Ducati
presented “Cucciolo”, an auxiliary engine to
put onto a normal bicycle. This engine was
sold in a particular assembly box and the final
customer had to “attach” it to its own bicycle.
After a short time the company decided to
also develop a special frame to combine with
the Cucciolo making the engine turn rapidly,
with some adaptations, into a small
motorbike. Thanks to Cucciolo and its
derivates, Ducati also became an important
company in the mechanical industry. The
years from the 1950s to the70s represent the
definitive
passage
to
the
mechanical/automotive sector and the brand
Ducati is now exclusively associated with
sportive
motorbikes
and
with
the
Desmodromic engine developed by Ducati’s
engineer in the 1960s.
In 1983 Ducati was acquired by the Cagiva
Group (another Italian automotive company).
In the following period the company had a
very intense growth period that culminated in
the launch of the famous “Monster” Model.
But Ducati entered a more problematic period
and, after a financial crisis in 1996, Ducati
was bought by the American Texas Pacific
Group. The new owner brought
the
necessary liquidity and a new group of
international
managers.
The
new
management, together with the previous
group of product development engineers,
27
began a turnaround that ended in some
important results in terms of revenue and
profits. One result of the turnaround period is
the entering of Ducati Motor Holding into the
Stock Exchange in New York and Milan.
The problems identified
At the end of the last century Ducati
was, among motorbike users, identified with
good design but also that it required a driver
who could handle technical problems.
Ducati’s own perceptions of the problems
were that the financial crisis was due to both
increased costs and insufficient product
quality. There was a need for increasing
efficiency as well as becoming more
innovative.
Among
all
the
improvements
identified, the changes on the consumer or
user side became the most public. The
ambition went from selling just a motorbike to
offering a whole lifestyle or to “transform
progressively Ducati into an entertainment
company offering a complete motor
experience”, as it was formulated by the
company itself. However, a far more
important improvement, from an operational
point of view, was the total re-modeling of the
supply chain.
Ducati’s deficiency in its own productivity was
obvious.
There were easily identifiable
weaknesses in both the production and in the
logistics. There were also problems in terms
of quality development of components and
sub-systems. An internal investigation
showed that the company could improve its
internal productivity by about 20%. This was
regarded as a significant possibility by the
management until this figure was related to
the product calculation. The effect of such an
improvement on the total product cost was
insignificant—only 4%. The reason was that
Ducati’s share of the total product cost was
only 20%; purchased components and
outsourced sub-systems accounted for 80%.
This is, in turn, an effect of the increased
specialization that Ducati, as most other
modern western companies, experienced
during
the
last
decades.
Increased
specialization is often combined with
outsourcing of more components, parts or
whole systems to external suppliers. The
single company will, as a result, be
The IMP Journal
Volume 2, number 2
responsible for a smaller part of the total
product cost. Consequently, the suppliers
take a larger share of the total product cost
and for many producers their share is 7080%, as in the Ducati case.
The management team of Ducati
realized that this “substantial” improvement in
internal productivity created such a small
improvement in relation to the products sold
that it could not be the base for the needed
turnaround. The fact is that, independent of
how much they could improve internal
productivity, it could only affect 20% of the
product cost—80% would be outside any
such improvement. The conclusion was
simple and obvious. The key issue was not to
focus on an internal change—the turnaround
had to be based on external changes in
relation to customers and suppliers. Without
changing the way they interacted with
customers and/or suppliers Ducati’s chances
were very bleak. Thus the important change
had to take place in the interaction processes
with customers and suppliers
4. The turnaround process
4.1. The marketing side
The change in Ducati’s vision and
strategy centered on the interaction with the
customer and on the value creation for
him/her. The turnaround process started from
the statement that in a company as Ducati
“the traditional marketing, decomposing the
market in homogeneous clusters of
consumers and coming up with effective
action for each of them, doesn’t work…The
unique unifying element for all the customers
is simply the motor…” (from an interview with
Antonio Ducati, 2003). On one side the
management recognized the importance and
the force of the product both from the image
and from the incorporated technology point of
view (i.e., the desmodromic technology that
was considered a very distinctive and
28
important feature of the product), on the other
side management faced weaknesses in both
the internal and external organization with a
serious problem of function integration and
lack of managerial skills, which had a
negative effect on the interaction with
potential customers.
The first action undertaken was the
revamp of the Ducati brand through the
reinforcing of the unique brand character
associated
with
a
broader
product
performance with the main objective “to
transform progressively Ducati into an
entertainment company offering a complete
motor experience” and create a Ducati
Community around the focal product “bikeaccessories-apparel”. This included the
creation of a DOC-Desmo Owners Club, new
Ducati stores, a museum connected to the
factory, a number of special events including
participation in racing, and advertising. In this
way Ducati was related to a whole life style.
This change can also be seen in the
percentage of the revenues from accessories
and gadgets that increases from 10% to 19%
between 1997 and 2004. (see Table 1).
The first “World Ducati Weekend”, an
event organized in Misano (near Bologna),
was a great success drawing 10,000 Ducati
fans from all over the world. The design and
opening of new DucatiStores had some
important effects. The philosophy of a
DucatiStore is completely different from a
traditional reseller shop. A DucatiStore is
directly owned by Ducati and managed with
particular attention to the creation of a unique
atmosphere. The opening of the Ducati
Museum in the Borgo Panigale factory and
the return of Ducati Racing in the GP in 2002
concluded this process.
These actions that can be seen as a
very traditional marketing strategy change,
actually mirror a radical internal change that
originates and develops from a complete reexamination of the Supply Chain concept and
Supply Chain management principles in
Table 1
Ducati’s sales revenue
- Motorbike
- Accessories / Gadgets
(sportswear,….)
1997 2000 2004
90% 85% 81%
10% 15% 19%
100
100
100
The IMP Journal
Volume 2, number 2
Ducati.
It’s
very
significant
that
the phrase “…In the last years the customer
becomes and will remain the centre of the
Ducati’s world and activity” was formulated
and used by the Purchasing Director before it
was used by anyone who was responsible for
the company’s marketing.
“In the automotive sector, innovations
in product projects and development activities
are obviously important, but first of all, in our
case, the innovations in business processes
are the most important…It was the
innovations in this field that allowed us to
reach significant cost reduction and value
creative goals, in particular innovations in the
supply network management…The first
question we posed was, where does the
customer value originate? The value concept
has to be integrated into the whole supply
chain. The most important innovation in
Ducati was the revolution in the ‘operations’,
that is all the activities linked to the
production process both from an internal and
external perspective, in relation to the value
creation in the entire supply chain” (From an
interview with the Purchasing Director, 2004).
If we look at this statement from an
interaction point of view, the manager is
pointing to the importance of a symmetry
between what is going on internally with what
is taking place in the interaction with
customers and that this has to be directly
connected to what takes place in the
interaction with suppliers.
This is the point of departure for the
Ducati Improvement Process or Change
Management that derives from the statement
that the value for the customer depends and
is generated in the entire supply chain in an
integrated vision. It is not simply a
restructuring of the Ducati supply chain in a
purely efficiency way, addressed to cost
reduction and waste elimination, but a reorganization that begins with the identification
of the critical nodes of value creation and
then “enlarges” upstream and downstream in
the supply chain. The main targets and
constraints of this change process were
focused both on internal production activities
as well as on the suppliers’ activities.
However, the main consequence of this
change is that the interaction with the
suppliers has to be developed in order to
create the customer value but also to better
relate what is going on inside Ducati with
29
what is done by the suppliers.
4.2. The purchasing side
In this perspective it is clear that the
upstream relationships have to be considered
essential for the achievement of the
company’s goals “…The change in Ducati
wouldn’t be effective if it would remain into
Ducati’s
boundaries…The
reached
improvement had to be extended where most
value is created, throughout the supply
chain…” (From an interview by the
Purchasing Director, 2006).
The revolution in the purchasing strategy has
followed two main principles:
i)
identifying what is of value for the
customer, what the customer is
willing to pay for;
ii)
mapping and putting into the right
sequence the identified value
activities
and
removing
or
rationalizing all other activities
following a lean supply logic.
These two principles led to a complete
new philosophy and organization of the
purchasing activities following the changed
philosophy of the company: “…We are not
more reasoning in terms of goods’
categories, but in terms of customer’s value
creation in our purchasing activities…It has
been a very important shifting from
‘commodities’ to ‘supply chain’ categories…”
(idem).
Previously (until 2002) the purchasing
function just had operative and administrative
goals and was internally structured into
“commodities sub-functions”, each of them
responsible for the purchase of some well
identified groups of goods (see Figure 1). The
people in charge of each sub-unit had
developed specific competences just on the
materials and corresponding suppliers they
were responsible for “…losing touch with the
final product and with the creation of value for
the final customer…” (idem). The result was
that, in the company, diverse people
(logistics, quality, projecting, purchasing…)
were involved in different manners in the
same supply, with many problems in terms of
relationships with suppliers, that were forced
to dialogue in an incoherent way with
different people, and in terms of conflicts
among internal organization units. In this
way, the suppliers met a counterpart that was
The IMP Journal
Volume 2, number 2
composed of a number of different units with
very different opinions and evaluation criteria.
Thus the internal organization within Ducati
created problems in the interaction with the
suppliers. It was impossible for the supplier to
understand what Ducati wanted out of the
interaction as Ducati itself had problems with
it. This is a normal problem in companies with
a specialized purchasing function, which
often stresses the importance of competition
between suppliers in order to lower the price
while other units are more concerned with
quality and deliveries. There will often be
double messages from the buying company.
To find another way of interacting with
the suppliers the purchasing function had to
be changed. Today it has been renamed
“supplier development” and it is organized
into five basic units that bring together all the
competencies to manage the purchasing
activities on a “supplier development” and it is
organized into five basic units that bring
together all the competences to manage the
purchasing activities on a “supply chain” base
30
in relation to macro-assembling groups: color,
electronic,
engine,
functional
groups,
commodities (see Figure 2). The purchasing
activities are now supported by interorganizational teams composed of five senior
buyers in charge of each of the five “supply
chain units” and the respective junior buyers
(12 in total) and different people from
logistics, product development and quality.
If we consider now, for example, the
chain “color”, previously the purchasing
operations involved in this chain (considered
a “chain” of high value for the final customer)
were managed by different buyers with
different buying competences in terms of
single commodities (frame, rims, plastic
components) with a lot of difficulties in terms
of coordination. Now the objective of each
single group (managed by a single buyer) is
to ensure that each single component
involved in the same “value chain” is
developed, produced and delivered following
the same “logic” in a coordinated way.
From the final customer’s point
Finance
AD
Personnel
Quality
R&D
Operations
Sales
I.T.
Purchasing
Direct iron materials
Direct non iron
materials
Figure 1
The earlier purchasing organization
Electric materials,
plastics,
commercials…
Indirect materials,
services, plants
The IMP Journal
Volume 2, number 2
31
Finance
AD
Personnel
Quality
R&D
Operations
Sales
I.T.
Suppliers Development
1
Color
2
Electronic
3
Engine
4
Functional
Groups
5
Commodities
Buyer
Buyer
Buyer
Buyer
Logistics
Logistics
Logistics
Logistics
Product Dev.
Product Dev.
Product Dev.
Product Dev.
Product Dev.
Quality Inspector
Quality Inspector
Quality Inspector
Quality Inspector
Quality Inspector
Buyer
Logistics
Figure 2
The purchasing organization after the change
of view, the result is that he doesn’t have to
wait 60 days for his order if he changes his
mind about his first color choice after placing
the order in a Ducati Store, but just five days.
The different components had very different
supplying times, ranging from one month for
a frame, two months for rims and 15 days for
plastic components and the total lead-time
was equal to the time of the slowest
component. With the new approach, the
entire process could be analyzed in a
coherent
way
among
the
different
components of the chain and with stress on
the slowest component, to shorten the total
time. Mapping the materials flow along with a
very strict stocking policy allowed the
company to reach a total lead-time of five
days for the change of color.
The same can be found with engine
performance or electronic equipment and not
only at the choice moment, in terms of
customization of the product, but also in the
post-sale phase, for example in case of a
malfunctioning of the product. The problems
are more easily individualized and more
quickly solved thanks to the competences
accumulated in Ducati and, above all, in
Ducati’s supplier network.
The supplier can now meet a buyer
that is able to discuss all combination of
problems—including different sets of costs,
quality and delivery alternatives. It is possible
to discuss the effects of different solutions for
both sides and to find suitable compromises
given that the supplier is also organized in a
similar way.
In general the new and closer
interaction with suppliers created the
following advantages for the involved
companies:
The IMP Journal
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-
-
Volume 2, number 2
better planning of time resulting in
lead time reduction for the buyer;
cost reduction: the enlarged picture of
the components in a single “order”
allowed for a better understanding of
how costs evolve in different activities
across firm boundaries;
quality improvement: the new way of
interacting increased the possibilities
both to increase the innovation
content in each relationship and to
combine different suppliers, i.e., it was
useful
to deal
with
potential
incompatibilities among the suppliers;
product
development
processes
across company borders were
facilitated resulting in time reduction.
At the same time, a single supplier
dialogue now can not only solve diverse
problems easily and quickly thanks to the
multifunctional team, but can also develop
coherent objectives and find common
solutions to problems connected with both
product
development
and
production
including deliveries.
4.3 The suppliers’ involvement process
The internal change within Ducati was
a reflection of the basic changes that
appeared in the interaction within Ducati’s
supply network, including within its suppliers’
relationships. The new “orientation” was the
result of a number of highly complex projects
32
together with some key suppliers. Seen from
Ducati’s side these projects involved three
main elements:
- outsourcing
- reduction of the number of
suppliers and rationalization of the
suppliers’ portfolio
- strategic
and
operational
integration
Outsourcing
One important element in the changed
interaction has been a systematic analysis of
where to perform different production
activities. One important starting point has
been an analysis made by Ducati where the
value the component/product/service had in
relation to the value for the final customer
was related to the necessary competences to
produce it (see Table 2). One effect has been
that some assembling phases, some
mechanical processing, the distribution of
spare
parts
and
accessories,
were
externalized. In particular inbound activities
(collecting components from suppliers,
Ducati’s internal warehouse and the sourcing
of assembly lines) and outbound logistics (
packing
and delivering
bikes)
were
outsourced. One important change in the
interaction was an increased utilization of
external resources and capabilities despite
the fact that at the start Ducati already was
highly dependent on these resources.
Table 2
Where to produce (Source: Ducati)
SUPPORTING
Selective outsourcing
Outsourcing: spare parts
logistics, inbound logistics,
outbound logistics
In house: assembling
MARGINAL
Value
+
Outsourcing
Canteen, mail, employee
payments, …
_
CORE
In house
Projecting, purchasing,
marketing
STRATEGIC
Selective outsourcing
Outsourcing: aluminum
processing
In house: steel processing
_
+
Competencies
The IMP Journal
Volume 2, number 2
Reduction of the number of suppliers and
rationalization of the suppliers’ product
portfolio
One very distinct change due to the
developed interaction was a significant
reduction in the number of suppliers it used.
From 1997 to 2004 Ducati reduced the
number of qualified suppliers from 380 to 170
(see Table 3). This was primarily due to the
fact that all suppliers were not prepared to
take on the increased responsibilities and
engagement
in
a
close
interaction.
Additionally, it was also an effect of an
increase in the supply of pre-assembled
complex
systems
instead
of
single
components.
Today the 170 first tier
suppliers supply complex assembled groups
and are fully responsible for the subsuppliers’ network beyond and for the
technical/functional competencies of the
whole system. Of the 170 suppliers, nine
account for 40% of the supply costs and 36
for 80%. The five most important suppliers
(wheels, braking system, head-engine,
basements, cylinders and pistons) are
located in Italy and two of them in EmiliaRomagna, near Bologna. The changed
interaction seems to enhance the position of
the closely situated suppliers. It might be both
easier and more motivating for them to
increase the interaction with the buying
company compared with suppliers being
located farther away.
Strategic and operational integration
The reduction of the numbers as well
as the increased concentration in terms of
volume and geographical location is a
reflection of a more intensive interaction
based on collaboration and integration of
33
activities and operations. The increased
interaction
takes
advantage
of
the
competences accumulated over years in the
mechanical industry and of the proximity of
the suppliers in terms of logistics and
operational process management. The
“choice” of the strategic suppliers is based on
history and the selection was made based on
how suppliers responded to the proposal to
participate in the Suppliers Partnership
Project. Most of the already highly involved
suppliers accepted and invested in some
conjoint initiatives that changed the content of
the interaction in a substantial way:
- Participation in DESMO projects
(Ducati
Evolution
&
Supply
Management
Optimization)
an
acronym reminiscent of the famous
“desmodromic” engine, developed by
Ducati.
This
project
can
be
considered the core of the entire
suppliers partnership project. DESMO
is based on the transfer and
development of particular methods
and techniques designed to reduce
waste in both the products and
logistics/production processes in the
supplier’s plant. The DESMO is
composed of three modules: cost
analysis, process analysis and
product simplification. Until 2005, 14
DESMO projects were completed that
led to an average
product cost
reduction of 5%;
- Mapping of flows to reduce the lead
time;
Logistics coordination. In 2005 about 12
suppliers worked in JIT with Ducati. With
some of them, thanks to collaboration with
logistics suppliers, also Just in Sequence
methodologies was implemented;
- Training;
Table 3
Number and location of suppliers
Local (district)
Italy
EU Countries
Extra-EU Countries
TOTAL
Number of qualified suppliers
60
80
20
10
170
The IMP Journal
Volume 2, number 2
Network data interchange platform
development based on Internet
technology.
All these tools have been useful to a
larger or lesser degree in single relationships
due to differences in the earlier interaction.
The main positive effect has probably been
that they forced all the involved actors to
make a very systematic analysis of the
existing interaction and suggested different
types of improvements.
-
4.4 Results
One important result is that Ducati
managed to increase its production from
12,000 to 40,000 bikes per year without
increasing the number of employees or
changing the production site. This had very
positive effects on revenues and profit and
resulted later in the introduction of Ducati
shares on important stock exchanges.
Another important effect is that the
make/buy ratio has been further developed
through increased use of suppliers. The
activities performed within Ducati’s Borg
Panigale plant is now only 8% of the total,
i.e., 92% is done by suppliers. Of the 8% just
half refers to the internal mechanical
transformation activities (production of headengine and basements, that covers 35% of
the total needs and production of drive
shafts), the remaining refers to the assembly
process.
5. Discussion
This case can be seen as an example
of how interaction can be used as a means to
change the position as well as the results of a
specialized company. Ducati is a highly
specialized company that is making a
turnaround through changing its interaction
with customers and suppliers. This is a
distinct break with how the interaction was
conducted before, especially in relation to the
suppliers. This is also an example of how
little attention interaction processes usually
get. When they are seen as just a “market
mechanism” without any problem-solving
content, there are no reasons to consider
them. But, as soon as they are believed to
have a potential content in terms of creating
34
opportunities to find new technical and
commercial opportunities the situation
becomes quite different. Then, one key
question is what kind of ambitions the
company has to utilize these problem-solving
and opportunity-creating processes. The
case is a good example of both what can be
achieved and of what is required to start such
a major change of interaction processes,
which in this case also resulted in a major
turnaround process.
If we start with what is achieved, the
major result can be seen as the
accomplishment of a much more fine-tuned
orchestra of suppliers. A supplier is, in itself,
a set of activities based on a complex
resource constellation. If a buying company
wants to utilize such a resource constellation
in a more extensive way there is need for a
difficult and time-consuming interaction
process. This process can be developed over
time and there are no limitations as to what
can be done. This is especially the case
when the supplier’s way of using different
sub-suppliers is included and/or how the
single supplier can be combined with
complementary suppliers. In this case the
activities performed by different suppliers and
the producer were related to each other in a
more systematic way than was done
previously. There were a large number of
adaptations of these activities in order to
increase efficiency in terms of the produced
components as well as the final motorbike. In
the same way the resources used by the
different involved companies went through a
process where they were more thoroughly
combined also across company borders.
Both the relating of activities and the
increased combination of resources required
that the involved supplier companies were
mobilized to take part in a more intensive
interaction process with Ducati and with each
other.
To achieve this increased efficiency
and better use of resources there are also
some important changes that had to be
accomplished. One very crucial ingredient is
that Ducati revised its purchasing methods. It
was such a big change that the company
even changed the “name” of the unit from
“purchasing” to “supplier development”. The
classical way of purchasing did not create the
type of interaction the company was looking
The IMP Journal
Volume 2, number 2
for. The key issue in the traditional way of
purchasing lies in the decision where to
buy—in the selection of the best supplier. All
established purchasing decision models
focus on this aspect. However, this is not the
key issue in the supplier interaction method
developed by Ducati. The key issue now lies
in how to find the best way to interact with the
suppliers. There is certainly a selection of
suppliers but this is much more long term and
closely related to how to interact—the
suppliers must be prepared to take part in
this close interaction. It is in this way more of
a self-selection—who is prepared to be an
active and highly involved counterpart.
Changing
the
purchasing
organization is one example of those internal
changes that must be made within a buying
company when it wants to change its
interaction with suppliers. This can also be
reversed to state that an organization’s
internal changes will always have effects on
the interaction with its counterparts. To gain a
certain interaction, an organization has to be
oriented toward conducting this interaction.
This was manifested in the Ducati case in
terms of creation of special teams that were
responsible for the interaction. These teams
included people with competence in technical
dimensions (production as well as product
features) and in logistical processes. The
ambition was to create a team that had both
the competence and ability to handle intricate
problem-solving
processes
within
the
interaction and would influence the
counterparts to create similar teams. Thus,
one key issue is to get a set of specialists
involved from both sides in order to find not
just the right competence but also the right
attitude toward the interaction process. The
activities are geared toward creating a
positive, creative problem solving process.
Thus, in order to interact in a problem-solving
way there are important reasons to design an
organization to get people involved that have
a certain attitude as well as a certain
competence.
The internal changes must often also
be mirrored by some of its counterparts’
(suppliers’) internal changes. These can be
larger or smaller dependent on how the
suppliers interact with other customers. Some
of them might already have a suitable
organization while others (many) have to go
through some major internal changes. This
35
can be initiated and influenced by the buyer
through the content of the interaction
process.
There is also an external change that
is important in relation to the buying
company. This regards the way single
suppliers are related to each other. It is a
question of how to organize the total
production and development work conducted
by suppliers and sub-suppliers. To what
extent should they be systematically related
to each other? First is how single supply
chains should be organized and second how
these chains should be intertwined. The
question is how ambitious should the
company be in creating a tight supply
network. This is very much related to the
utilization
of
different
types
of
interdependencies (Håkansson & Persson
2007). All types of serial, pooled and mutual
interdependencies can be found in the total
structure. Each type requires special
attention and special activities
The internal and external changes
described above are necessary for creating
the basic conditions for the interaction but
must also be formed together with the
counterparts. In this case the development of
these
interaction
processes
was
systematically influenced by the use of
certain tools. Furthermore, this development
of the interaction must never end—it must
continue and new forms must evolve as it is
developing. The systematic efforts are used
both to get the process started and to
continue development day by day. This must
be done in two complementary ways. One is
a conscious process of development with
each single supplier and the other to
systematically combine each relationship with
some of the other supplier relationships.
These systematic efforts include a number of
different activities. Some of them are related
to the use and activation of specific
resources, others regard the design and
control of development, production and
handling activities and a third type regards
the handling of relationships with the
counterparts. Let us have a closer look at
each of these types starting from the last one.
a) Configuring the relationships: One
crucial aspect is to find a suitable
interaction form within each supplier
relationship. One important part can
be for both sides to increase their
The IMP Journal
Volume 2, number 2
consciousness as to how the
interaction can be used to influence
costs and revenues. Here the use of
the DESMO tools was one ingredient.
Another is that by focusing on the
relationship and its way of functioning,
the other party is also influenced in
the same direction.
b) Designing the activities: In this case,
Ducati works hard with developing
operations, and the DESMO project is
one important starting point. However,
in the long run the involved
companies have to refine and develop
these type of projects as the total
activity pattern must always be
developed further. Ducati has to
develop its tools but it has also to
encourage the suppliers to develop
their tools. If not, the supply network
might easily turn into a very
hierarchical one creating more
problems.
c) Combining the resources: The
designing of activities has a significant
impact on the total efficiency—
combining resources has the same
effect on the innovative capability.
Single resources as well as
constellations of resources have to be
combined. This is one of the reasons
why the involved teams should
include several types of specialists.
There are so many different resource
items—both tangible and intangible—
that might be combined in better ways
within
both
single
supplier
relationships and, even more, across
different supplier relationships. The
importance of the combining ranges
from whole constellations to single
resources. An interesting example is
the combining of tangible and
intangible resources. These can be
combined in many different ways
especially as they are adapted to
each other over time. In this case, the
intangible resources are also the glue
between the tangible resources
increasing their value for the involved
actors. This is, probably, one of the
most important reasons for the
positive effects that Ducati created
through
the
more
extensive
interaction with the suppliers.
36
Another interesting aspect that
emerges from this case is that Ducati’s
turnaround process did not start out from
either a very extensive analysis of the
situation or from a very developed theoretical
model. Instead, the early phase of the
turnaround was dominated by the use of
strategic and operational instruments and
theoretical models that are not actually very
sophisticated or innovative—outsourcing,
reduction of the number of suppliers,
strategic and operational integration, lean
supply philosophy and the Kraljic matrix. On
the contrary we could consider them very
traditional if compared to the mainstream
literature on purchasing or SC management.
Through
the
company’s
increased
consciousness of cost and revenue
influencing factors, the effect became highly
innovative at the end. The result was a
turnaround process that certainly is not just
impressive but also from which much can be
learned.
Appendix
Data collection
This case is mainly based on in-depth
direct interviews with the managers of Ducati
Motor Holding S.p.a. and on written material
from the company.
The first contact was in March 2003
when the company was asked to take part in
a research study concerning purchasing
behavior in medium sized companies in the
mechanical sector in Italy. The first interview
was carried out through a semi-structured
questionnaire with the purchasing director of
Ducati Motor Holding. In the same period we
had the possibility to collect some additional
information regarding Ducati from two of its
suppliers—one large company located in
Bologna, near Ducati, and a small enterprise
(located near Pesaro) that was contacted in
the same research project (Bocconcelli,
Tunisini 2006; Bocconcelli 2005).
The data collected from Ducati and
from Ducati’s suppliers, was considered
interesting and stimulated a next step in the
investigation for the development of a specific
case study based on the Ducati turnaround.
In December of the same year the
purchasing director was contacted again to
The IMP Journal
Volume 2, number 2
more precisely map the most important steps
of the turnaround process. Based on this data
a first draft of the case was written.
In 2005 two more extensive interviews
were conducted with Ducati: the first with the
Information Systems manager and the
second one with the same purchasing
manager as above who, in the meantime,
had changed his position. Now he was one of
the partners of Ducati Consulting S.r.l., a
company born to exploit the competences
developed during the turnaround process.
In 2006 there was a follow up
interview with the same manager in
connection with a workshop at Urbino
University where he also presented the
Ducati turnaround for an academic audience.
References
Araujo, L., Dubois, A., & Gadde, L-E.
Managing interfaces with suppliers.
Industrial Marketing Management. 28,
497-506.
Bocconcelli, R. (2005) Creazione del valore
per il cliente finale e Supply Chain
Management: il caso Ducati. II
Convegno annuale della Società
Italiana
Marketing:
Tendenze
evolutive del marketing dei servizi.
Trieste. 2-3 Dicembre.
Bocconcelli, R., & Tunisini, A. (2006).
Cambiamenti nel comportamento
d’acquisto delle medie imprese
industriali: un’indagine sul settore
meccanico. Sinergie. 70.
Gadde, L-E., & Håkansson, H. (2001). Supply
Network Strategies. London: Wiley.
Gadde, L-E., & Snehota, I. (2000). Making
the most of supplier relationships.
Industrial Marketing Management, 29,
305-316
Kraljic, P. (1983). Purchasing must become
Supply
Management,
Harvard
Business
Review.
September/October, 109-117.
Persson, G., & Håkansson, H. (2007).
Supplier Segmentation – When
Supplier Relationships Matter. IMP
Journal. 1 (3), 26-41.
Van Weele, A. (2005). Purchasing & Supply
Chain
Management:
Analysis,
strategy, planning and practice. 4th ed.
London: Thomson International.
37
The IMP Journal
Volume 2, number 2
38
Towards a Model for analysing Supplier Relationships
when developing a Supply Network
Ann-Charlott Pedersen a, Tim Torvatn b and Elsebeth Holmen c
a
Norwegian University of Science and Technology, Department of Industrial Economics and Technology Management, Trondheim,
Norway Phone: + 47 73593503, e-mail: [email protected]
Norwegian University of Science and Technology, Department of Industrial Economics and Technology Management, Trondheim,
Norway Phone: + 47 73593493, e-mail: [email protected]
c
Norwegian University of Science and Technology, Department of Industrial Economics and Technology Management, Trondheim,
Norway Phone: + 47 73590464, e-mail: [email protected]
b
Abstract
In this article we propose a model for analysing supplier relationships when developing a supply network. The model
takes the buying firm as the point of departure but also conceptualises how it can take the supplier’s context into
account. The first dimension of the model discerns between situations where the supplier is the most important
supplier for the specific product or service for the buying firm, and situations where the buying firm has several
important suppliers for the same product or service. The second dimension of the model discerns between situations
where the buying firm is the most important customer for the supplier, and situations where the supplier has several
(equally) important customers (of which the buying firm is one).
We use the proposed model to analyse a particular longitudinal case in the construction industry, which focuses on a
main contractor that initiates the development of a supply network. The aim of the analysis is to offer an illustration of
the different quadrants in the model and discuss effects with regard to three issues: learning, capacity and handling
costs. Following this, we examine the use of a portfolio approach in relation to supply network initiatives. Specifically
we discuss three managerial challenges; (1) managing with differences, (2) eliminating differences and (3) creating
differences. Finally, we draw conclusions and suggest some areas for further research.
Keywords: Supplier relationship, supply network, purchasing portfolio models, construction industry
Introduction and purpose
Over the last decades, purchasing
has
increasingly
become
supply
management
(Kraljic,
1983).
Firstly,
purchasing has become more important
because the amount a firm spends on
purchased goods and services comprises a
larger amount of its turnover. Firms in
different industries report that figures of 6080 percent are not uncommon as firms
increasingly
focus
on
their
core
competences and outsource other activities
to suppliers (van Weele, 2000). Secondly,
supplier relationships have become more
important because companies more often
make use of one or a few suppliers instead
of shopping on the market from various
suppliers (Gadde and Håkansson, 2001).
This means that within the field of
supply management, several management
issues have increasingly been attended to.
One of these issues is purchasing portfolio
models which have received a great deal of
attention in the literature the recent years
(Caniëls and Gelderman, 2007). From the
seminal article by Kraljic in 1983, many
researchers have discussed and further
developed different type of portfolio models
(see e.g. Olsen and Ellram, 1997; Bensaou,
1999; Nellore and Söderquist, 2000;
Gelderman and van Weele, 2002). The
The IMP Journal
Volume 2, number 2
general idea is with the help of a portfolio
(2x2) matrix to “…optimise the use of
capabilities of different suppliers and
thereby effectively manage suppliers”
(Caniëls and Gelderman, 2007, p. 220).
Another important issue within the
field of supply management is how to
manage single supplier relationships, and
furthermore how to manage supply chains
and supply networks (Håkansson and
Persson, 2004). So far, single supplier
relationships have received much attention,
and thus there is quite an amount of
knowledge on how such relationships may
be handled (see e.g. Håkansson, 1982;
Lamming, 1993; Dwyer et al., 1987; Frazier
et al., 1988, Gadde and Snehota, 2000;
Gadde and Håkansson, 2001). However,
the development into managing supply
networks has received much less attention.
We characterise supply networks as
consisting “…of interconnected entities
whose primary purpose is the procurement,
use, and transformation of resources to
provide packages of goods and services”
Harland et al. (2001, p. 22). Thus, we have
a buying firm as the point of departure
which organise a set of suppliers and subsuppliers into a supply network.
Most of the scarce research within
the field of supply networks has so far
focused on organisational aspects e.g. the
number of suppliers, the number of
organisational levels/tiers, and how the
network develops over time from the
perspective of the buying firm (Gadde and
Håkansson, 1994; Dubois et al., 2003;
Harland et al., 2004). This is hardly
surprising given that supply directs the
focus on purchasing issues and thereby the
buying firm. However, over the last few
years more contributions have paid
attention to the supplier’s view on supply
networks. We find these contributions
interesting since we take a network
perspective to supply management and
thereby emphasising the importance of the
supplier’s context for the buying firm when
trying to develop a supply network.
Thus, the purpose of this article is to
develop a model for analysing supplier
39
relationships when developing a supply
network. The model takes the buying firm as
the
point
of
departure
but
also
conceptualises how it can take the
supplier’s context into account. The
conceptualisation is based on a case study,
which focuses on a main contractor within
the construction industry that initiated the
development of a supply network.
In the next section, we review
literature on purchasing portfolio models
with special attention to models which focus
on classifying/assessing buyer-supplier
relationships. Following that, we look into
recent contributions on supply networks
seen from both the buying firm’s and
supplier’s point of view. At the end of this
section we develop a model a buying firm
can use for analysing supplier relationships
when developing a supply network.
Furthermore, in section 3 we discuss
methodology and present an empirical case.
The case concerns a main contractor which
has initiated the development of a supply
network. In section 4 we analyse and
discuss how the case firm may benefit from
using insights from the suggested model.
Finally, in the two last sections we discuss
the use of the portfolio approach in relation
to supply network initiatives and how this
can affect the managerial challenges, and at
the end we draw some conclusions and
suggest implications for further research.
1. Theoretical basis
The theoretical part of the article first
presents and discusses literature on
purchasing portfolio models with special
attention to models which focus on
classifying/assessing
buyer-supplier
relationships. Following that, we look into
recent contributions on supply networks
seen from both the buying firm’s and
supplier’s point of view. At the end of this
section we propose a model a buying firm
may use for analysing supplier relationships
when developing a supply network.
Purchasing portfolio models which focus
on
classifying
buyer-supplier
The IMP Journal
Volume 2, number 2
relationships
In 1983 Peter Kraljic published an
article in the Harvard Business Review
entitled Purchasing must become supply
management, and by doing so he was the
first to bring portfolio models into the
purchasing area (Gelderman and Van
Weele, 2000). Kraljic’s model is based on
two dimensions for classifying a firm’s
purchased materials or components; (1) the
strategic importance of purchasing and (2)
the complexity of the supply market. The
article received a great deal of attention
both from managers and academics, and is
still applied in practice and used as a
reference by researchers in industrial
purchasing.
In later years, a number of
academics have further developed Kraljic’s
model
by
classifying
buyer-supplier
relationships
instead
of
purchasing
situations. We shall present a few of these
contributions as an inspiration for further
discussion on assessing buyer-supplier
relationships. One example is Sinclair et al.
(1996) who extend Kraljic’s model by
introducing the perspectives of both the
customers and suppliers. They use the
40
dimensions (1) Customer’s importance to
suppliers and (2) Importance of supplier to
customer. According to Doran et al. (2005),
who have used this model, the model by
Sinclair et al. (1996) stresses in what
situations buyers (and sellers) seek closer
relationships. In a similar vein, Bensaou
(1999) has used the dimensions (1) Buyer’s
specific investments and (2) Supplier’s
specific investments in his portfolio model,
and thereby reaching a relationship
classification similar to Sinclair et al. (1996).
Furthermore, Gelderman and van Weele
(2000) have used the power-dependence
between the buyer and the supplier to
differentiate between different types of
relationships (or exchanges). Based to this
classification they have developed different
supply strategies. For an overview of these
contributions see table 1. For a review of
some of the latest developments in
purchasing portfolio models, see Dubois
and Pedersen (2002) and Persson and
Håkansson (2007).
The similarities between the models
is that they use the buyer-supplier
relationship as the point of departure for the
classification and thereby focus on both the
buyer’s and the suppliers’ perspectives. In
Table 1
Different portfolio models focusing on buyer-supplier relationship
Portfolio model
Sinclair et al. (1996)
Classification dimensions
- Customer’s importance to
suppliers
- Importance of supplier to
customer
Bensaou (1999)
- Buyer’s specific investments
- Supplier’s specific investments
Gelderman and Van
Weele (2000)
- Supplier’s dependence
- Buyer’s dependence
Classifying what?
Business relationships
- Market Exchange
- Dependence Leverage
- Dependence Management
- Strategic Partnership
Relationships
- Market Exchange
- Captive Buyer
- Captive Supplier
- Strategic Partnership
Supply strategies
- Efficient processing
- Exploit power
- Volume insurance
- Balanced relationship
The IMP Journal
Volume 2, number 2
our view these models, with Kraljic’s model
as the point of departure, have become
popular and widespread partly because they
are fairly easy to communicate and
understand, and partly because they give
practical guidelines for how to manage
different
buyer-supplier
relationships/situations.
This
is
also
highlighted by Gelderman and Van Weele
(2002, p. 35) who claim that the models
building on Kraljic’s model “… seems to be
an effective tool for discussing, visualizing,
and
illustrating
the
possibilities
of
differentiated purchasing and supplier
strategies”. In the follow part we shall turn
our attention to the concept of supply
network.
Supply network
In an article by Mills et al. (2004)
they conduct an extensive review of
strategic supply network literature. The
authors claim that supply network
management is a rapidly expanding field
with a fast growing amount of literature. In a
similar vein, and based on a literature
review of both purchasing and ‘nonpurchasing’ journals, Holmen et al. (2007, p.
180) identify and discuss three important
issues in supply network management.
These issues are:
1) interconnected relationships, i.e.
creating
relationships
among
suppliers in the supply network
(which also incorporate the nature of
the relationships)
2) the structure of supply networks
3) the process of initiating, creating,
managing and/or changing a supply
network.
In the following, we will use these
three issues to structure the presentation
and discussion.
If we start with the issue of
interconnected relationships many of the
contributors within the field of supply
networks
have
touched
upon
this
41
characteristic. Harland et al. (2004, p. 2)
consider how a supply network can be
delimited in space and argue that “… we
could examine the total supply network for a
firm that could be represented by the set of
upstream and downstream organizations it
deals with, either directly or indirectly, from
original source of raw material or service
creation, to ultimate end customer. This
would provide a map of all relationships
within that firm’s supply network”. Dubois
and Gadde (2000) also argue that an
important issue of supply networks is that
collaboration not only takes place between
a buying firm and its suppliers, but also
among the suppliers thus creating
connected relationships. In a similar vein,
Andersen and Christensen (2005, p. 1261)
claim that “…supply networks are
characterized by sets of purposeful and
connected exchange relationships”. This is
supported by Håkansson and Persson
(2004) who discuss different types of
interdependencies in supply networks.
The second issue is how the
structure of supply networks can be
characterised and classified. In Lamming et
al. (2000) and Harland et al. (2001) a model
for classifying supply networks based on
two dimensions is presented; (1) the degree
of supply network dynamics and (2) the
degree of focal firm supply network
influence. Based on these two dimensions
the authors develop a 2x2 matrix and
discuss four supply network types. Mills et
al. (2004, p. 1023) also discusses structural
elements of supply network and claim that
the static network perspective of a focal
firm’s whole supply network is important
“…in order to compare performance in its
multiple supply chains…”. Furthermore, they
emphasise the firm’s position in the network
and how the position can be improved
without changing the structure of the supply
network. Related to position in supply
networks, Knight and Harland (2005)
discuss organisational roles in supply
network management and, based on
empirical research and the use of role
theory, they identify six different roles that
firms can have in supply networks.
The IMP Journal
Volume 2, number 2
Håkansson and Persson (2004) also focus
on structural issues as they discuss
interdependencies in supply network, on the
basis
of
Thompson’s
concepts
of
sequential,
pooled
and
reciprocal
interdependencies. They claim that one
major issue in relation to supply networks is
“… the fact that any focal organization is
normally part of several supply chains, each
of them representing different entities, which
may or may not be in conflict as far as
optimization and integration is concerned.
This issue in fact is related to the
exploitation of pooled interdependencies”
(Håkansson and Persson, 2004, p. 18).
A third issue, which over the latter
years has become more prevalent in the
literature, is the process of initiating,
creating, managing and/or changing a
supply network over time. This is also
pointed out by Mills et al. (2004) who divide
what they call the dynamic network
perspective into (a) the evolution of existing
supply chains and (b) the creation of new
supply chains. One stream of research
within this area is carried out at the Centre
for Research in Strategic Purchasing and
Supply (CRiSPS) at University of Bath, see
e.g. Harland (1996), Johnsen et al. (2000),
and Harland et al. (2004). They have
particularly focused on (a) the creation and
operation of supply networks and (b)
strategies related to how to manage these
supply networks over time. A more logisticsoriented approach is taken by Hines et al.
(1998) who present and discuss a lean
logistics approach to design a programme
to develop a supply network. Romano
(2003) also takes a logistical point of
departure and discusses co-ordination and
integration mechanisms to manage logistics
processes across supply networks. He
develops
a
conceptual
framework
containing three elements and concludes
that the process has lead to intensified
interaction and communication both at a
dyadic level, but also at an overall supply
network level. In another stream of research
we find Dyer (2000) and Dyer and Nobeoka
(2000)
who
have
studied
and
conceptualised the knowledge management
42
processes in Toyota’s supply networks. In
relation to that they describe the evolution of
the network in three phases: First, the
development of weak ties between the
buyer and the different suppliers in the
network. They use the term ‘weak’ to point
out that the relationships were new and the
frequency and intensity of the interaction
was low. Second, the development of strong
ties between the buyer and the suppliers,
where Toyota transferred know-how of, for
example, production technologies. Third,
the development of strong ties among the
suppliers, enabling the suppliers to create
sub-networks within the full network to
maximise willingness to share information
and knowledge.
The discussions so far about supply
network has been from the buying firm point
of view, e.g. how a core buyer may manage
and organise its suppliers in networks, and
thus, not many studies have taken the
suppliers’ interests into account. The
suppliers are rarely viewed as actors with
their own plans and visions, and seldom are
the alternative relations available to the
suppliers discussed or handled. Lately a
few contributions have pointed out that fact
that there is less focus on the supplier
perspective of supply networks (Mills et al.,
2004; Stjernström and Bengtsson, 2004;
Andersen and Christensen, 2005). For
example Stjernström and Bengtsson (2004,
p. 137) claim that “one shortcoming,
however, is that most of the literature is
based on buyer perspective, while studies
made from the supplier perspective are
rather few”. However, there are a few
examples of contributions which have taken
the suppliers’ view of supply networks as
the point of departure. We shall present and
discuss some of these contributions
because we are interested in the network
view of supply network and thus more
knowledge about the supplier side is
needed.
Some
contributions focus
on
situations where it is only one buyer or a
dominant buyer. One early contribution is
Lilliecreutz (1998) who takes into account
how a buying firm’s restructuring of its
The IMP Journal
Volume 2, number 2
supply base affects the suppliers, and how
a buying firm can synchronise its strategy
with the strategies of its suppliers. He
claims that suppliers need to develop their
own strategies as a consequence of buying
firms’ growing interest in restructuring,
rationalising and developing their supply
base/network. Lilliecreutz (1998) concludes
that the suppliers’ ability to orchestrate their
resource base, role and position is of great
importance. In a similar vein, Calabrese
(2000) studied 25 small and medium sized
suppliers and looked into the strategies they
adopted in order to handle changes initiated
by the manufacturers (the buying firms), for
example reorganisation of the supply
base/network. Finally, Johnsen and Ford
(2005, p. 184) look at how suppliers react to
two different sets of strategies applied by a
buying firm. The first strategy is ‘network
intervention’, i.e. that the buying firm is
actively
involved
itself
in
indirect
relationships. The second strategy is
‘network delegation’, i.e. that the buying firm
instructs another actor to disseminate or
forward the buying firm’s preferences.
Based on a case study they conclude that it
in some situations was difficult for the
suppliers to carry out their own strategies
because they were constrained by the
buying firm. What is typical about these
contributions is that they focus on situations
(or structures) where it is only one buyer (or
a dominant buyer). This implies that all
changes, strategies etc. are related to the
initiatives taken by a single, often dominant
buyer in a supply network.
Some other contributions have
focused on the suppliers’ situation in
multiple supply networks. One example is
Stjernström and Bengtsson (2004) who
discuss
suppliers’
contributions
to
customers’
product
and
process
development in multiple supply networks.
By contributions they mean (a) new product
development,
(b)
new
product
manufacturability, (c) efficient manufacturing
processes and (d) the general development
of the supply chain/network. Stjernström
and Bengtsson (2004) have studied six
suppliers who have overlapping customers,
43
and the three different customers had
different views on the fact that their
suppliers delivered to a competitor. While
the suppliers believed that delivering to
different, competing customers would lead
to faster technological development and
more learning, one of the customers
stipulated in the contract that the suppliers
should not to deal with the competitors (of
the specific customer). Andersen and
Christensen (2005) also discuss different
supply network structures and look at the
positions and roles of individual suppliers in
such structures. Based on different
illustrative cases they present a typology
with
five
different
bridging
roles
subcontractors (suppliers) can have in
international supply networks. They are: (a)
the local integrator, (b) the export base, (c)
the import base, (d) the international
spanner and (e) the global integrator.
Andersen and Christensen (2005) identify
some of the same issues related to how to
handle situations with multiple buyers who
individually may initiate new supply network
strategies.
Based on the literature review above
we conclude that it is important to pay
attention to the context both of the buying
firm and of the suppliers which form part of
such supply networks. In the following
section, we shall use parts of the different
models we have introduced and discussed
in the theoretical basis to generate a model
for analysing supplier relationships a buying
firm may use to develop a supply network.
Towards a model for analysing supplier
relationships when developing a supply
network
So far, the article has reviewed
literature within two fields of supply
management. First, purchasing portfolio
models with a special focus on
classifying/assessing
buyer-supplier
relationships and second, the supply
network seen from both the buying and the
supplying firm’s perspective. As mentioned
earlier, this article focuses on how a buying
firm (the customer) can take the supplier’s
The IMP Journal
Volume 2, number 2
perspective and the supplier’s context into
account when developing a supply network.
Following this logic, we suggest the
following model for analysing supplier
relationships:
The first dimension of the model is
related to the buying firm’s type of
relationship to the potential suppliers in the
supply network. We separate between
situations where the supplier is the most
important supplier for the specific product or
service, and situations where the buying
firm has several important suppliers for the
same product/service. In both situations the
two firms may have established a close
relationship and, as a consequence, have
cooperated and made mutual adaptations in
the past, as well as developed a
considerable amount of trust towards, and
knowledge about, each other. The
difference between the two situations
concerns to what extent the buying firm has
divided its attention among a number of
different suppliers (dual sourcing) or
focuses on one important supplier (single
Buying firm most
important customer
Supplier’s
context
Buying firm one of
several important
customers
44
sourcing).
The second dimension of the model
is related to the supplier’s type of
relationship to the buying firm and its other
customers. We separate between situations
where the buying firm is the most important
customer for the supplier, and situations
where the supplier has several (equally)
important customers (of which the buying
firm is one). Also in these two situations the
two firms may have established a close
relationship and, as a consequence, have
cooperated and made mutual adaptations in
the past, as well as developed a
considerable amount of trust towards, and
information about, each other. The
difference between the two situations
concerns to what extent the supplier is
involved with a number of other important
customers or focuses on one important
customer (the buying firm).
By combining these two dimensions,
we can construct a model which is
illustrated in Figure 1.
Based on the two dimensions we get
II
Dual sourcing
IV
Single sourcing
and providing
I
Dual sourcing and
providing
III
Dual providing
Buying firm’s context
Supplier one of
several important
suppliers
Supplier most
important supplier
Figure 1
Model for analysing supplier relationships a buying firm can use when developing a supply
network
The IMP Journal
Volume 2, number 2
the following four quadrants:
Quadrant I – Dual sourcing and
providing: In this quadrant both the buying
firm and the supplier have relationships to
other important suppliers/customers. This
implies that that buying firm uses a handful
of different suppliers for the same product or
service, and thus needs to divide its
attention between the different suppliers.
The supplier has a few other important
customers besides the buying firm, which
also may or may not have different types of
supply network initiatives or supplier
development programmes. Thus, the
supplier also has to share its attention
between different customers.
Quadrant II – Dual sourcing: In this
quadrant the buying firm is the most
important customer for the supplier but the
buying firm has relationships to several
other important suppliers. This implies that
the supplier is very much focused on the
request, needs and routines of the buying
firm to be able to serve its most important
customer in the best possible way. The
buying firm, on the other hand, uses several
different suppliers for the same product or
service, and thus needs to divide its
attention between the different suppliers.
Quadrant III – Dual providing: In this
quadrant the supplier is the most important
supplier for the buying firm but the supplier
has relationships to several other important
customers. This implies that the buying firm
is dependent on the supplier and is working
to get the most out of the supplier
relationship and become prioritised by the
supplier. The supplier, on the other hand,
has several other important customers
besides the buying firm, and thus, the
supplier has to share its attention between
different customers.
Quadrant IV – Single sourcing and
providing: In this quadrant both the buying
firm and the supplier is the most important
counterpart for each other (in relation to a
specific product area or service). This
45
implies that the buying firm is dependent on
the supplier and is working to get the most
out of the supplier relationship when it
comes to adaptations etc. The supplier is in
the same situation and is focused on the
needs and routines of the buying firm to be
able to serve its most important customer in
the best possible way.
In the following section we shall look
into and discuss three important issues we
may use to evaluate positive and negative
effects in the four different quadrants of the
proposed model. The first issue is learning
which has been an important issue in the
supply network review above, especially in
the discussion of initiating a supply network.
The second issue is capacity which is
touched upon in the discussion of how the
suppliers may react to customers’ supply
network initiatives. The third issue concerns
handling costs which are related to the
number of suppliers and tiers and the
different roles in the supply network, as
discussed in the part of the supply network
review focusing on structural issues.
The first issue is learning across
relationships, which has been addressed by
several authors. Among those we find
Nobeoka et al. (2002) who discuss the
influence of customer scope on supplier
learning and performance in the Japanese
automobile industry. They suggest that the
extent of learning as well as the
performance of a supplier is strongly related
to the number and type of customers with
whom it cultivates highly cooperative
relationships. Nobeoka et al. (2002)
distinguish between relationship-specific
knowledge vs. re-deployable knowledge
and argue that in order for knowledge to be
re-deployable across different customer
relationships, the customers must have
‘related needs’, e.g. by all being large
automotive assemblers. Based on these
premises, Nobeoka et al. (2002) propose
that a supplier who engages in a small set
of relationships to customers with related
needs and, furthermore, is able to transfer
re-deployable knowledge across these
relationships will not only learn more but
The IMP Journal
Volume 2, number 2
also perform better. The authors stress the
importance of focusing their attention on a
small set of relationships to customers with
related needs because “too many result in a
lack of information sharing and investment
and in high administrative costs” (Nobeoka
et al. 2002, p.731). Somewhat similar
conclusions have been reached by
MacDuffie and Helper (1997) who have
studied Honda’s supplier development
practices in the automotive industry. They
suggest that an important issue for the
buying firm as well as for the supplier in a
relationship is to consider the potential
complementarities between the focal
relationship and the supplier’s other
customer relationships. On the one hand,
the supplier may benefit from understanding
“which skills will be taught and how
applicable they will be to other customers”
(MacDuffie and Helper, 1997, p.144)
thereby trying to assess whether or not the
practices it is to learn in one supplier
development
initiative
will
be
complementary to and useful for what the
supplier learns and does in its other
customer relationships. On the other hand,
the buying firm may benefit from
considering that helping a supplier to
achieve consistency across
all its
operations and all its customers can be an
important component of a buying firm’s
strategy towards its suppliers.
The second issue is related to
capacity. It is argued by Dubois and
Fredriksson (2008) that in addition to the
learning issue, the efficiency/volume issue
is important when selecting a sourcing
strategy (and thereby the type of supplier).
This implies that how the supplier’s
production capacity is divided between
different important customers is crucial for a
buying firm. Håkansson and Persson (2004)
argue using the different interdependences
identified by Thompson, that pooled
interdependence is important because
pooled interdependence between two
activities means that they share a common
resource. When selecting a supplier for a
supply network the buying firm should take
into account that the production capacity of
46
the supplier is a ‘common resource’ that are
shared between the different customers of
that particular supplier. The stress of
responding to several major customers with
different priorities was also studied by
MacDuffie and Helper (1997, p. 143), who
stated the following: “Don’t worry about
knowledge spillover to competitors through
a shared supplier. Do worry about the
impact of multiple customers on a supplier’s
responsiveness”, in terms of taking up too
many of the supplier’s managerial resources
and other forms of capacity.
The third issue is handling costs
both regarding specific suppliers as well as
the overall supply/purchasing related costs.
Gadde and Håkansson (1993), in their
discussion of indirect costs in purchasing,
discuss handling cost as one important
factor. They claim that these costs are both
related
to
specific
buyer-supplier
relationships as well as costs generated in
the purchasing process by handling
documents, invoices etc. Gadde and
Snehota (2000) divide these handling costs
into ‘relationships handling costs’ and
‘supply handling cost’. According to Gadde
and Snehota (2000) handling cost is one of
the important type of costs to consider when
deciding to either have one or a few
suppliers for each product or service and to
work in high-involvement relationships or
using multiple sourcing and work in lowinvolvement relationships. The handling
costs are assumed to increase with the use
of a multiple sourcing strategy. This is also
discussed by Dubois (2003) who claims that
the number of suppliers a buying firm use
(for a specific product or service) have a
direct impact on the handling costs, but also
have a indirect effect on a lot of other cost
drivers (e.g. number of invoices).
In the following sections of this article we
present and discuss a processual case
study of a main contractor within the
construction industry who has tried to
develop a supply network, together with its
technical subcontractors, across a large
number of construction projects carried out
over a number of years.
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2. Methodology and empirical basis
The case in this article is based on a
long-term processual case study, which is
real-time, theory-led, and contextual. The
focal firm in the study is a large main
contractor. Most studies of supply network
management focus on firms in various
manufacturing industries, often automotive
(see Kinder, 2003 and Stjernström and
Bengtsson, 2004). Thereby, this study adds
to our awareness of how supply networks
can be developed (and managed) in other
industries, e.g. the construction industry.
The empirical material for the case
study was gathered in real-time, over a
period of almost ten years, and multiple
sources of information were used. For
example, we have:
-
-
taken part in the main contractor’s
supply network project
carried out approx 40 semistructured, personal interviews with
people from the contractor as well as
the subcontractors (suppliers),
taken part in various internal
seminars, workshops and field trips
(to construction sites),
read various company documents,
and
supervised a number of (master)
students writing their theses with the
contractor as the core firm.
Empirically, we have followed a
large main contractor in its efforts at
reorganising and reducing the supply base
of the firm and structuring part of the base
as a supply network. This process started
in 1997 and we have followed the firm in the
period 1997-2007. For a more thorough
description of the case, see Holmen,
Håkansson and Pedersen (2003) and
Holmen, Pedersen and Jansen (2007).
We have divided our longitudinal
data into the following four periods:
1. before 1998, when the first supply
network initiative started
47
2. during 1998-1999, when the first
supply network initiative was carried
out
3. during 2000-2005, after the first
supply network initiative
4. 2005-, during the second supply
network initiative
In the first period, before the first
supply network initiative started, the main
contractor mainly used competitive bidding
in
relation
to
its
suppliers
and
subcontractors, which were quite numerous
in number. However, being increasingly
dissatisfied with this approach, the main
contractor decided to change its approach
towards some of its suppliers.
In order to change its approach, the main
contractor organised its efforts by means of
a sourcing project with the aim to design a
supply network within the Building Division
of the firm. The project was called; ‘Network
with technical subcontractors’, and the
supply network consisted of subcontractors
of three types of technical services:
Electrical services, Ventilation services and
Plumbing services. The aim of the project
was ”…to develop a method for choosing
and organising co-operation partners which
will enable the firm to achieve competitive
advantages. This should enable the firm to
become better at: (1) choosing ’optimal’
technical solutions for their customers, (2)
handling interfaces among technical
subcontracts and (3) utilising advantages
stemming from co-operative relationships.”
In this second period, the firm
classified all the suppliers (the supply base)
of one chosen business unit in the Building
Division into a catalogue called ‘the Supplier
Library’ where all the business unit’s current
preferred
suppliers
were
classified
according to the materials they produced
and/or the service they delivered, for
example timber frames, steel, plumbing
services etc. Since the sourcing project
mainly focused on designing a supply
network of technical subcontractors, the
subcontractor subset of the supply base
was singled out, i.e. suppliers delivering
Electrical services, Ventilation services and
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Volume 2, number 2
Plumbing services. In total, nine suppliers
were selected, three for each type of
technical subcontract. The supply network
was to be tried out in a number of actual
construction projects through which it was
assumed that the supply network would
develop
substance
within
single
relationships as well as connections
between relationships (creating a network).
In these projects the subcontractors were
divided in different constellations which
were to work together as ‘sub-networks’
with electricians, plumbers and ventilation
installers.
Through this process (beginning of
1998 to end of 1999), the way in which the
business unit related to its technical
subcontractors changed dramatically. For
example, the purchase of electrical services
from
the
three
chosen
technical
subcontractors tripled during this period
(without any major change in turnover). Out
of the business unit’s total purchase of
technical services in 1999, approximately 95
% were from the designed supply network.
In the third period, between 20002005, some of the subcontractors from the
original supply network project were
gradually used less and some relationships
even ended. Other subcontractors became
more important in the years after the supply
network project, and still others started to be
used after 2000.
In 2005, the main contractor wanted
to establish mechanisms which could
facilitate joint learning and mutual
adaptations among the firm’s most
important technical subcontractors, and
among these technical subcontractors. In
particular, the main contractor wanted to
establish a small network of technical
subcontractors which could ‘train as a team’
across a number of construction projects
which would function as pilot arenas for the
collaborative efforts. Therefore, in the fourth
period, the main contractor started a new
process of mapping their present technical
subcontractors in order to identify suitable
candidates for the initiative. Among the
important features of the relationships, the
main contractor stressed that the technical
48
subcontractors should have worked with
firm for several years, that the collaboration
had been satisfactory, and that there were
good personal relations among the
individuals from the different firms which
were most heavily involved in the
relationships to the main contractor.
Having singled-out 5-6 technical
subcontractors, the main contractor ‘invited
themselves to
visit the
respective
subcontractors, on the premises of the
subcontractors.’ In beforehand of the
meetings, the main contractor had asked
each of the subcontractors to make a
presentation of their firm which would
enable the main contractor to assess
whether the subcontractor had the intention
as well as the ability to partake in efforts
aimed at joint, continuous improvement and
learning. Based on these meetings, the
main contractor chose three subcontractors
– covering the respective areas of plumbing,
ventilation, and electrical services. After the
selection, the supply network initiative has
developed over a number of construction
projects used as pilots for the initiative, and
recurrent meetings, workshops as well as
theme groups - all with representatives from
different levels at the various firms – have
been carried out in order to generate
learning as well as to systematise and/or
transfer it among the network participants.
The changes over time are shown in
Table 2.
3. Analysis
In this section we use the proposed
model for analysing supplier relationships
developed in section 2, to provide an
illustration of the different quadrants and
discuss effects with regard to the three
issues: learning, capacity and handling
costs. Even though we have discussed the
three issues theoretically both in relation to
a buying firm (a customer) and its suppliers,
we shall focus the analysis only on the
buying firm’s perspective since it is the
buying firm who initiates a supply network
and
thereby
analyses
its
supplier
relationships.
The IMP Journal
Volume 2, number 2
49
Table 2
Technical subcontractors used by the main contractor, 1997-2007
Subcontractor
Used during the
supply network
initiative in 1998-99
Used in the period
2000-2005
Subcon 1
Used in the years
before the supply
network (SN)
initiative started in
1997
Yes
Yes. Part of SN
Subcon 2
Yes
Yes. Part of SN
Subcon 3
Subcon 4
Yes
Yes
Yes. Part of SN
No. Part of SN
Subcon 5
Yes
Yes. Part of SN
Subcon 6
Subcon 7
Subcon 8
Yes
Yes
Yes
Subcon 9
No
Yes. Part of SN
Yes. Part of SN
Yes. Part of the
period. The firm had
financial problems
and left the SN.
No
No. The subcon.
changed its strategy.
Yes, but only on
smaller projects.
Merged in 2000.
Used quite little in this
period.
Merged with subcon.
13 and 14 in
2000.Not used after
2000.
Yes
Yes
No
Subcon 10
No
No
Subcon 11
Yes
Yes, became partly
part of the SN.
Subcon 12
Yes
Yes, but not part of
the SN.
Subcon 13
No
Yes, but not part of
the SN.
Subcon 14
No
No
Subcon 15
No
No
Yes. The subcon.
started to be used
because the main
contractor needed
more subcontractors
of electrical services.
Yes. Some former
employees of subcon.
5 became owners of
this subcontractor.
These persons have
been the main
contractor’s key cooperation partners.
Yes. The subcon.
started to be used
because the main
contractor had too
few plumbing
subcontractors.
Yes. Much used
today and an
important partner.
Yes. More used after
the merger (with
subcon. 5 and 14).
Yes. Stated to be
used after the merger
(with subcon. 5 and
13)
Yes. Important
partner today.
New supply network
initiative (2005-)
Yes (plumbing)
Yes (ventilation)
Yes (electrical)
The IMP Journal
Volume 2, number 2
Quadrant I - Dual sourcing and providing
Empirical illustration
During the first supply network
initiative (1998-1999) the main contractor
developed a close relationship with the
plumbing
subcontractor.
The
main
contractor had bought a lot of services from
this subcontractor (but always based on
tendering procedures) over the years before
the supply network initiative started. During
the initiative, the relationship strengthened
and new routines were developed.
Furthermore, potential new co-ordination
mechanisms at the construction site were
analysed and implemented. However, the
main contractor also frequently uses threefour other subcontractors within the field of
plumbing. One of these (subcon 7) took
part in the supply network initiatives
together with the plumbing subcontractor in
focus, and thus also has a long term
relationship with the main contractor. The
two-three other plumbing subcontractors
that are widely used today started the
cooperation with the main contractor in the
late
90ties.
Thus,
the
plumbing
subcontractor in the New supply network
initiative is one of several important
subcontractors in the field of plumbing for
the main contractor.
The plumbing subcontractor also
has a few other important customers than
the main contractor within the construction
industry. The subcontractor has reduced its
number of important customers since the
New supply network initiative started in
2005, but still the main contractor is one
among two-three important customers of the
plumbing subcontractor. Two of these other
customers are large construction firms and
one has a very different supply strategy
than the main contractor (with a focus on
competitive biding) and the other has more
a collaborative strategy towards suppliers,
and is known for working with a new
collaborative method on a very large and
prestigious project.
Analysis
In the following section we shall look
50
at the advantages and disadvantages for
the main contractor with regard to the three
main issues introduced above:
Learning: The main contractor can learn
from the plumbing subcontractor with regard
to ways of working together. Since the
plumbing subcontractor has been quite
heavily involved in a large project with
another main contractor who has developed
collaborative strategies with its suppliers, it
is possible for the subcontractor to transfer
some of these routines into the New supply
network initiative. Thus, what the main
contractor can learn in this situation in not
about plumbing but ways of working in close
relationships as well as coordination
methods for the construction site.
Capacity: The main contractor is one of
several customers which the plumbing
subcontractor has to divide its production
capacity among. This implies that the
subcontractor often is occupied with other
large projects and do not have the sufficient
production capacity for the main contractor.
This sometimes creates tensions in the
relationship as the main contractor
experiences delays from the plumbing
subcontractor. Thus, in this situation the
main contractor does not get top priority
from the plumbing subcontractor, and
thereby the production capacity is not that
reliable.
Handling costs: The main contractor
experiences some relationship handling
costs since it has to develop and maintain
the relationship with several plumbing
subcontractors. This also increases the
cost of handling invoices, technical
drawings etc. from the different plumbing
subcontractors. Thus, in this situation the
main contractor needs to work with several
subcontractors and thereby the total
handling costs will rise.
Quadrant II - Dual sourcing
Empirical illustration
The electrical
subcontractor
has
The IMP Journal
Volume 2, number 2
delivered services to the main contractor for
15-20
years
(based
on
tendering
procedures), but the more substation
relationship started around the year 2000. In
the period from 2000 to 2005 the main
contractor
has
used
the
electrical
subcontractor more and more frequently,
and the two firms have developed a closer
relationship over the last years. Since the
electrical subcontractor had not taken part
in the supply network initiative (1998-1999)
the main contractor still works quite a lot
with four-five other subcontractors for
electrical
services.
Two
of
these
subcontractors are somewhat smaller than
the electrical subcontractor in focus, but the
other three subcontractors are to a large
extent, large competitors (of the focal
electrical subcontractor).
After entering the New supply
network
initiative,
the
electrical
subcontractor, on the other hand, has
directed much of its activities and resources
towards the main contractor. The electrical
subcontractor does not have any other large
customers within the construction industry
and thus the main contractor has become
the most important customer.
Analysis
In the following section we shall look
at the advantages and disadvantages for
the main contractor with regard to the three
main issues introduced above:
Learning: It is more difficult for the main
contractor to learn from the electrical
subcontractor
(than
the
plumbing
subcontractor) since the subcontractor has
very few other large customers. As it is not
a question of learning about electrical
issues, but instead working methods,
coordination forms and routines the
subcontractor has few others to learn from
than the main contractor. Thus, the learning
opportunities are minor when it comes to
transferring knowledge.
Capacity: The electrical subcontractor has
devoted most of its production capacity to
the main contractor. Often the main
51
contractor
takes
100%
of
the
subcontractor’s
total
capacity,
and
sometimes the subcontractor also hires
extra manpower to make sure they can fulfil
a contract with the main contractor on time.
Thus, in this situation the main contractor is
highly
prioritised
by
the
electrical
subcontractor, and thereby the production
capacity is reliable.
Handling costs: The main contractor
experiences some relationship handling
costs since it has to develop and maintain
the relationship with several electrical
subcontractors. Even though the number of
different electrical subcontractors is smaller
than for plumbing subcontractors, the main
contractor still has to divide its attention
between
a
few
different
electrical
subcontractors. Thus, the main contractor
will experience that the relationship handling
costs will be high.
Quadrant III – Dual providing
Empirical illustration
When the New supply network
initiative started in 2005 the main contractor
changed its strategy and decided to
gradually develop the three subcontractors
into the most important supplier for each of
the three technical areas, but as we have
discussed above this has not yet happened
for the plumbing and electrical areas.
However, the ventilation subcontractor
gradually has become the main contractor’s
most important supplier of ventilation
services. If we look at the development
related to the ventilation subcontractor, the
relationship started in 2000, as a result of a
merger. In the period from 2000 to 2005 the
main contractor has used the subcontractor
more and more frequently, and the two firms
have developed a closer relationship.
The ventilation subcontractor on the
other hand is heavily involved with several
other
important
customers
in
the
construction industry as well as in other
industries, and the ventilation subcontractor
is the ‘preferred supplier’ for one of these
other customers. Most of these other
The IMP Journal
Volume 2, number 2
customers are competitors of the main
contractor within the construction industry.
One of these customers is the same as the
firm mentioned above (for the plumbing
subcontractor) which has a collaborative
strategy towards suppliers, and is known for
working with a new collaborative method on
a very large and prestigious project. The
other two customers within the construction
industry are large national and international
main contractors.
Analysis
In the following section we shall look
at the advantages and disadvantages for
the main contractor with regard to the three
main issues introduced above:
Learning: The main contractor can learn
from the ventilation subcontractor with
regard to ways of working together. Since
the ventilation subcontractor has been
heavily involved in a large project with
another main contractor who has developed
collaborative strategies with its suppliers, it
is possible for the subcontractor to transfer
some of these routines to the New supply
network
initiative.
The
ventilation
subcontractor also has a few smaller main
contractors who it has developed beneficial
working routines with. Thus, in this situation
the main contractor can use the learning
opportunities.
Capacity: The main contractor is one of
several customers which the ventilation
subcontractor has to divide its production
capacity among. This implies that the
subcontractor often is occupied with other
large (and small) projects and do not have
sufficient production capacity for the main
contractor. This sometimes creates tensions
in the relationship as the main contractor
experiences some delays from the
ventilation subcontractor. Thus, in this
situation the main contractor does not have
top
priority
from
the
ventilation
subcontractor, and thereby the production
capacity is not that reliable.
Handling costs: The main contractor will
52
experience lower relationship handling costs
compared to the relationship with the
plumbing and the electrical subcontractors,
since it has to develop and maintain the
relationship with primarily one ventilation
subcontractor. Thus, in this situation the
main contractor will work in a highinvolvement relationship with the ventilation
subcontractor and thereby the relationships
handling costs will fall.
Quadrant IV - Single sourcing and
providing
Empirical illustration
Even though the main contractor has
worked with all three subcontractors, which
are part of the New supply network initiative,
over a long period of time (approx. 7-15
years), none of the relationships have
developed into single relationships.
Using the proposed model the
analysis can by summed up in the
illustration in Figure 2.
4. Discussion
In this article, we have suggested a
model (inspired by a portfolio approach) for
analysing and categorising a main
contractor’s relationships to three suppliers
who are part of a supply network initiative
introduced by a main contractor. By using
this model, the three suppliers were placed
in different categories/quadrants. We also
identified
different
advantages
and
challenges related to the three different
categories and, hence, to the three different
suppliers.
From a portfolio perspective, it can
seem beneficial to have suppliers in
different categories since this enables the
main contractor to achieve all types of
benefits
(but
also
all
types
of
disadvantages) of the different types of
relationships. For example, it may be
beneficial to have some relationships in
which one primarily learns from the supplier
due to it having multiple relationships to
related customers, and some relationships
in which one primarily teaches the supplier.
The IMP Journal
Buying firm most
important customer
Supplier’s
context
Buying firm one of
several important
customers
Volume 2, number 2
II Dual sourcing
Electrical subcon
Learning: Capacity: +
Handling costs: -
53
IV Single sourcing and
providing
Han
I Dual sourcing and
providing
Plumbing subcon
Learning: +
Capacity: Handling costs: -
III Dual providing
Ventilation subcon
Learning: +
Capacity: Handling costs: +
Han
Buying firm’s context
Supplier one of
several important
suppliers
Supplier most
important supplier
Figure 2
Analysing the case using the proposed model
If we follow the logic of many
portfolio models, e.g. the one suggested by
Kraljic (1983), the managerial consequence
would be to have differentiated approaches
to the differently-categorised suppliers. In
our case, the main contractor initiates a
supply network initiative in which the three
suppliers are treated in the same manner,
i.e.
a
non-differentiated
approach.
Furthermore, not only are the suppliers
each treated in a similar manner (applying a
similar approach to different supplier
relationships), they are also directly grouped
together by the main contractor (similar
approach to a network of suppliers). An
interesting issue then becomes to what
extent such an approach offers advantages,
or creates problems, for the main
contractor’s supply network. We suggest
that different managerial challenges may
arise in such a network.
One such managerial challenge
relates to managing (with) differences
among suppliers in the network initiative,
thus preserving the heterogeneity among
them. Firstly, if some suppliers always take
more of a teaching role towards the main
contractor, whereas other suppliers never
do so, this may create problems and tension
among the suppliers. It may require the
main contractor to point out that the
suppliers are equally important regardless
of their different learning-related roles and
inputs; alternatively that the main contractor
explicitly assigns different roles to suppliers
belonging to different categories. For
example, a supplier with a learning-role may
first be asked to adopt a new routine
developed by the main contractor, and if
benefits can be shown to result from this
test, suppliers with a teaching-role may
subsequently be asked to adopt the
routines. Secondly, if there are never
capacity problems related to some suppliers
but frequent capacity problems related to
other suppliers, this may create problems
among the suppliers in case of sequential or
reciprocal interdependencies among their
activities. It may also create problems for
the main contractor who needs to find ways
of handling such differences, possibly
developing penalties which are accepted
among the supply network members, or
developing a system of differentiated
The IMP Journal
Volume 2, number 2
penalties implying that it is accepted that
some suppliers are allowed to cause delays
while others are not. We may also note that
differences may not only create negative
effects but also positive ones, for example
when one supplier is able to teach another
supplier without much intervention and effort
from the main contractor. We may also
observe that ‘managing with differences’
may require the main contractor to make
separate, supplementary efforts towards
some suppliers in addition to the similar
efforts within the supply network initiative.
Another managerial challenge may
be related to eliminating differences among
suppliers in the network initiative, thus
creating some homogeneity among them.
Whereas the suppliers may be placed in
different categories at the outset of a
network initiative, one purpose of such an
initiative may be to make the suppliers
become more similar, over time cancellingout the differences among the suppliers in
the different categories. For example, the
main contractor may view the initiative partly
as a ‘supplier development’ initiative aimed
at upgrading and aligning the capabilities of
the suppliers in certain dimensions, or
requiring of the suppliers that they make
changes in or of their other relationships.
Furthermore, by encouraging the suppliers
to work together as a team over a large
number of projects, the main contractor may
rely on the suppliers becoming more alike
through socialization and by making other
types of adaptations among them. However,
similarly to the arguments above, we may
also note that eliminating differences among
suppliers in a network initiative may not only
create positive effects but also negative
ones, for example if group-think, fixed
routines, and reduced creativity occur. This,
in turn, may lead to a third managerial
challenge, i.e. generating differences
among suppliers in a network initiative, thus
creating some heterogeneity. We may also
observe that eliminating (as well as
creating) differences may require the main
contractor to make separate, supplementary
efforts towards some suppliers in addition to
the common efforts within the network
54
initiative.
While the three types of challenges
–
managing
differences,
eliminating
differences, and creating differences – are
theoretically distinct, they may coexist
empirically, in the sense that a main
contractor may focus on managing with
differences in some dimensions while, at the
same time, eliminating differences in other
dimensions, and creating differences in yet
other dimensions. Furthermore, while
eliminating or creating differences requires
the passing of time, and hence touches
upon the handling of dynamics in a network
initiative, managing (with) differences can
be an approach both for the short-term as
well as for the long-term. In addition, we
may also mention a fourth approach –
ignoring differences – which may be quite
widespread approach, since it is impossible
and possibly unproductive to deal with all
types of differences, even if one might be
aware of them.
5. Conclusions and implications
In general, portfolio models are tools
for simplifying analyses of complex
processes and/or situations. By using 2x2
matrices, we can focus the analysis on a
limited number of factors which may be
important in the four different situations. In
addition, 2x2 matrices serve as a way of
presenting strategies for how to act. In this
article we have proposed a model for
analysing supplier relationships when
developing a supply network, showing how
a buying firm may consider the supplier’s
perspective and the supplier’s context. The
first dimension of the model separates
between situations where the supplier is the
most important supplier for the specific
product or service for the buying firm, and
situations where the buying firm has several
important suppliers for the same product or
service. The second dimension of the model
separates between situations where the
buying firm is the most important customer
of the supplier, and situations where the
supplier has several (equally) important
customers (of which the buying firm is one).
The IMP Journal
Volume 2, number 2
We use the model to analyse three issues;
learning, capacity and handling costs, as
outlined earlier. All three issues help to
emphasis differences in the situations
described in the model, and together they
create a set of unique opportunities and
drawbacks linked to each quadrant in the
model. We do not, however, claim that
these three issues are the only relevant
ones which could have been analysed. For
example, R&D costs and economies of
scale and scope could be other relevant
issues which can be analysed using the
same type of models.
By offering an illustration of the
different quadrants of the proposed model,
we have demonstrated in the analysis
section that the chosen issues have an
impact on the dimensions presented in the
model. The proposed model represents a
simplification of the real situation of the case
firms. Thus, we claim that a buying firm may
benefit from analysing the supplier
relationships with regards to the dimensions
outlined in the model, for example before a
new supply network initiative is introduced.
The model can help the buying firm by
giving an overview of the status quo before
starting a new initiative, and thus help
understanding how the buying firm can
emphasise different aspects in order to
succeed with the network initiative. We are
aware that there might be an information
problem for a buying firm in relation to
finding out its suppliers’ degree of
involvement with other main customers.
Handling this requires a close relationship
with the suppliers in question, and it can be
resource-intensive to acquire this type of
information. However, the case study shows
that it is possible for a buying firm to gain
insight into the important customers of its
main suppliers. Such knowledge may be
vital to a firm which would like to develop
and manage a supply network.
There are two areas which we have
not focused on in the article, but which we
would like to suggest for further research.
The first suggestion is to use the proposed
model (and other portfolio models) to
analyse and monitor changes over time in a
55
supply network. By analysing the situation
at different points in time, the buying firm
may look at changes in the structure which
can be met by a shift in the way in which the
buying firm attempts to develop the
relationships. If, for example, a supplier has
moved from quadrant I to quadrant III over a
period of two years, it may be necessary to
rethink and adjust how this relationship is
managed. The portfolio model can thus be
used to alert the buying firm to changes,
and enable the buying firm to suggest new
strategies to dealing with the changes.
The second suggestion is to develop
the model into also covering the suppliers’
situation and their view on their customers’
supply network initiatives. As mentioned
above, portfolio models can serve both as
analytic tools and as presentation tools, and
using the model as a basis for discussion
between the buying firm and the suppliers
will be an example of using the model as a
presentation tool. This would also facilitate a
possibility to discuss the suppliers’ view of
their possibilities for learning, for handling
capacity issues, and for influencing handling
costs.
From a portfolio perspective it is
considered beneficial (and easy) to use
different
managerial
approaches
for
suppliers belonging to different categories.
However, in a network initiative which
involves suppliers from different categories,
it may be problematic to use differentiated
approaches. This implies that differences
among suppliers may need to be eliminated
or managed in other ways. Consequently,
we may conclude that the managerial
challenges which arise from taking a
portfolio perspective on a set of separate
supplier relationships can differ significantly
from the managerial challenges which arise
when considering the same supplier
relationships as part of one network
initiative.
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Kinder, T. (2003). Go with the flow – a
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Knight, L., & Harland, C. (2005). Managing
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Kraljic, P. (1983). Purchasing must Become
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strategic review of “supply networks,
International Journal of Operations &
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The IMP Journal
Volume 2, number 3
1
A Letter From The Editor
Welcome to the third issue of Volume 2 of the IMP Journal.
This issue builds on a number of themes that have already been introduced in
previous issues. The first two papers by Frida Lind and Anna Dubois and by
Anna Bengtson and Hakan Hakansson are both extended case studies, within
the IMP Tradition. Both papers deal with different aspects of the issue of
“Embeddedness” which is central to network thinking. The two papers use
the examples of two very different innovations to show the ways in which a
technological change that is apparently easily defined and demarcated from
its surroundings is actually embedded in a complex landscape of resources
and activities. The first paper uses two dimensions of the concept of
embeddedness: organisational space and time. It applies network analysis in
the organisational space dimension to analyse project embeddedness with
regard to activities, resources and actors. The paper then uses the idea of
embeddedness in time to analyse changes in the nature of embeddedness
over time before, within and following projects. The paper draws conclusions
about the management of research and development projects and the
importance of considering different aspects of embeddedness. The second,
Bengtson and Hakansson study is of a much larger-scale network innovation.
The paper plots the nature of the evolution of this innovation and the case
highlights the nature of the surrounding resource structure and specific
resource interfaces. The paper concludes with a discussion of some of the
economics of innovation that arise from this analysis of embeddedness.
The third paper by Gadde and Ford also relates to themes that have been
well-developed in IMP Literature. The paper examines the links between the
Industrial Network Approach and earlier research on Distribution. The paper
relates these two connected research traditions to the emerging empirical
trends in distribution. It suggests how the Network Approach could contribute
to an understanding of Distribution. As an aside to the comparison that the
paper makes between different research approaches, it highlights the value,
particularly to scholars new to the area of examining ideas from earlier
generations of marketing and distribution researchers.
I hope that the papers make interesting and rewarding reading.
Best wishes
David Ford
The IMP Journal
Volume 2, number 3
2
Analysing Dimensions And Consequences Of
Project Embeddedness
1
Frida Lind a and Anna Dubois b
a
Division of Industrial Marketing, Department of Technology Management & Economics, Chalmers University of Technology,
S-412 96 Göteborg, Sweden, e-mail: [email protected]
b
Division of Industrial Marketing, Department of Technology Management & Economics, Chalmers University of Technology,
S-412 96 Göteborg, Sweden, e-mail: [email protected]
Abstract
This paper aims to develop the notion of ‘project embeddedness’ and takes its starting point in the
suggested need for viewing projects as embedded in the wider structures and processes that influence and are
influenced by them. Two dimensions of the concept of embeddedness are identified: organisational space and
time. The industrial network model is applied in the organisational space dimension to analyse project
embeddedness with regard to activities, resources and actors, while project embeddedness in time is analysed
with regard to past, present and future. It is concluded that the roles and contributions of project members may
vary in these dimensions and that projects can be organised with this in mind. The reasoning is illustrated by a
case of an inter-organisational research project aiming at developing frost resistant oats.
Keywords: Projects, project embeddedness, industrial networks
1. Introduction
Several authors have emphasised
the need for studying projects with
consideration of how they relate to their
contexts or environments (Gilbert 1983,
Kreiner 1995, Engwall 2003, Lundin and
Steinhórsson 2003, Sydow et al 2004,
Lakemond and Berggren 2006, Manning
2008). For instance, Söderlund (2004)
suggests that closer attention should be
paid to the relationships between projects
and their environments. One reason for
the existence of such relationships is that
projects are often dependent on
information, resources and knowledge
from outside the project, and the firm(s)
organising the effort (Bengtsson and
Ericsson 2002).
Placing
a
project
in
an
organisational or corporate context
indicates a willingness to acknowledge
that “projects are embedded in wider
structures
and
processes” (SahlinAndersson and Söderholm 2002, p. 18).
One important reason for why projects
should be considered as embedded in
their environments is that projects are
temporary organisations and that projects
as temporary systems are likely to be
embedded in more permanent contexts on
various levels (Sydow et al, 2004).
This
paper
focuses
on
embeddedness of projects. The most
frequently used reference when it comes
to embeddedness is Granovetter (1985),
who introduced the concept to explain how
economic action is embedded in structures
of social relations. Granovetter (1985)
points to the importance of personal
relations or networks in terms of actors’
actions being “…embedded in concrete,
ongoing systems of social relations.” (p.
487)
From an economic sociological
stand point this conceptualisation of
embeddedness has been used to explain
how markets work. For example, Uzzi
(1997) focuses on exchange relationships
categorising the ties among companies as
either arm’s-length or embedded. For
embedded
ties,
trust,
fine-grained
information transfer and joint problemsolving
stand
out
as
important
1
An earlier version of this paper was presented at the IMP Journal Seminar, Gothenburg, 2006 and resubmitted following
further review.
The IMP Journal
Volume 2, number 3
characteristics.
A
mix
of
close
relationships and arm’s-length relations is
argued to be the optimal network structure
from a firm’s point of view in a market.
From an industrial network point of
view Halinen and Törnroos (1998) suggest
that there are different types of
embeddedness characteristic for business
networks. They suggest that there are
temporal, spatial, social, political, market
and technological types of embeddedness
and they also distinguish between
horizontal and vertical embeddedness.
Horizontal embeddedness refers to the
relations of actors within a level, i.e.
geographically, based on a channel
structure or within a specific industry, while
vertical embeddedness of a firm refers to
relations among actors of different levels
in a network. Another aspect of
embeddedness from an industrial network
point of view is the embededdness of
resources. Wedin (2001, p. 24) points out
that resources are used within a network
of embedded relationships and more
specifically
“when
some
sort
of
dependence and adaptation is present
between two resource elements, one
could
argue
that
resources
are
embedded”. Hence, during resource use,
resources are combined and adapted
towards other resources, and therein
embedded in a network of relationships. It
should also be noted that embeddedness
in a more general sense is seen as an
underlying assumption in industrial
network studies (Holmen 2001).
Firms as embedded in various
ways and dimensions have been
discussed extensively, but projects have
not been subject to the same interest.
There are, however, some exceptions.
One strand of research have taken the
starting point in the relationships between
a project and its parent organinsation(s)
(cf. Löwendahl 1995, Johansson et al
2007),
while
another
sees
the
embeddedness of a project based on the
perceptions of the parties involved, i.e.
how the members of a project perceive
themselves in relation to the project versus
parent organisation (Blomquist and
Packendorff 1998). Another way of
approaching project embeddedness has
been to take the perspective of a parent
3
organisation organising several projects
concurrently and sequentially (Mattsson
1983). This is referred to as ‘multi-project
environments’, in which a project is seen
as embedded in terms of being part of and
inter-dependent with other projects and
the parent organisation (cf. Eskeröd 1996).
These
notions
on
project
embeddedness all rest on the project as
an entity and as the unit of analysis. In this
paper we will build further on these efforts
by taking the starting point in the industrial
network approach (cf. Håkansson 1987,
Håkansson and Snehota 1995) in
conceptualising the context of a project.
In the next section, project
embeddedness is addressed and a
conceptual framework is suggested.
Thereafter, the method is described and a
case study of an inter-organisational
research project is presented and
analysed. Finally, we discuss some
consequences of considering project
embeddedness when organising projects.
2. Problem Discussion
From the project management
literature, we can learn that projects are
temporary in nature, often address unique
tasks, have a clear goal formulation and
go through a number of steps or phases
(cf. Meredith and Manthel 1995). The time
aspect and the temporary character of
projects is most fundamental according to
Lundin and Söderholm (1995). In
accordance, Sydow et al (2004, p. 1477)
state that: “Organizing projects is a
temporally limited process, but projects, as
temporary systems, are likely to be
embedded in more permanent contexts.”
These permanent contexts refer to the
organisational context of a project.
However,
one may
question the
“permanence” of the permanent contexts
as these contexts change over time.
Kreiner (1995, p. 338) addresses this by
pointing to ‘drifting environments’ referring
to “a situation where something diverges
from its projected course”. It is argued that
drifting environments are not something
that a project can plan away but instead
must be seen as a challenge that projects
need to cope with.
The IMP Journal
Volume 2, number 3
Sydow et al (2004) argue that there
is a variety of project contexts owing to
different organisational levels, and that at
least four such levels should be
considered:
organisational
units,
organisations,
inter-organisational
networks and organisational fields. Engvall
(2003) includes two dimensions in his
definition of the project context: an
organisational dimension, i.e. other
activities concurrent to the project, and a
time dimension, i.e. what happened before
and what will happen after the project
having an impact on the project outcomes.
While Sydow et al (2004) integrate the
time dimension by considering projects as
embedded in permanent contexts, and
suggests different organisational levels of
these contexts, Engwall (2003) explicitly
points at time as an equally important
dimension, in addition to organisational
space. Thus, both acknowledge time as
central in studying the embeddedness of
projects but differ in how they do it. In this
paper, we will view time and organisational
space as two dimensions of project
embeddedness. The content of these two
dimensions are discussed in the next
sections.
Organisational space
To further structure our analysis of
the embeddedness of projects, we will use
the industrial network model as a general
framework. The framework is based on
three basic classes of variables defined in
relation to each other: actors, activities
and
resources
(Håkansson
1987,
Axelsson and Easton 1992, Håkansson
and Snehota 1995, Håkansson and
Waluszewski 2002). Actors perform
activities and control resources and can be
identified on various organisational levels
e.g.
individuals,
departments
and
companies. Actor bonds exist where
actors are related to each other. Hence,
the project and its individual members can
be seen as actors. A project may (through
its members) perform activities and control
resources. Activities are performed by
actors in that resources are combined,
developed, exchanged or created by use
of other resources (Håkansson 1987).
Activities are linked to each other in
different ways both within and across
4
organisational boundaries (Dubois 1998).
Resources consist of physical and human
assets and are adapted to each other.
Ties among resources therefore exist
since each resource is interrelated with a
number of others (Håkansson and
Snehota 1995). By looking at project
embeddedness in terms of how actors,
activities and resources within the project
boundary relate to actors, activities and
resources
outside
of
it,
project
embeddedness as a concept captures
how the project relates to its context.
Starting with organisational space
as a dimension of project embeddedness,
the content of this dimension can vary.
The basis for this is that the members of a
project are inter-related with or have
relationships with other actors in the
project context. The actors in the project
context could be of different kinds (Lind
2006). Firstly, the members of a project
may be involved in other activities or
projects apart from a focal project. The
project members’ resources and other
potential involvements in concurrent
activities or projects could influence or be
influenced by the project. Secondly,
another vital part of the context is the
parent organisation(s). These may initiate
and sponsor the project, have access to
financial and other resources, and
commonly do a number of other things,
both as non-project activities or projects,
which may be more or less related to the
particular project. Thirdly, another part of
the organisational context consists of the
actors outside the project that influence
and/or are influenced by the project.
These other parties, referred to as third
parties, may be either other organisations
or projects including ones with which the
parent
organisations
have
other
relationships. They may thus be related to
the project either directly or via the parent
organisations’ network of relationships.
Overall, a project may need support and
feedback e.g. in terms of information,
knowledge, and physical resources, from
several actors in the project context.
Further, the flow of resources between a
project and its context may change with
different phases of a project (Bengtsson
and Ericsson 2002).
The IMP Journal
Volume 2, number 3
Looking at the different types of
actors in the project context suggested
above, we see that it may not be the
actors but rather the activities and/or
resources that are inter-related with the
project. A project performs certain
activities directed towards a project goal.
How and when these are organised may
depend on the activities of actors in the
project context, for example, in terms of
companies manufacturing input to a
process, or waiting for the results of some
output from the project. Furthermore, a
project may need resources from the
outside of the project e.g. staff, time,
financial
resources,
equipment
or
knowledge during the project. These
resources may be identified during the
course of a project.
Concluding from above, a project is
embedded in an organisational space
based on the actors involved, the activities
they carry out individually and jointly, and
the resources they use and develop. Each
project member of a project is thereby,
based on its activities and resources to
various degrees embedded in the context.
A project may thus contain a mix of project
members that to different degrees and in
different
ways
contribute
to
the
embeddedness of the project in the
organisational space.
The time dimension
The second aspect of project
embededdness is time. Gressetvold and
Torvatn (2006) point at the time dimension
when addressing the variety of effects of
product
development
projects.
By
broadening the focus from the actual
product subject to development to
incorporate effects on the business units,
business relationships and production
facilities involved, the time dimension
appear vital to the understanding of the
effects of product development projects:
To sum up, the effects of
product development can
take
place
either
concurrently
or
subsequently.
Furthermore, they can be
of either a direct or an
indirect type. The time
5
dimension suggests one
challenge
related
to
these effects, namely
that some of them tend
to occur late, in particular
the indirect ones. In
addition, whether or not
an effect will take place
is a question burdened
with uncertainties, which
means that they are
difficult to plan for.
(Gressetvold
and
Torvatn, 2006, p. 50).
As pointed out above, time is
significant for projects, in that they are
temporary in character, by definition
(Lundin and Söderholm 1995). Time is
also significant in relation to project
embeddedness with regard to activities,
resources and actors. The project, the
project members and other related actors
have a history and through past and
existing
relations
among
activities,
resources and actors the project may be
embedded in historical contexts. The
project may also have a specific future(s)
in terms of other projects or efforts that
follow after the project is completed as a
result of it, as also pinpointed by Engwall
(2003). The time dimension also contains
a
processual
aspect
as
the
embeddedness may change during a
project. This, in turn, may impact on the
effects of the project: for the project itself,
for the project members and for third
parties being part of the project context.
To
summarise,
we
suggest
organisational space and time as two
dimensions of project embeddedness.
Organisational space contains the three
industrial networks components: actors,
activities and resources, while time
addresses project relevant developments
before, during and after the project. Based
on these suggested dimensions of project
embeddedness we will inquire further into
the consequences for the study and
management of projects.
3. Method
The conceptual discussion on
project embeddedness addresses projects
The IMP Journal
Volume 2, number 3
in general. An empirical illustration can be
provided by the case of an interorganisational
research
project.
Characteristics
of
research
and
development projects are that they build
on integration of knowledge across
disciplines
and
technical
solutions
(Söderlund
2005).
The
conceptual
framework introduced above will be used
to analyse the case. However, the case
study has also, in interplay with the
theoretical framework, functioned as a
framework for developing the conceptual
model based on an abductive research
strategy (Alvesson and Sköldberg 1994)
and systematic combining (Dubois and
Gadde 2002). This is further discussed in
Lind (2006).
The project focused on in the case
study was active in the field of plant
biotechnology and the project aimed at
developing frost resistant oats for the
Swedish climate. The case study is based
on interviews with project members and
actors in the project context, internal
project
documentation
and
related
websites. The interviews were “semistructured” (Bryman 2002). In total, 16
interviews with 11 persons were carried
out
during
2001-2004.
To
gain
trustworthiness, first, member checks has
been pursued, i.e. representatives from
four key actors were given the opportunity
to read through the case description in
accordance with e.g. Lincoln and Guba
(1985). Second, triangulation of data has
been pursued in different ways; by using
multiple sources and multiple informants
as recommended by e.g. Yin (1989).
Third, several versions of the case study
have been presented to gain review and
elucidation in a number of forums.
4. Empirical Illustration: The Winter
Oats Project
The aim of the winter oats project
was to develop frost resistant oats. Four
parent organisations took part in the
project: The first was a co-operative where
the majority of the members are farmers.
The co-operative’s development division
had an interest in improving certain
characteristics of oats, in this case its frost
tolerance. The second participant in the
6
project was an international plant breeding
and seed group specialising in developing
new varieties and producing seed to be
used in cold climate areas. The rationale
for this firm to be involved in the project
was that they had not succeeded in
breeding oats that survive the winters, in
spite of several attempts. The cold
resistance characteristics of oats were
expected to be of great interest to the
farmers owing to the higher yields that
would be the result of sowing in the fall
instead of in the spring. This was the
reason why these two actors initiated, and
were involved in, the project.
In addition to these two firms, two
research groups were involved. One of
them was from the University of
Gothenburg and includes molecular
biologists specialising in research on
organism and plant structure and function.
The other research group, belonging to
Skövde University, contained computer
scientists specialising in developing
methods and algorithms for structuring
and handling huge amounts of data. The
data focused on in the winter oats project
consisted
of
“nucleotide
sequence
information”. This is the key to frost
resistance, which is the first step towards
developing winter oats. Hence, the
project’s activities were mainly directed
towards identifying the genes involved in
regulating frost resistance in oats. In
contrast to winter crops developed through
hybridisation, which requires their cold
adaptation
to
be a
monogenetic
characteristic, the cold resistance of oats
was assumed to be dependent on the
interplay among several genes. This made
it necessary to combine the competences
of the parties involved in addition to getting
access to project external resources, the
need for which were identified during the
project.
The winter oats project was
financed by three main sources. The first
one was the West Swedish Farmers
Supply and Crop Marketing Association
Funding Body. This was related to one of
the members of the project, the farmers’
association, but was a legally separate
body. This funding body has a long-term
interest in oats and has supported several
oats related projects. The second source
The IMP Journal
Volume 2, number 3
was the development division of the
farmers’ association, which financed the
sequencing. The third source of funding
was the National Research School in
Bioinformatics and Genomics, hosted by
University of Gothenburg, which mainly
funded two PhD students involved in the
project.
One of the project members, the
molecular biologists, had developed a
technique to transform oat genes in a
previous research project. When the
winter oats project started this technique
was considered to be useful in the
development of oats characteristics. The
previous project was also funded by the
West Swedish Farmers Supply and Crop
Marketing Association Funding Body.
From the funding body’s perspective, the
winter oats project was seen as a
continuation of the previous project and as
a potentially interesting application of the
new technique. However, thus far, this has
not been the case since the efforts to
identify and develop the characteristics in
oats have taken other routes.
The winter oats project can be
described by four main sets of research
7
activities: 1) Preparations for sequencing,
2) Sequencing, 3) EST data analysis, and
4) Preparations for micro-array analysis.
These research activities are briefly
described below with particular focus on
some of the key resources, activities and
actors. In addition, further uses of some of
the results developed in the project are
described.
Preparations for sequencing
The first main research activity of
the winter oats project was the
preparations
for
sequencing.
The
preparations included production of
material to be used as a starting point for
the actual sequencing activity. In order to
produce the material different types of oat
were needed. The plant breeding firm
contributed with oats from the international
breeding firm of which it is. In particular,
oats from England that had survived the
relatively mild English winters were used.
In parallel to the preparations for
sequencing, the plant breeding firm also
contributed “winter oats” for field study
tests on oats sown in the south of
Sweden.
Oat varieties from
England
The transformationtechnique
Preparations of
material
Material ready
for sequencing
Winter oat
varieties from US
and Russia
Project
boundary
Research
activity
Resource
developed
and/or used
within the
project
Fig. 1. Research phase I: Preparations for sequencing.
The IMP Journal
Volume 2, number 3
For that purpose the plant breeding firm
managed to find and get access to
Russian and American “winter oats”
varieties. See Figure 1 for illustration of
research activities and resources used
and developed during this research phase.
Sequencing
Sequencing means deciding the
order of the nucleotide bases of the
genome. Knowing this order is a first step
towards identifying the genes and
understanding their function. For the
sequencing, important external resources
and activities were used. A firm that offers
sequencing on a commercial basis was
engaged as a supplier and performed the
oats sequencing at their facilities in
Germany. Test tubes with prepared oats
were delivered to the sequencing firm who
returned, so called, “EST data”. See
Figure 2.
When it was realised that a huge
amount of data was to be analysed, the
need for knowledge and experience in
handling and analysing huge data sets
8
arose. This requirement resulted in
discussions with the Department of
Computer Science at Skövde University
that had started to specialise in
bioinformatics, i.e. handling huge sets of
biological data such as the sequencing
data. The computer scientists, who were
not involved from the beginning in the
project, were asked to join the project at
this point.
The EST-data analysis
The EST data supplied by the
sequencing firm was considered a central
resource developed within the project.
However, the data did not provide
knowledge unless it was combined with
tools and knowledge on how to interpret
and further refine the data. Eventually the
project members managed to develop a
refined set of EST data, including data on
potentially interesting genes that was
generated by use of a mix of resources.
Some of these and how they were
accessed
are
described
below.
Project boundary
Research activity
Resource
developed and/
or used within
the project
Facilities at
sequencing
firm
Material
ready for
sequencing
Sequencing
EST data
Fig. 2. Research phase II: Sequencing.
The IMP Journal
Volume 2, number 3
In order to facilitate the analysis of
the EST data an EST database was
developed by the computer scientists. The
EST database contains both the original
raw data in addition to other data
concerning EST characteristics. For
example, information from public database
searches was stored in the database,
which made it possible to structure
essential information on specific ESTs.
Another vital set of resources for
analysing the EST data was results from a
parallel research project carried out by the
molecular biologists on a “model plant”;
Arabidopsis Thaliana. Because of its
simplicity, this plant has the potential to
explain characteristics of other plants. In
addition, there are vast amounts of
research on the Arabidopsis Thaliana
plant that may benefit research on oats.
The analysis of the EST data resulted in
an increased understanding of the oats
genome, e.g. in terms of identification of a
set of genes, an understanding of the
function of certain genes in oats. A
number of potentially interesting genes
were identified during the EST data
analysis and these are further explored in
the micro-array analysis.
Some of the results from the EST
data analysis have been used in settings
outside the project. For example, a
specific fraction of the EST data has been
used further as a starting point for
development of a so-called “gene family
tree”. The computer scientists have mainly
produced the design of the tree. The gene
family tree describes to which other plants
oats are most related. The starting point
for this family tree was a particular gene
that was found during the EST data
analysis to not be cold related. In this
case, oats have been compared with
wheat, rye, corn and rice. It is useful to
know what species oats are most similar
to.
In particular when a certain
characteristic that is not found in oats is
studied, it is possible to use knowledge
concerning that characteristic in a related
plant. The family tree may contribute to the
winter oats project later on through
comparisons of this kind, but this is still
uncertain and depends on other findings.
Hence, the family tree was an application
that primarily interested and benefited the
9
involved computer scientists and was
made beyond the scope of the project. In
designing the family tree for oats, external
resources were also needed. One
important resource was the software
programme Phylip which is used for
kinship analysis. The work with the family
tree also required botanical knowledge
and so a contact was established with the
Botanical Institute at University of
Gothenburg.
The EST data analyses also
resulted in identification of a number of
health-related genes. These genes in
combination with the transformation
technique formed the basis for cooperation
among two of the project members; the
farmers’ co-operative and the molecular
biologists, and a research group that was
external to the project belonging to the
Department of Food Science at Chalmers
University of Technology. Inspired by the
identification of health-related genes, this
constellation put together a joint research
application where they suggested further
research on oats especially with a focus
on its health characteristics. The healthrelated genes identified in the EST data
analysis, which were not directly related to
the cold adaptation, were thus recognised
as useful beyond the scope of the project.
The farmers’ co-operative had worked with
the Department of Food Science at
Chalmers in earlier research projects on
oats. The three parties started their
discussion in relation to an ongoing large
project that the Department of Food
Science already was involved into making
minerals available in food. The project
focused especially on herring, yeast and
oats. For an illustration of research
activities and resources during the EST
data analysis see Figure 3.
Preparations for micro-array analysis
Micro-array analysis is a technique
for deciding exactly what genes are active
in an organism at a certain moment under
certain conditions. A tool called the microarray chip places an essential part in this.
A micro-array chip could be described as a
grid in which each square represents one
gene. The EST data was a necessary
precondition to be able to conduct microarray analysis. Since there were no oat
The IMP Journal
Volume 2, number 3
Methods for data
handling and
database building
The
Arabidopsis
Project
10
Non-cold-related
genes
EST data analysis
EST
data
Public
databases and
tools
Project
boundary
Potential coldrelated genes
Healthrelated genes
Research
activity
Resource
developed
and/or used
within the
project
Fig. 3. Research phase III: EST data analysis.
micro-array chips available, the first step
towards performing micro-array analysis
was to develop these chips. Facilities at
Gothenburg University were needed for
this development and these were
accessed via the molecular biology
department.
Some of the results of the EST
data analysis were used in other settings
beyond the project boundary. The data
has been used as input to a traditional
plant-breeding programme in England with
the ambition to develop oat-breeding
markers. Through the plant breeding firm,
the EST data has been transferred and
further used in this new setting. Using the
EST data in this way was not planned
initially but represents an opportunity that
was identified along the way. Research
phase four is illustrated below in Figure 4.
In conclusion, several genes have
been identified in oats. Some were
concluded to not be cold-related and some
were potentially related to the coldadaptation process. These potentially
cold-related genes are to be further
explored in micro-array analysis, the
results of which we do not yet know.
However from a project embeddedness
point of view, the description of the project
as it has developed so far provides
inspiration for the analysis.
5. Analysis
The case illustrates the interplay
among various actors and their activities
based on the resources used and
developed by them. All project members
contributed resources and/or activities in
one way or another although they were
involved in different ways and to different
extents. Figure 5 illustrates the main
actors and sets of activities involved in the
project and thereby visualises the project
as embedded in its context. Some of the
The IMP Journal
Volume 2, number 3
Facilities for
microarray
analysis
Potential oatbreeding
markers
EST data
Potential
cold-related
genes
11
Coldadaptive
genes in oats
Microarray
analysis
Project
boundary
Research
activity
Resource developed
and/or used within
the project
Resource not yet
fully developed
Fig. 4. Research phase IV: Preparations for microarray analysis.
involved actors had ongoing relationships
prior to the project; however, this is not
shown in the figure. For illustration of the
resource dimension, see Figure 4 in the
previous section.
Embeddedness
with
respect
to
Organisational Space: Actors, Activities
and Resources
The molecular biologists and the
computer scientists seem to have been
the most active parties within the project,
particularly in the EST data analysis. In
these activities they were able to combine
what they were doing within the project
with concurrent research activities. The
molecular biologists related to another
research project concerned with the
Arabidopsis Thaliana plant and therein
embedded the project with regard to both
resources and activities in a concurrent
research project carried out at the parent
organisation. Resources were tied in that
the two individual plants were related and
compared and they managed to learn from
one plant and apply that knowledge and
increase the understanding of the other.
Activities were linked in that the sets of
analyses for the two plants, were partly
performed concurrently and showed many
similarities in terms of set up, performance
and analysis of results.
The computer scientists made use
of their research on methods and
algorithms for structuring and handling
huge amounts of data and thus the project
became embedded, based on the
activities of the computer scientists. The
computer scientists performed datahandling searches and managed to relate
these activities to the oats-related search
activities in public databases. In a similar
vein, they had access to resources for
building databases that became used in
the project in new ways.
Furthermore, the identification of
The IMP Journal
Volume 2, number 3
Project
boundary
Research
activity
Actors involved
in the project
Skövde University
UK Breeding
Programme
Plant Breeding Firm
Oat Breeding
Group
12
Department of
Computer Science
Sequensing Firm
Chalmers University
of Technology
Prep. for
sequencing
Sequencing
EST data
analysis
Microarray
analysis
The Farmers
Co-operative
Department of
Molecular Biology
Development
Division
Division of Food
Science
University of
Gothenburg
Arabidopsis
thaliana Project
West Swedish
Farmers
Funding Body
National
Research School
Relationships between actors
Actors’ involvement in and/or external use of
resources developed during research activity
Funding of the project
Fig. 5. Main actors and activities embedding the project.
Botanical
Institute
The IMP Journal
Volume 2, number 3
oat genes that were not of particular
interest for the project was used in
different ways by the project members
beyond the project boundary. The
computer scientists used it in the
construction of the gene family tree and
therein created a new relationship with the
Botanical Institute and the molecular
scientists, in co-operation with the farmers’
co-operative and a third party, in
developing ideas for future projects on
health-related genes. Hence, resources
developed within the project boundary
could be combined with other resources in
continuing external activities. Thus the
project became further embedded with
respect to resources and activities in the
two project members’ contexts.
While the plant breeding firm
provided the project with appropriate oat
varieties that were essential resources for
the sequence preparation activities, they
where not particularly involved in any
internal project activities. However, they
took part in concurrent projects, such as
the English breeding experiments, in
which resources were used that had been
developed in the project. Furthermore,
these breeding experiments may result in
resources that can later be useful in the
winter oats project in a similar way to the
gene family tree that was developed by
the computer scientists. Hence, possible
future uses of these resources may be
explored which may embed the project
further into its specific context.
The role of the farmers’ association
seems mainly to have been to use its
relationships to other actors and thereby
contribute to the project. As a funding
body, they played an important role in
setting the project goals around which the
project activities and the resources used
and developed in these efforts revolved.
Although the other project members
contributed in different ways to finance
parts of the research activities, the
farmers’ co-operative acted as a ‘project
owner’ in setting the overall goals of the
project and in funding the main part of the
project. In terms of embeddedness they
played a major role in embedding the
project in a general research context
13
focusing
on
developing
different
characteristics of seed.
Several of the project members
managed to contribute resources from
their parent organisations, as in the
example above where the plant breeders
accessed oat varieties and the molecular
biologists gained access to central
equipment from their parent organisation
in the preparations for micro-array
analysis. The parent organisations were
thus in different ways important as
resource bases in the project.
Embeddedness with regard to Time: Past,
Present and Future
The winter oats project can be
seen as embedded with regard to time:
past, present and future. There are several
examples of prior projects and existing
relationships influencing the route of this
project: Firstly, three of the project
members had worked together on a
project where the transformation technique
was developed. The potential further uses
of that resource can be seen as a central
driver initiating the project. Thus, the
project was considered as an extension of
a previous project where three of the
members where involved. Secondly, the
farmers’ co-operative maintained a
relationship with the Department of Food
Science at Chalmers University of
Technology as they had worked together
in other projects. Based on this, the
farmers’ association identified possibilities
to combine resources and activities of
some of the actors to explore features of
the resources developed in the project, i.e.
health-related genes in oats.
As stated above, three of the
project members had worked together
prior to this project. During the project, it
became apparent that the skills of the
computer scientists were needed and they
were invited to join the project. Eventually
this department became a central project
member, especially with regard to the EST
data analysis. The choice to include the
computer scientists affected the project
embeddedness. If the computer scientists
had remained an external collaboration
partner, the embeddedness with regard to
resources and activities would have been
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Volume 2, number 3
high since the interdependence between
the activities and resources of the
molecular biologists and the computer
scientists were strong. When the computer
scientists were brought into the project,
these interdependences became part of
the project.
During the project a number of
concurrent activities were initiated as a
result of what was happening in the
project. The development of the family tree
and the ideas to form a new research
project on health-related genes in oats are
examples of this. In addition, some
activities that were carried out concurrently
became related to the project during its
course. The breeding experiments and the
research on the Arabidopsis Thaliana
were examples of this. There were also
several plans to draw on outcomes of the
project in future.
Hence, the project was embedded
in time based on specific developments in
the past, concurrent activities and future
plans. All had an influence on the project
and its individual members and all also to
some extent affected the project’s context.
Hence, there was certainly some influence
on the way in which the ‘drifting’ project
environment drifted.
Contribution to Project Embeddedness
Some remarks can be made with
regard to the project members’ respective
contributions to project embeddedness.
The molecular biologists made a
significant contribution with respect to both
resources and activities. They managed to
access and combine resources and
activities with other concurrent projects’
external efforts. The farmers’ association
contributed through their relationships with
other actors in the context, both through
the parent organisation and as a result of
prior projects. The farmers’ association’s
contribution to embeddedness was mainly
with respect to accessing resources and it
was minor with respect to activities. The
plant breeder embedded the project with
external resources within the parent
organisation and outside but not to a great
extent with respect to activities and actors.
Finally, the computer scientists resembled
the molecular biologists, embedding the
project mainly with respect to activities and
14
resources, while to a lesser extent with
other actors, although their efforts to
develop the family tree did put them in
contact with some new actors. Hence, all
four
actors
contributed
to
the
embeddedness of the project in different
ways. But all of them were able to relate
what was done in the project with
activities, resources and/or actors outside
of it. The mix of how actors, activities and
resources were embedded through the
project is unique and the same
combination could not have been achieved
by any other constellation of project
members or by any project member alone.
6. Concluding Discussion
We introduced the paper by
pointing to an identified need to study
projects in their contexts. This can be
taken further to the managerial question of
whether projects should be organised and
managed as isolated or embedded
entities. Hence, the first issue to be
discussed is of projects as isolated or
embedded. The second issue concerns
the design of projects with embeddedness
in mind.
Projects as isolated or embedded
Engwall
(2003)
argues
that
research on projects typically takes a
perspective on them as isolated from their
contexts in time and space. In particular,
the
growing
literature
on
project
management typically describes projects
as discretely and consciously designed
and planned. Project managers are
instructed to “explicate and operationalize
the goals of the effort, to define and
analyze the work breakdown structure, to
coordinate
implementation
by
comprehensive planning, to supervise the
work
processes
towards
task
accomplishments, etc” (Kreiner, 1995,
335). In a similar vein Gilbert (1983, pp.
83-84) notes that “most of the projectplanning models currently available
consider the project as though it was
developed in a vacuum. Such an approach
may be necessary for analytical purposes,
but is a gross oversimplification”. Hence,
how to manage projects by “planned
isolation”, or how to conduct projects
The IMP Journal
Volume 2, number 3
autonomously with a powerful project
manager (e.g. Eisenhardt and Tabirizi
1995) or to only allow loose couplings to
the project environment (Lundin and
Söderholm 1995, Hobday 2000) have
become strong but questioned, themes in
the project management literature.
Blomquist and Packendorff (1998)
note that when projects are considered as
isolated then the environment is only
relevant to consider before and after the
project, providing goals and resources and
receiving the final results. They further
argue that from a traditional project
management point of view embeddedness
is a dysfunction:
“Projects are supposed
to be closed activity
systems in order to be
possible
to
manage
effectively,
and
all
environmental influences
are
consequently
considered
as
disturbances that the
project manager has to
protect his organisation
from.” (ibid., p. 38)
This view of projects is recognized as
problematic since most often the results of
a project are to be used by others
(Johansson et al 2007).
While other suggested notions of
project embeddedness mainly rest on the
actor dimension and how projects are
related to other organisations, we suggest
that the activity and resource dimensions
highlight additional aspects of project
embeddedness that cannot be captured by
the actor dimension alone. Although
actors, activities and resources are always
related, the emphasis with regard to
embeddedness to a particular project may
vary as we have tried to capture in the
analysis of the case.
Designing Projects with Embeddedness in
Mind
If we consider the whole range of
project types then the need for
embeddedness
in
the
dimensions
discussed in this paper may of course
vary. “Simple” projects with straightforward
15
goals that are carried out in short periods
of time may not need to be embedded to
the same extent as more complex
projects. Sydow et al. (2004, p. 1475)
argue that projects are a fast and flexible
mode of organising:
“Because of their limited
time duration, projectbased organizations do
not constitute irreversible
resource commitments of
fixed
costs.
Hence,
companies and other
types of organization
may launch a variety of
ventures through project
based organizations and
may
terminate
unsuccessful ventures at
low
cost
and little
disturbance
to
the
organizational sponsor.”
In contrast, we suggest that the
more the project form of organising is
required, i.e. when various resources,
activities and actors need to be involved,
then uncertainty is high and the project
duration extends over longer time periods,
then the more the project needs to be
embedded in its contexts. Based on this
we suggest that a differentiated approach
to project design and management in view
of embeddedness is needed.
Designing
a
project
with
embeddedness in mind raises the
question of what parties should be
involved in the project as project
members. External actors may be
connected to the project in different ways.
While Uzzi (1997) points to the risks with
“over-embedded”
firms,
a
similar
reasoning may be valid for projects. High
levels of embeddedness can be difficult to
manage from a project management point
of view and there are obvious risks, such
as a lack of focus. When uncertainty is
high, some interdependencies may be
better taken care of within the project
boundary. Embeddedness into the “right”
contexts may enable relations with actors
that are internalised in the project on such
an occasion.
The IMP Journal
Volume 2, number 3
Project member selection naturally
builds on current knowledge and plans for
which activities and resources the project
members may contribute in relation to the
project goals at its beginning. However,
when plans need to be made during a
process and dealt with as a series of
decisions over time (Gressetvold and
Torvatn, 2006), then the basis for this
selection may change over time. In
addition, the project members’ concurrent
activities may important in order to embed
the project in “relevant” contexts and to
maintain
a
readiness
for
further
embeddedness during the project. Hence,
project design may not only encompass
the project’s internal actors, activities and
resources. It may also include access,
through project members, to contexts in
which
potentially
useful
activities,
resources and actors exist. The potential
contexts in which the project may become
embedded thus requires consideration of
the contexts of individual members and
what they do outside the project boundary.
However, it is not possible to “control”
these concurrent activities from a project
management point of view and this may
therefore be seen as disturbing the focus
of the project. This issue has similarities
with what Kreiner and Schultz (1993) have
identified as a “management paradox”.
Although Kreiner and Schultz focus on
information sharing, the point made can be
relevant to project embeddedness in
general. On the one hand, what is
regarded as confidential information and
what is to be kept internally needs to be
strictly regulated. On the other hand, those
involved need to be allowed to share
information through informal networking in
order to get access to the latest frontiers of
research. Hence, the balance is between
what needs to be kept internally within the
project and what needs to be embedded
and with which specific counterparts.
Intuitively, it may seem beneficial
for a project to have members that can
access a great variety of internal and
external resources while concentrating on
the project in the activity dimension.
However, there are two related aspects
that complicate this presumption: Firstly,
access to external resources may require
project members to be involved in
16
concurrent, external activities. When the
results
of
research
projects
are
considered, the uses (and/or further
developments) of the resources developed
may be limited to specialised actors, in
combination with other actor-specific
resources. Hence, the actors involved in a
project may be essential for the further
uses and developments of the resources.
Secondly,
the
strength
of
the
interdependence between resources and
activities may vary. Hence, some project
members may contribute resources that
may be used independently of their
involvement in joint activities while other
project members need to be involved in
activities related to specialised resources.
Another consequence of the
involvement of project members in other,
project-external activities is that this may
enable the project to better cope with
“drifting environments” (Kreiner 1995).
Thus, a project is better able to cope with
changing conditions, such as the need to
access newly developed resources, by
being embedded in its context rather than
isolated from it.
We also need to consider how a
single project may contribute to activities,
resources and actors outside of its
boundaries. Hence, while the results of
projects in terms of goal fulfilment are of
obvious interest, the other contributions of
a project to its members and other related
actors are of relevance when assessing
the outcomes of projects. For instance,
resources that are developed as means to
fulfil project goals may be used beyond the
project boundary by project members,
their parent organisations and third
parties. What are considered as the “ends”
and “means” of a project depend on each
actor’s
individual
perspective
and
therefore a strict “project perspective”
limits the view of the project’s
contributions. These perspectives will
need to be taken into account when
designing a project and as become part of
considerations of how the project may
develop in terms of the project’s
embeddedness.
From
an
individual
project
member’s perspective the embeddedness
of a project also impacts on what is gained
apart from the obvious factors such as
The IMP Journal
Volume 2, number 3
funding for the time spent on the project
and future use of the ex ante planned
project result. Project members that are
able to benefit from the project’s
embeddedness, either through getting
involved in concurrent or future activities
or getting access to resources that were
not part of the plan, will have achieved
more than was expected from the start. If
a project is isolated then these kinds of
effects cannot be achieved, but instead
the project member have to start from
scratch in a context that may have “drifted”
to its disadvantage since the project
started.
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Söderlund, J. (2005). Projektledning och
projektkompetens, Malmö: Liber.
Uzzi, B. (1997). Social structure and
competition in interfirm networks:
The paradox of embeddedness,
Administrative Science Quarterly,
42, 35-67.
Wedin, T. (2001). Networks and demand:
The use of electricity in an
industrial process, Dissertation,
No. 83, Department of Business
and
Administration,
Uppsala:
Uppsala University.
Yin, R. K. (1989). Case Study Research –
Design and Methods, Sage
Publications,
Applied
Social
Research Method Series. New
York: McGraw-Hill.
The IMP Journal
Volume 2, number 3
19
An Interactive View Of Innovations:
Adopting A New Timber Solution In An Old Concrete
Context
Anna Bengtson a and Håkan Håkansson b
a
b
Department of Business Administration, University of Uppsala, Sweden, e-mail: [email protected]
International Management, Norwegian School of Management, Oslo, Norway, e-mail: [email protected]
Abstract
This article takes an interactive view of innovation with the aim of investigating how physical and
organisational resource interfaces within an industrial context will affect and be affected by the adoption of a
particular innovation. It is based on a case study of a change process that took place in the Swedish construction
industry in the mid and late 1990s centring on the use of timber constructions in tall buildings. The case analysis
focuses on describing the resource structure behind a building, and on further analysis of some of the resource
interfaces. These resource interfaces have explanatory power in the examination of the focal change process
and its outcome. The article ends with an analysis of the particular innovation process from an economic
perspective.
1. Introduction
A focus on newness seems to be
common to most definitions of innovation.
Van de Ven (1986, p. 591), for example,
defines innovation as “(t)he development
and implementation of new ideas by
people who over time engage in
transactions with others in an institutional
context.” Trying to pin down the newness
he continues; “An innovation is a new
idea, which may be a recombination of old
ideas, a scheme that challenges the
present order, a formula, or a unique
approach which is perceived as new by
the individuals involved.” The same
concept of perceived newness is adopted
in the definition used by Damanpour
(1992, p. 376), who states that an
innovation is “(t)he adoption of an idea or
behaviour, whether a system, policy,
program, device, process, product or
service, that is new to the adopting
organization.” Newness is thus not
primarily regarded as internal newness of
the artefact as such, but rather as external
newness of the artefact into the adopting
system
(e.g.
Damanpour,
1992;
Johannessen et. al., 2001; Pettigrew,
1997; Styhre, 2006). Johannessen et al.
(2001, p. 23ff) assert, for example, that
“(p)rior innovation research suggests that
the extent of newness of an innovation
may be related to the domain into which
the innovation is adopted”, and argue that
one should not focus too narrowly on
aspects such as “how highly technical an
innovation is, or the outcome of large
investments in R&D”, because “(t)he
success of an innovation is determined
more by the extent of its adoption than by
who originates it or how technologically
advanced it is.”
The process that we will focus on
in this article concerns the adoption of an
innovation that by no means can be
described
as
very
technologically
advanced, nor is the product as such new
for the involved actors. However from a
use point of view it is totally new to the
involved companies. Thus, it has to go
through an adoption process of the type
The IMP Journal
Volume 2, number 3
suggested above. This process took place
in the Swedish construction industry in the
mid and late 1990s. More than one
hundred years earlier, in 1888, a large city
fire in Sundsvall, the last in a long line of
city fires in the nineteenth century, had put
an end to the construction of timber
framed residential buildings of more than
two storeys. In the early 1990s, however,
new research findings showed that the
legislators had confused timber frames
and timber facades at the time of the
prohibition and thus forbidden both. New
fire tests proved that timber frames
provided rather good fire insulation
compared to other materials used such as
steel.
In
1993/1994
the
building
regulations in the Swedish building code
BBR94 were changed in favour of
functional requirements. The prohibition
against burnable materials such as timber
was thereby replaced with requirements
that stated how long a building must hold
in the event of a fire.
To explain the considerable
interest shown by the construction industry
in reintroducing timber as a frame
material, one needs to know that this legal
change came at a time when the Swedish
construction industry was looking for ways
to lower production costs. These had
been rising steadily for some years
(Engebeck and Wigren, 1997; SCB,
Bostads- och byggnadsstatistisk årsbok,
2002). Swedish industry representatives
looked at the USA at the time and were
able to show that the American
construction industry, which had not been
burdened with the same timber prohibition
as the Swedish industry, used timber
frames in more than 90 per cent of its
multi-dwellings. The technique had been
popular for decades and comparisons to
Swedish production costs revealed that it
resulted in much lower costs than those in
Sweden. This was so even when
considering differences in taxes, climate,
quality demands, etc. (Miller and Stone,
1995). The interest in timber construction
shown by the Swedish construction
industry in the mid 1990s was thus based
on the fact that they were given an
opportunity to lower their production costs
by perhaps as much as 40 to 50 per cent
simply by switching to another framing
20
material. The material, timber, was well
known and widely used for many other
industry-wide applications.
The prevailing situation in the
Swedish construction industry in the mid
1990s gives researchers interested in
innovation processes, an interesting
opportunity to study how the existence of a
specific limitation influenced the economic
use of a set of physical and organizational
resources. These resources have been
combined to create a total structure of
physical and organisational interfaces
within a specific network where timber as
a frame material was not included. We
believe that analysis based on this case,
based on the same logic as presented by
Rosenberg (1994), will help us to better
understand how economy is created in the
reconstruction of this resource set. In this
article, building on Bengtson (2003) and
Bengtson & Håkansson (2007), we will
thus investigate how the physical and
organisational resource interfaces within
the construction network in Sweden that
are related to the design and the
production of buildings was affected by
reintroducing the “old” frame material. By
starting with the legal change concerning
the use of timber in Sweden described
above, we will be able to show that the
construction of an economically beneficial
technical solution concerning a certain
innovation (new item) is far from a simple
or neutral process. Through time,
resources and resource interfaces have
been directed toward each other into
certain specific combinations or “use
areas” where new resource combinations
have emerged and been utilized, making
the resources even more directed toward
each other.
An interesting aspect of the case is
the fact that we have a “test group”
represented by the American construction
network that has used the product
(innovation) extensively for a long time.
Also, while timber framing has been
forbidden in the Swedish network, the
material itself is used in a large number of
other applications. We can therefore
assume that the total use and knowledge
of the timber material is at the same level
in both countries (it could even be higher
in Sweden as this country is more
The IMP Journal
Volume 2, number 3
dependent on the forest industry than the
USA). Any difference in the two subnetworks can therefore not be related to
the level of general knowledge but only to
the effects of the blocking of the specific
interfaces between wood when used as a
frame material and other resources related
to the frame. The situation is that of a
designed classical experimental situation
with one test group where, at a certain
time, there was a change and a control
group with no change and where, 100
years later, it is possible to measure the
long-term effects as there is a change
back to the old solution. We will study how
the Swedish construction network, with its
experimental “change” situation, evolved
from one technological situation to a
somewhat different one in an attempt to
reconstruct the economical map based on
the timber innovation. This adaptation
process is affected by both technical and
organisational interfaces as well as by the
industrial parties´ knowledge and/or
ignorance of these interfaces.
The aim of this article is thus to study how
this very limited “innovation” may be
turned into economically beneficial
solutions for involved parties, and what
obstacles there might be to the attempts to
reach a positive bottom line despite the
fact that the newness is so limited. Our
aim is to make a contribution in terms of
illustrating the importance of the
adaptation
process
in
the
commercialization phase. We will argue,
based on the empirical case that it is the
confrontation between the earlier nonused item and an existing and welldeveloped (rich) structure and how this
confrontation process is handled that
determines the adoption process.
The article has the following
disposition: In the next section we will
describe some of the analytical and
methodological considerations taken into
account in collecting the data for this
article. The case analysis focuses on
describing the resource structure behind a
building and on further analysis of some of
the resource interfaces that have
explanatory power in order to understand
the change process and its outcome. The
article ends with an analysis from an
21
economic point of view of
the
technological change that we studied.
2. Methodological
Considerations
And
Analytical
For anyone interested in how
resources become combined into larger
valuable and functional “wholes” or
products
with
certain
value,
the
construction of a building is an ideal object
of study. The functionality aspects related
to the product are quite complex since
there are several functions that any
building must have and that must be
considered during the design process. The
most fundamental function of a residential
building is to provide shelter for its
residents. Providing shelter can however,
be further broken down into more specific
functions such as safety (for example
resistance to wind, moisture and fire), and
comfort (such as ventilation and sound
insulation). Some of these functions are
described in laws and regulations, either
on a national basis or in a larger setting.
Other functions are still perceived as
given, i.e. over time they have become
part of our very definition of a building.
Designing a building aesthetically and
technically requires consideration of all
these functions.
These functions, whatever they are
also raise certain demands on the
individual materials and components used
to construct the building, on how these
materials and components are combined
in the construction, i.e. on various physical
resource interfaces, and on the larger
technical resource structure needed for
the construction of the building. All
functional and aesthetic requirements for a
certain product – in this case a specific
building – are also affected by the
production processes hidden behind the
construction of the various components
and materials of which the building is
fabricated. Producing all of these
components and materials that fulfil these
functions requires an extensive and highly
complicated production structure. The
various production processes in the
production structure are then affected by
the requirements on the building, but also
primarily by demands on economical and
The IMP Journal
Volume 2, number 3
organisational aspects, such as efficiency
and the long-term production planning of
each specific component in each specific
production unit. The production side of the
resource structure is composed of a
number of suppliers and sub-suppliers
each having specialised production
equipment as well as design and
production knowledge/experience.
The empirical data described and
analysed in the article constitutes the
empirical basis of a thesis (Bengtson
2003). The data material for the thesis was
collected through both primary and
secondary sources. First a referential
study of a traditional building project using
the concrete technology was conducted
through interviews with involved parties
such as the construction firm, architect,
constructing
engineer
and
several
suppliers and sub-contractors. Thereafter
information and data concerning the
attempts to achieve technological change
in Sweden was gathered through
interviews with persons involved in the first
two projects using the timber technology.
Material was also collected through media
and through research reports and
technical articles on the subject as well as
through participation in project groups
working on the technical aspects of the
change.
Finally,
a
Scandinavian
comparison of the change attempts
concerning timber framing was made in
cooperation
with
researchers
from
Norway, Denmark and Finland. More than
fifty interviews were completed. For further
information on the methodological aspects
of the study, see Bengtson (2003),
Chapter 3.
The innovation literature can,
according to Johannessen et al. (2001), be
categorised into four different approaches:
(1) an individual oriented approach that
focuses on aspects such as age and
gender of innovator, (2) a structure
oriented approach in which various
organisation characteristics and their
effect on innovation is studied, (3) an
interactive approach, and (4) a systems of
innovation approach that discusses
regional and national systems and their
impact on innovation in the area. The
interactive perspective, which will be used
for this study, focuses on how action
22
influences structure and vice versa in the
innovation process. In our case the data
has been collected and analysed using an
industrial network approach (Håkansson
ed 1982, Håkansson & Snehota 1995).
The starting point is an identification of
relevant resource interfaces. Here we
have used the four R model (Håkansson &
Waluszewski 2002). This model has been
designed
in
order
to
analyse
developments where both physical and
organisational resources are combined.
The model can be used to identify the
involved actors and their interfaces within
a development process. The existence of
specific interdependencies between the
resources gives the interfaces a content
that in turn has an explanatory power in
the analysis of change in industrial
networks. In the model, and thus in our
analysis, a distinction is made between
physical (tangible) interfaces, which relate
to
how
products
and
production
equipments are combined with each other,
and
the
organisational
(intangible)
interfaces, which are made up of
combinations of competences, skills and
economic reasoning by the involved
companies and organisations (see Figure
1).
The next step in the analysis is to
identify the activities influencing these
interfaces
(development,
production,
marketing and purchasing). There are
activities directly changing the interfaces,
but all these activities are also dependent
on how these interfaces are designed.
Thus, in order to understand the effects of
the interfaces the analysis has to include
identification and description of those
activities and the costs and revenues
related to them. It regards both direct
investments in the resources and their
design as well as changes and
adaptations in daily activities.
3. Learning About The Economy In
Interfaces
When Sweden prohibited the use of timber
in tall residential buildings in the early
nineteenth century, its use for house
construction had just started to become
more industrialised. For example, an
expansion of the saw mill industry
The IMP Journal
Org. Resources
Construction firms
Org structure
Knowledge
Routines
Volume 2, number 3
Products
Facilities
23
Org. Relationships
Frames
Components
Systems
Production
equipment
Planning
To suppliers
To architects
To technical consultants
Architects
Knowledge
Criteria
Frames
Buildings
Designing
systems
To construction firms
To users
Technical consultants
Calculation routines
Knowledge
Testing procedures
Frames
Components
Testing
To construction firms
equip.
To regulating bodies
Standards
Measuring scales
Supplier of components
Knowledge
Org.structure
Frames
Components
Production
equipment
To construction firms
To suppliers
Supplier of systems
Design abilities
Knowledge
Frame
System/product
Production
equipment
To construction firms
To other system suppliers
Fig. 1. The 4R-model applied to the case
in the 1870s made light timber
construction more common, and an
industry branch with housing catalogues
and
prefabrication
was
expanding.
However, other materials took over after
the prohibition. Non-burnable materials
such as stone and brick had already
become more commonly used as cities
expanded in the urbanisation at the turn of
the century. It was these materials that
were now reached for in the absence of
the possibility of using timber for
construction for more than two storeys.
Soon, however, concrete became more
common, and more recently has
dominated the application, even though
steel and steel/concrete combinations are
alternatives that may be considered.
The shift from timber to concrete
for framing clearly meant a lot for those
producing concrete, but also for others
who produced materials or components
that in some way were related to the
frame. The frame is an important part of
the building as it is directly related to
several of the key functions (stability, fire
protection, sound insulation, design, etc.).
The choice of framing material impacts
both the design phase and the production
phase as well as the final use of the
building. The standard choice for framing
of
Swedish
multi-storey
residential
buildings is concrete, which is a robust
and thermally efficient material. But as the
material became popular for house
building in the 1960s it was found that
concrete contains a large amount of
moisture before it dries, making certain
interfaces, such as surface materials and
the glue used for the surface material on
floors, vulnerable if not used properly.
Cast in-situ concrete also has some
disadvantages in the construction phase in
a cold climate country like Sweden, since
the construction becomes vulnerable to
changes in temperature, rain, snow etc.
Therefore prefabricated framing elements
have often become an alternative.
Because the country is rather large, high
transportation costs for the heavy and
ungainly concrete elements became a
major obstacle. Another obstacle is the
need for heavy equipment such as loadbearing cranes. Due to the large span
width that can be accomplished, recent
decades have seen a rise in the popularity
The IMP Journal
Volume 2, number 3
of steel for the construction of large
buildings that demand open-plan space,
such as garages or open offices.
This was the context when timber
framing again becomes possible to use
through a legal change. In the 1990s,
developers from the Swedish construction
firm Skanska, together with others
interested in the reintroduction wanted to
learn more about the economy behind the
timber framing technique before any
investment was made in timber framing for
tall buildings. They made a comparison
between production costs for tall
residential buildings in the USA and in
Sweden. (For broader comparisons of the
framing technologies in the two countries,
see also Eriksson, 1993a; 1993b). The
comparison confirmed a) that Swedish
production costs were much higher, and b)
that this difference was most likely due to
the use of different framing technologies in
the two countries.
Hence a change from concrete to
timber framing was seen by Swedish
enthusiasts as a “quick fix” that could be of
great value in lowering production costs.
Table 1 below is a comparison between
construction costs in the two countries that
was made by the investigators in the early
1990 and published in a book on the
matter in 1995.
The second column (concrete
Swedish) lists all costs in the production of
a typical Swedish housing project at the
time of the investigation, i.e. a residential
building with a concrete frame. The third
column (Concrete Swedish in USA) is an
estimate of what the costs of the same
project would have been if it had been
produced in the USA. The fourth column
(Concrete American) gives the costs of an
American project using concrete frames,
and the last column shows the costs of a
building in the USA with a timber frame.
Looking at the index in the last row we find
the results that made the investigators so
excited: the Swedish concrete framed
building was 50 per cent more expensive
to produce than the American timber
frame building. Looking at the other
figures, we also see that the American
concrete building was less expensive to
produce than the building built in Sweden.
24
It is stated, however, that “American
builders are unanimous in claiming that, all
things considered, wood frame buildings
are 20–30 per cent cheaper than concrete
ones” (in the USA) (Miller and Stone,
1995, p. 64).
But as we will see in the following,
these figures are much more problematic
than anyone of the involved managers
could imagine. In order to identify and
understand these problems we will in the
following sections make a closer
inspection of the resource interfaces
involved in a) the design of a building, b)
the construction of a building, and c) the
design and production of components
needed in the housing construction.
Framing Material and the Design of a
Building
When we consider timber frames,
the standard choice for residential
buildings in the American construction
network, we find that it is generally not
possible to determine the material from
which it is made from the appearance of
the building. Some of the buildings that
were built with timber frames after the
legal change in Sweden were originally
planned as regular concrete buildings.
When the development started, its aim
was to reach the same result in all
functional dimensions independent of the
framing material that was used. Later in
the development, however, the timber
material was sometimes used as a sales
argument, as explained by a builder from
the building company Skanska, engaged
in the development. “People tend to like
timber, which has positive associations, in
comparison to concrete that one may have
somewhat of a dislike for.” Fulfilling the
same functional requirements independent
of the framing material used, involves
different requirements for the two
materials. For example, concrete is nonflammable, whereas timber is flammable
and requires coverage with a material
such as plasterboard to fulfil the same firesafety requirements. The fact that timber is
a lightweight material, while concrete is
heavy, puts different demands on the
design of the construction in relation to
stability. Acoustic conditions also vary
The IMP Journal
Volume 2, number 3
25
Table 1
Construction costs: comparison between Sweden and the U. S. (U. S. D ´000) (taken from
Bengtson 2003 )
Materials
and
labour
Concrete
Brickwork
Steel
Lumber
Thermal
insulation
Roofing
Doors, windows
Drywall, ceilings
Stone, tiling etc.
Carpeting
Parquet flooring
Paintwork
Acoustic
boards, etc.
Bathroom
equip., etc.
Kitchen
cab.,
closets
Appl., kitchen,
laundry
Elevator
Plumbing, ventil,
control equipm.
Electrical install.
Total
Index
concrete
Swedish
concrete
Swedish in U. S.
concrete
American
wood
American
271
44
25
13
320
58
30
18
145
29
18
21
9
17
40
1
164
10
15
66
32
23
11
8
27
1
23
70
12
26
9
14
11
2
7
31
56
7
17
11
-
1
20
38
23
8
3
10
12
5
12
15
27
16
13
23
24
27
24
32
72
41
75
40
73
65
26
717
100
48
820
114
60
578
81
29
469
65
between a timber and a concrete framed
building. In the designing process there
are two types of organizational resources
– architects and technical consultant – that
are of special interest. In the next two subsections we will have a closer investigation
of their interfaces with the frame.
The Interface between the Architect and
the Frame:
Architects
have
a
rather
independent position in the Swedish
construction network. The architect’s
knowledge and design resources are used
to give the building its aesthetic
appearance and this happens before and
sets the boundaries for the work that
needs to be conducted by other parties in
the building project. For example, it is
common for commissioners to arrange
architectural competitions to which certain
architects are invited. The prize for “best”
design is, of course, the assignment.
Compared to the interaction between the
construction firm and sub-contractors,
such as the consulting engineer, the
relationship between the architect and the
construction firm is more distant within
projects. This is because the majority of
the architects’ efforts based on its
resources precede the intense production
The IMP Journal
Volume 2, number 3
phase in which most interaction takes
place.
When the first building projects
using the timber framing technology in
Sweden were conducted, it became
apparent that the “independent” architects
were also adapted to the fact that their
main customers, the large construction
firms were heavily directed towards
concrete frames. When comparing
Swedish multi dwellings with American
ones, the Swedish buildings are generally
speaking, narrower so that each
apartment has windows in several
directions whereas the American buildings
are larger, often covering a whole street
block. The fact that these design
preferences were created in different
resource sub-networks, and thus based on
different interfaces to the frame, was not
anything that most had considered.
However, as the Swedes constructed their
first timber houses using Swedish design
criteria, resulting in tall and narrow
buildings, problems arose related to
stability for unexpected horizontal wind
forces, which had not come about with a
more American design. Being used to and
adapted to concrete, the architects were
not aware of the resulting effects on such
aspects as stability and spread of sound in
light construction, and could therefore not
make a well thought out evaluation of
design in relation to function based on
timber conditions.
In order to use the new frame
material the architects needed to adapt
both in terms of designing the building and
also in how they combined different
materials and components with each
other.
The Interface between the Technical
Consultant and the Frame:
A consulting engineer competent in
making all technical calculations for the
building is always assigned to a building
project. The technical calculations are
required so the construction firm will know
how to construct the building in
accordance
with
all
technical
requirements.
Besides
load-bearing
capacity, the consulting engineer also
makes sure that the building will function
according to stability and acoustical
26
requirements, which are given in an
acoustic
standard.
The
consulting
engineer also ensures that the system
conforms to the fire safety requirements,
which in Sweden can be found in the
building code BBR 94 that refers to the
standard time-temperature curve.
It became apparent to the technical
consultants that the interface between
concrete frames and their competence
area had resulted in several adjustments
that made their task more difficult when
working with timber. Along with the
difficulties in stabilising the tall and narrow
buildings, they ran into difficulties in sound
testing. From a legal perspective there
were no problems in reaching an
acceptable acoustic environment in the
buildings. However, the scale used for
measuring sound was based on concrete
noise and the frequency in which timber
noises occur was lower and thus not taken
into consideration in the standard. Until a
new standard could be accepted, the
consulting engineers had to test and
decide on their own what spread of sound
could be considered acceptable, knowing
that
an
uncomfortable
acoustic
environment could have a negative effect
on the technology’s survival.
A third area that made the
consulting engineers’ work on the maiden
projects difficult concerned fire testing.
The investigators who made comparisons
between
the
American
production
technology using timber and the Swedish
concrete-based technology gave the
flammability
of
timber
special
consideration and checked costs for fire
insulation in the USA. The fire safety
requirements stated in BBR94 in Sweden
were almost identical to the American
requirements, but despite this, the fire
tests that were conducted showed that
almost double the amount of gypsum
would be needed. A first conclusion drawn
by the engineers was that “it burns better
in Sweden than in the U.S.” Later,
however, because the consequences of
this difference were rather devastating
from a cost perspective, a more thorough
investigation of the real reasons for the
difference was conducted. It showed that
the American testing had been made a
long time ago, and that changes in
The IMP Journal
Volume 2, number 3
components had been made since then.
The American construction would thus be
unlikely to pass their own test if they were
retested. The investigators also found
differences in testing procedures. The
American fire tests were, for example,
made with elements loaded from one side,
whereas the Swedish test elements were
loaded double-sided and therefore more
vulnerable to fire. Taken together, one
finds small and rather coincidental
differences in testing procedures, etc., that
resulted in negative economic effects in
the Swedish network.
In order to use the timber as a
frame material the technical consultants
had to adapt their knowledge, their testing
procedures and their working processes.
There were even reasons to change the
national safety requirements
Framing Material and the Construction of a
Building
The production of concrete frames
can take place either on the construction
site or in a factory. A site-made concrete
frame is constructed in several steps. After
the ground has been prepared, the
shuttering for the first storey frame is built
and concrete is poured into it. The
concrete must then dry for some time
before the same procedure can follow for
the second storey and so on. A
prefabricated frame is constructed on
large moulding tables from which it is lifted
after a short drying time. When enough
elements have dried they are transported
to the site and lifted onto the building one
by one. Properly made sections are vital to
reach good strength and bearing capacity
for a prefabricated frame of this type.
Whereas both methods have their pros
and cons, the choice of either method is
normally decided on in the planning phase
of the building project, based on such
considerations as time schedule, time of
the year, availability of construction
workers, etc.
A great deal of knowledge on how
to produce concrete frames has emerged
through the little more than 100 years that
the material has dominated the application
in Sweden. The technology had been able
to mature during the production peak
caused
by
the
so-called
“million
27
programme”. The programme was based
on a resolution in 1965 that was passed by
the Swedish Parliament on a production
goal of one million new apartments to be
produced in ten years. The million
programme declaration made it worthwhile
for large contractors to invest in factories
and heavy machinery to make their
production more efficient. Great efforts
were made to make the interface between
the frame and the production process
more efficient, and to ease the interface
between design or architecture and
production. The houses built during that
era were often claimed to use “crane
architecture” since the design was made
to ease both scale production and the
production process at each construction
site. As already indicated, much was
learned during the million programme era,
but many mistakes and shortcomings in
different features became apparent
several years after completion of the
buildings.
If we temporarily move away from
the concrete frame and instead consider
the interface between a timber frame and
its production process we find, by looking
at the US network, that it is somewhat
different. Since the timber frame is a light
construction much less construction
equipment and machinery is needed (no
cranes, for example), and there is less
waiting time involved. The lightness of the
construction
also
means
simplified
foundation laying and access roads during
construction in comparison to concrete.
The technology of site-made timber
construction is most common in the USA.
A great deal of manpower (nailing power)
is needed for this type of frame
construction. The whole frame can,
however, be raised in a few days. Much of
the construction on a concrete building is
completed as soon as the frame has been
constructed, but many “layers” of
insulation, gypsum board, etc. are still
needed in a timber framed building. This
makes time tables and organisational
procedures based on the technology for
one framing material difficult to translate
and use for the other.
The frame is also important for the
production process of the whole building,
and must be considered if the entire
The IMP Journal
Volume 2, number 3
project is to be efficient. Experience with
concrete as a framing material has created
knowledge about routines to minimise the
time loss in production caused by such
things as drying, without decreasing
quality. A modern Swedish building project
is organised around careful time
schedules showing when deliveries are
due, when each production activity must
take place, etc. Thus typical features of
concrete production have been built into
other production processes at the
construction sites, as well as into the
activity structure of the project as a whole.
The activity structure of the building
project is thus arranged according to the
frame assembling on the different storeys,
so that surface materials and other
finishes might be made on the first storey,
while installations are made on the second
storey and frame assembling or moulding
on the third. The specialisation of the work
done by the workforce can thus be rather
high in large buildings, as the buildings are
constructed in stages related to a cycle
with a particular circulation period. The
workers move from one storey to the next
and continue with the same type of activity
there.
Returning to American site-made
timber construction, we find a different
activity pattern from the one found on a
regular Swedish construction site. The
American construction workers are
carpenters specialised in the different
production phases. For example, there are
some carpenters (often young, strong and
willing to travel) who nail the frame
whereas there are others who do more of
the finishing parts. A timber construction
also enables the workers to work on all
storeys at once since the whole frame is
assembled in just a few days. Thus all
installations in the building are usually
made at once instead of divided by storeys
as they are in a concrete construction.
Another cost advantage with timber in the
USA is that the same materials can be
used in interiors as in the frame thereby
reducing overheads. In order to identify
some more specific interfaces we will now
examine the interface between the most
important organizational resource, the
construction firm and the timber frame.
28
The Interface between the Construction
Firm and the Frame:
Until the turn of the twentieth
century, construction work was a
handicraft in which all components and
materials needed, such as windows and
paint, were produced on the construction
site. Today construction firms can best be
described as central nodes or as a
coordination resource that brings together
products, materials and skills from a large
set of specialised companies. Several of
today’s large construction firms (such as
Sweden’s largest construction firm,
Skanska) became interested in the
construction of residential homes in the
1950s and 1960s, after the first
“industrialisation” of the construction work
which started to become more rationalised
and specialised. These companies had
their background in construction of the
state-owned railroad system, which started
around the mid nineteenth century, and in
the building of roads, bridges and other
infrastructure projects (dams, etc). With
their resource base and their knowledge
from heavy road construction they made
important contributions to the continued
efforts to mechanise construction work.
Their efforts were also further supported
by a special fund for machine loans that
was started in 1952, and in the passing of
unitary building regulations in the early
1950s. This background assisted the use
of concrete as a basic building material.
Most of the large construction firms are
still devoted to both house building and
heavy construction work such as road and
railway construction. At times it is argued
that this mix of operations gives the large
firms the opportunity to move resources
from one area to another, or from one
region to another, in relation to changes in
demand (Nordstrand, 1993, p. 138).
Furthermore, they can continue to build on
their earlier background for the use of
“heavy” construction methods (such as
using concrete for frames) in both
application areas.
Construction firms´ costs for
components,
materials
and
subcontractors are estimated to average
around seventy percent of total production
costs. Hence, as indicated above, the
competence needed by the construction
The IMP Journal
Volume 2, number 3
firms consists mostly of “combining skills”,
both regarding materials and components
and in regard to different sub-contractors
and suppliers. Many sub-contractors and
suppliers are (or at least have been)
smaller local companies located in
different regions. This is one of the
reasons why the construction firms have a
decentralised organisational structure, and
perhaps especially so on the purchasing
side. The construction companies have
learned to work decentralised on a large
number of different locations within the
large company. This structure indicates
that most of the skills must be spread out
in the organisation so each building project
works efficiently. All these features
enhance the use of one dominating
production design. This is further
strengthened by the fact that most of the
purchasing activities are done within single
projects despite attempts to centralise
some of the purchases to reach better
long-term supplier deals. Relationships
with suppliers are often tight within
building projects since many technical and
economic
considerations
must
be
discussed and handled throughout the
production phase. Between projects,
however, most relationships are handled
at arms length because of the strong
reliance on tendering procedures for each
project.
Looking at the American situation,
we see a rather different organisational
interface. Whereas multi-family houses in
Sweden were built by general contractors
operating in the whole country, the large
American contractors concentrated on
projects of a particular kind, such as
offices or large scale industrial facilities,
and seldom in housing production. Thus
the construction companies active in the
housing sector differed between the two
countries with a dominance of large
construction firms in Sweden and small
firms in the USA. The small American
firms have been noted to “display a big
capacity for survival, by virtue of their
flexibility, good local knowledge and small
overheads” (Miller and Stone, 1995, p.
20). There were also other differences:
Whereas Swedish general contractors had
a large number of construction workers on
their payrolls, American companies largely
29
relied
on
sub-contractors.
Another
difference concerned unionisation, which
was almost a 100 per cent in Sweden, but
low in the American housing construction
sector. (There were at the time of the
investigation of the American conditions
24 nationwide construction unions in the
USA. The unions, among other things,
define which tasks each trade is allowed to
carry out.) In summary, the resources of
the relevant construction companies were
not at all designed in such a way that they
suited the use of timber frame. Instead
they were more or less perfectly adapted
to the use of concrete as a framing
material.
Framing Material and the Design and
Production of other Components
The components or building
materials needed for the construction of a
building can be sorted into five groups: 1)
frame
materials,
2)
supplementary
materials, 3) interior materials, 4)
installation materials, and 5) expendable
supplies. A large portion of these
components and materials are currently
produced
in
process
industry
characterised
by
capital
intensive
production facilities, indicating that there
are scale effects to consider. The scale
economies of components together with a
reliance on a tendering system have led to
“batch production” and the use of
standards. Standard components are thus
bought for the specific building projects
and must be adapted on the sites to fit the
design and requirements of the specific
building. Hence, even if the production of a
building normally is in a project form and
thus “unique” to a certain extent, the
production of its different components are
made with “standardised interfaces”. The
term standardised can be misleading if
one believes that the components are
designed to fit equally in all situations. On
the contrary, the standards are based on
the general conditions faced in a specific
use situation.
In the Swedish case, the general
use situation until around 1994 consisted
of building projects in which a concrete
frame is used. Over time, the standardised
interfaces became adapted to these
conditions, since the requirements put on
The IMP Journal
Volume 2, number 3
such things as pipes, board or insulation
material differ depending on the framing
material that is used. (This phenomenon
has been termed by some researchers
“collective adaptation”, see for example
Dubois and Gadde, 2002.) The use of
standards to reach scale economies often
makes it difficult to engage suppliers in
development efforts. For example, the
contractor for the early Swedish building
projects using timber framing tried to
engage both plasterboard producers and
insulation suppliers in their development
trials. These parties were, however,
sceptical of making any large efforts
before any substantial change of framing
technology had occurred in the Swedish
construction network. It became clear
through these change efforts that the longterm Swedish attempts to reach a general
construction standard with standardised
interfaces led to a structure optimised
towards the included resources. Changes
in one resource interface in this structure
led to difficulties in several other
interfaces. We will now investigate in more
detail the interface between three
organizational units involved in the design
and
production
of
materials
and
components used in the construction of a
building and the frame material.
The Interface between the Supplier of
Framing Materials and the Frame:
The supply of framing materials in
a concrete project is made within a highly
specialised structure based on concrete
technology. The first two timber frame
building projects, conducted after the legal
change in Sweden in 1994, were made in
Linköping and Växjö and bear witness to
much more trial and error, of trying to find
ways to organise a functional supply
structure. Despite the fact that the same
construction
firm,
Skanska,
was
responsible for the construction of both
buildings and the fact that they were
parallel in time, different technologies were
tested and hardly any experiences were
shared between them. The project in
Linköping was an attempt to copy as much
as possible of the American site-made
construction technology while the Växjö
project was linked to technical research
efforts on the timber material and tried out
30
a technology for prefabrication of timber
elements.
The supply of lumber for the frame
was not considered an important aspect in
the Linköping project. They were inspired
by the Americans, who use standard
lumber of one type (2 × 4 inches), varying
the amount of lumber put next to each
other and the width of span between
girders. The lumber for the project was
delivered from a local manufacturer. Some
of the other components and materials
needed for the project were viewed as
central to the quality reached. For
example, they had problems finding a
good board for the floors, a crucial aspect
for both handling moisture during
production and achieving well functioning
working conditions in the building. An
American board, developed and used for
this very purpose, was therefore imported,
together with the glue that the Americans
used for attaching the boards to the joists.
In the other project in Växjö, the
production management aimed to continue
the efforts with more prefabrication even
though the new framing material was
tested. This project had been initiated by
one of Sweden’s large forest owners’
societies, Södra Skogsägarna, and was
located next to their head office by the
lake Växjösjön. Neither they nor Skanska,
however, had the necessary resources,
such as factories for production of timber
elements. Therefore a solution with a field
factory made of reused building material
was tested. The elements (inner walls,
outer walls and floor components) were
produced in the factory and then
assembled in accordance with the
procedures for a concrete building. The
lumber needed to make the elements was
delivered from Södra’s own saw mills.
There were some special demands on the
lumber that was delivered but most efforts
were made in relation to logistics. The saw
mills were not used to delivering such
small quantities (deliveries were made by
apartment), or of a specific quality, or in
exact dimensions. Their standard delivery
was a bulk product for foreign markets
sold in large quantities on an international
spot market. Thus, the supplier of the
timber frame did not have all the resources
needed to function in an efficient way in
The IMP Journal
Volume 2, number 3
relation to the construction site. This is not
unexpected as they are newcomers in this
production network.
The Interface between the Suppliers of
Components and the Frame:
The interface between a concrete
frame and the suppliers of components is
largely based on standards. The ambition
of construction firms to be independent
and to be able to always look for the
lowest price available at that moment,
combined
with
their
decentralised
organisational structure, influences the
interfaces between them and their
suppliers. It is risky for the suppliers to
invest in long-term adaptations towards a
certain construction firm. The next time
they do business with the construction
firm, they will most likely be dealing with
another purchaser without the experience
of their former joint accomplishments.
They might also be bidding for a standard
product knowing that they have a higher
priced but better adapted solution to the
tender.
The
decentralisation
of
construction firms thus leads to difficulties
in the transfer of knowledge not only within
the construction companies, but also
between them and various suppliers.
Much of the experience gained and the
knowledge needed in the industry has
become institutionalised into building
regulations, standardised products and
production processes. It has also been
built into standardised organisational
interfaces
or
standardised
“role
descriptions”, leaving little room for
specific counterpart changes in the
interaction patterns between a contractor
and a certain type of supplier or
subcontractor. Hence, the expectations
put on each party are largely given.
For a long time the suppliers to the
large construction firms in Sweden
operated in an environment that
demanded efficient components in a
setting in which concrete technology was
by far the dominant regime. Consequently,
their products improved over time and
became better adapted to this technology,
i.e. to fit as well as possible into most usesituations at the building sites. This is also
the reason why gypsum board producers,
insulation suppliers, etc. were rather
31
unwilling to “de-invest” in all these
experiences and “re-devote” themselves to
timber
technology
efforts.
These
producers and suppliers had already
invested a great amount of effort into the
interfaces combining user knowledge and
experiences of construction firms with their
own experiences and knowledge of
component production. If a supplier’s R
and D expenditures for decades were
devoted to making the interface between
concrete frames and their insulation
product more efficient, it is rather obvious
that a request to invest resources into the
development of a new interface is met with
some scepticism.
The Interface between the Supplier of
“Systems” and the Frame:
Looking at the organisational
interfaces between the construction
companies and system suppliers, one
finds two different interaction patterns if
comparing the Swedish and the American
networks. American construction firms
together
with
subcontractors
and
installation firms make up what can be
referred to as informal networks, which are
rather stable over time. As explained by
Miller and Stone (1995, p. 21), “Most often
the general contractors operate with a
chosen group of subcontractors. On
average 20 percent of projects are put out
on bids, and then only to check price
levels.” The more distant relationships
between the parties in Swedish projects
was probably an economic drawback due
to lack of communication and sharing of
risks and outcomes. The investigations by
the Swedish construction companies of
American timber technology had found
that costs for system installations could be
reduced using timber framing due to
simplified installation procedures and a
more
flexible
production
structure.
However, they discovered in the
production phase for the first timber
projects that the Swedish system suppliers
had raised their prices instead of lowering
them, due to perceived risk and to their
insecurity with the new technology. Later it
turned out that it was also difficult to
achieve cost reductions on a more longterm basis due to differences in working
routines and safety requirements, which
The IMP Journal
Volume 2, number 3
had been developed in the Swedish
setting with its concrete framed buildings.
The Economic Aspects of Framing
The
combinations
of
organisational and technical interfaces that
have been described above are vital for
the economy of each actor with an
interface to the frame. Our description has
shown that far more resources have an
interface to the frame than one might
believe at first glance. One important clue
for working with the wood frame
reintroduction and its economic effects is
to identify these relevant resources and
the actors controlling them. But when the
investigators
considered
the
cost
differences, they did not know about all the
time and effort that was required of the
different parties (contractors, installation
firms and authorities among others) to
build up the interfaces that made it
possible to provide the low cost structure
present in the American network. Timber
frame installations were not that much
cheaper per se, but had become so
through testing, documentation, product
development, creation of skills and of
routines on behalf of the involved actors.
Another angle to the same example is
whether any cost savings that could be
reached in the Swedish network using the
American procedures would benefit the
system supplier, the construction firm or
both. Skanska was the actor investing
most in the new framing technique and the
one taking most risks in the reintroduction.
However, by agreeing to share any cost
savings that could be reached they might
have had a better bargaining position to
get other parties, such as the system
suppliers, involved in and dedicated to the
development.
There are many changes in the
involved parties between individual
Swedish building projects but few in how
the parties work together. Still, there are
clear long-term relationships in the
construction network in terms of working
together over time, in finding patterns and
routines of how to work together, of how to
solve problems, etc. The strong wish to
maintain their “independence”, however,
creates a need to standardise all physical
interfaces. All components have been
32
standardised, not randomly, but to be
efficient relative to the use of some
specific frame technology. A standard is
always built on some given other
interfaces.
The difficulties involved with the
attempts to introduce timber framing in
Sweden give a good picture of the
collective learning taking place in a
network. Each material and component as
well as the production unit in which it is
produced are designed to function in
accordance with other materials and
components in the larger technological
resource structure from an economic point
of view. In the component production in
the case, the resource structure on an
aggregate level became used to and
adapted to a certain scale of production,
and adjustments in similar but originally
non-identical components were made to
reach even larger scale advantages. Over
time, interfaces were also built up between
these components and the production of
the buildings on the production sites. It is
therefore not surprising to find that there
was a lack of certain components and
materials in Sweden that were suitable for
timber framing, and that the costs for
adjustments and trials related to the use of
unknown components were high. But there
is an even more important conclusion to
make. The design of the physical
interfaces was affected by economic
considerations. There are not just physical
interdependencies between the different
interfaces but also a large number of
economic interdependencies. Over the
years the physical interfaces were adapted
to find economically efficient solutions in
both production and use. Thousands of
technicians and others over the years
developed better solutions from an
economic point of view.
The economy for the actors in the
US “wood” network as well as in the
Swedish “concrete” network was in this
way a “construction” that was based on an
intensive interaction over many years
where the choice of frame had been one
important ingredient. It was perhaps not
the most important component in the
building but central enough to have
influenced a large number of physical and
organizational interfaces. It was not easy
The IMP Journal
Volume 2, number 3
suddenly to try to take away the “concrete”
as well as to introduce the “wood”! Every
construction project consists of a rather
tight network of companies that needs to
be coordinated and interrelated in an
efficient way. Each party must know what
the others are able to do and how to do it
in an economical way. The role
descriptions given to each party are
therefore rather inflexible and based on
institutionalised and economised roles that
are fixed within a certain context but that
may vary between contexts. This fact
becomes apparent in the difficulties
construction companies experience when
attempting to internationalise business,
except for specific construction such as
large bridges or other large constructions.
The conclusion of the description
and analysis is that production of the
frame material developed over the last 100
years, and that this is the case in both our
“test group”, the Swedish network, and in
the group with “non-restricted” conditions,
the US network. The production of the
frame developed both in terms of the
production structure of the frame itself as
well as in terms of how the production of
the frame is handled at the site. We have
argued that other components used in
building houses have been adapted to the
use of a specific material in the frame.
This also affected, at least in certain
cases, the way these components are
produced. Hence, what has been shown is
that the specific framing material, through
adaptations in the interfaces with all the
other technical attributes, has become
embedded into both the use of the specific
features of these others as well as into a
number of production processes both
before and on the site. And all of these
adaptations were made for economic
reasons.
4. Final Remarks
The reintroduction of timber into
the Swedish construction network and its
use situation turned out, despite the
believed ease of the task to be quite a
difficult and time consuming task. Neither
of the two early timber framing projects,
located in the cities of Växjö and
33
Linköping, was an economic success.
Several shortcomings of both a technical
and an economic nature had to be dealt
with in the projects and in the continued
timber framing efforts. (For more detailed
information on the Wälludden project see
also Hansson, 1997 and Persson, 1998).
This can be explained using a network
perspective. The change effort in the
Swedish context was confronted with an
already established network of resources
and activities where the existing resource
interfaces were part of a constructed
economy with certain logics and
interaction patterns on behalf of the
involved parties. Hence establishing the
timber framing technology would imply a
reconstruction of this economy that had
evolved during the last 100 years. Such a
reconstruction will demand great effort and
take time. This is primarily so because it
involves a large degree of deconstruction
– of moving away from a well functioning
and well developed economic structure
towards something else that might, or
might not, generate larger revenues for
some of the involved actors. Some parties
in the construction network control
resources, which made it interesting for
them to move towards the change. Timber
suppliers were, for example, presented
with an opportunity to sell a more adapted
product on their national market. Other
parties, such as several component
suppliers, had invested much in the
already established interfaces and saw the
efforts
towards
timbering
as
a
“disturbance” of this development and thus
more as a threat.
The timber framing change was a
simple change from the perspective of
adoption of new technological knowledge.
However, the framing application in the
already established construction network
is, as has been described in the case, a
much
embedded
function
with
dependencies on a wide set of resources
in housing design and in housing
production. Adoption into a structure with
thick and multi-levelled interfaces is
demanding, especially since there is a gap
between design and production as in this
case. In all use situations, such as the one
in the Swedish construction network, there
is not one given economic potential for a
The IMP Journal
Volume 2, number 3
certain technology or a certain resource.
Rather, the technological option and,
especially, its economic potential are
created through an interaction process by
the parties in the network. The success of
this interaction process depends on the
use of pre-existing resources and resource
interfaces. What then becomes interesting
to discuss is the way the already
established resources and resource
interfaces are working, and the ability to
forecast economic effects of adoptions
and reconstruction based on the
knowledge embedded into this network.
Another interesting aspect is the
process-driven character of innovations. A
certain use situation is the result, or mirror
of earlier learning about use potentials of
certain resources and technologies in
combinations. However, this mirror just
reflects the results, it by no means gives
anyone the full story or complete
knowledge of its construction. Changing
one small piece – in this case the framing
material – in the use structure shows that
this mirror reflection is far from enough.
The knowledge that has been built into the
structure (into the various resources and
resource
interfaces),
which
lies
underneath the reflection will be and
needs to be activated, understood,
questioned and tested based on the new
piece. A functioning economy based on a
certain technology is thus achieved
through interactive and stepwise efforts
rather than given at a certain moment.
Hence, economy is constructed through
time based on actions that result from
various pieces of network knowledge. All
earlier innovations and technical artefacts
and the way they are related are part of a
particular used knowledge set. In this way,
knowledge of economic potential has
become embedded and manifested in a
physical structure as well as in a number
of use-processes, not just within single
users but also across actor boundaries.
Hence, the network consists of artefacts
and processes built on an economic logic
that in turn is part of the used-knowledge.
As a consequence, knowing the functional
potential of a certain innovation is not
enough in an economic setting. The
innovation must also be adopted to and
built
into
technical
artefacts
and
34
organizational processes stretching over a
number of firm boundaries in order to gain
a particular economic potential.
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Stockholm.
Miller, T., & Stone, G. (Eds.), (1995).
Multifamily Housing in the U. S. A
and Sweden. A Comparative
Study. The Swedish Federation for
Rental
Property
Owners,
Stockholm.
Johannessen, J-A., Olsen, B., & Lumpkin,
G. T. (2001). Innovation as
newness: what is new, how new
and new to whom? European
Journal of Innovation Management.
4 (1), 20-31.
Norén,
J.
(1996).
Brandklassade
träkonstruktioner i U. S. A, Kanada
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Några
direkta
jämförelser.
Trätek
Rapport
P9609078.
Östman, B. (1997a). Brandsäkra trähus –
ett
Nordic
Wood
projekt.
Slutrapport – fas 1. Trätek Rapport
P9702014.
Östman, B. (1997b). Fire Design of Timber
Frame
Buildings
–
present
knowledge and research needs.
Paper presented at the COST
Action E5 Workshop Fire Safety of
Medium-Rise
Timber
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Residential
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VVT,
35
Finland,
June
1997.
Trätek
Rapport L912103.
Östman, B. (1998). Träteks FoU-projekt
1997.
Resultatöversikt.
FoUområde 7 Träbyggnadssystem och
byggprodukter. Trätek, Rapport
L9801004.
Persson, S. (1998). Wälludden trähus i
fem våningar: Erfarenheter och
lärdomar. Rapport TVBK-3032.:
Department
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processual
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Management Science. 32 (5), 560607.
The IMP Journal
Volume 2, number 3
36
Distribution Research And The Industrial Network
Approach
1
Lars-Erik Gadde a and David Ford b
a
Professor of Marketing, Division of Technology Management and Economics, Chalmers University of Technology,
Gothenburg, Sweden, [email protected]
b
Affiliate Professor, Euromed, School of Management, Marseille, France, [email protected]
Abstract
This paper has two aims: The first is to show the linkages between the early distribution literature and some of the
central assumptions and building blocks of the industrial network approach. The second aim is to illuminate how
studies of current distribution issues could benefit from industrial network thinking and point out the conceptual
and managerial implications of taking a network perspective on distribution. The paper presents a review of some
of the basic building blocks of the early distribution literature. In particular it illuminates how central aspects of
current industrial network thinking can be traced back to the systemic approach to distribution presented by Wroe
Alderson and others some fifty or more years ago. The paper compares central elements of the distribution
literature and the industrial network approach and discusses the ways in which they see the world similarly and
differently. The paper shows how mainstream distribution literature drifted away from its previous holistic
perspective towards focussing on more narrow issues without considering how these issues relate to the totality
of distribution. The paper then presents observations on current distribution practice showing that distribution
reality has become “network-like”. The paper concludes that it would be fruitful to analyse this reality with models
and concepts from industrial network theory. In the final section the paper examines some of the consequences
of a network view of distribution.
Key Words: Distribution, Networks, Channels, Alderson.
1. Introduction
The aim of this paper is twofold:
The first is to show the linkages between
the early distribution literature and some of
the central assumptions and building
blocks of the industrial network approach.
We hope that this analysis will highlight
some things that we may be able to learn
from earlier literature in order to benefit
our network research. The second aim is
to illuminate how studies of current
distribution issues could benefit from
industrial network thinking and point out
the
conceptual
and
managerial
implications
of
taking
a
network
perspective on distribution.
The study of distribution and its
role in the economy is one of the important
precursors of current management
thinking. The literature that emanated
1
from the early studies of distribution
provided insight into the scale and
interconnections between the flows and
transformations
that
constitute
the
substance of economic life. This literature
also highlighted the nature and effects of
the
relationships
between
different
individuals and groups in the economic
landscape and developed ideas about the
atmosphere of these relationships in terms
of power, expectations, conflict and
collective action.
Distribution scholars
also placed considerable emphasis on
innovation in terms of the evolution of
distribution as a whole and of changes in
the operation of individual companies
operating in the economic landscape.
Therefore this early literature on
distribution has been of considerable value
in the attempts to conceptualize and study
An earlier version of this paper was presented at IMP Asia, Phuket, December 2007. Following review, a revised version was
presented at the IMP Journal Seminar at Lancaster University, May 2008 and a final version was submitted following further
review. Grateful thanks to four reviewers.
The IMP Journal
Volume 2, number 3
what happens in what are now commonly
called business networks.
Over time, however, this holistic
view of distribution was replaced by more
specialized studies aiming at closer
examination of more narrow distribution
issues.
This narrower distribution
channel view brought a focus on the
manufacturer’s situation in the economic
landscape. It interpreted distribution as
the responsibility of manufacturers and
saw the form of distribution as the
outcome of manufacturers’ decisions.
Distribution became of one of marketing’s
“Four P’s”.
In recent decades the
emphasis on transaction cost and supply
chain management has further increased
the gap between current approaches and
the early distribution literature.
However, there are lots of studies
and evidence from practice that highlight
that the empirical reality of distribution has
evolved and continues to evolve. This
reality appears to be rather different from
the situation portrayed in the mainstream
literature on distribution management and
to be rather network-like in its form.
We begin the paper with a short
résumé of some of the basic building
blocks of the early distribution literature. In
particular we try to illuminate how central
aspects of current industrial network
thinking can be traced back to the
systemic
approach
to
distribution
presented by Wroe Alderson and others
some fifty or more years ago. We then
compare central elements of the
distribution literature and the industrial
network approach and discuss the ways in
which they see the world similarly and
differently.
Thereafter we show how
mainstream distribution literature drifted
away from its previous holistic perspective
towards focussing on more narrow issues
without considering how these issues
relate to the totality of distribution. We
continue by presenting some observations
of current distribution practice showing
that distribution reality has become
‘network-like’. We conclude that it would
be fruitful to analyse this reality with
models and concepts from industrial
network theory. In the final section we
discuss some of the consequences of a
network view of distribution.
37
2. The Early Distribution Literature
The Pioneers
One of the pioneers in the study of
distribution classified all business activity
in three main categories: extractive,
manufacturing and distributive (Sparling
1906). In his view, marketing should be
considered to be an element within the
much broader field of distribution.
Sparling defined marketing as the “the
commercial processes…concerned with
the distribution of raw materials of
production and finished output of the
factory” (quoted in Gripsrud 2004:192). It
is worth noting also that marketing was
conceived of as encompassing the whole
of what would be referred to as the “supply
chain” in current terminology – it did not
start at the point of a single manufacturer
(Gripsrud 2004). A similar view of the role
of marketing in the 1910s is expressed by
Weld (1917) who defined marketing as
“the services that must be performed in
getting commodities from producer to
consumer” (p. 317).
These services
required
a
number
of
marketing/distribution activities to be
carried out.
These activities were
identified
as
functions
of
marketing/distribution originally introduced
in Shaw (1912).
Clark (1923)
systematized these functions, building on
Sparling’s idea that they involve selling
(demand creation) as well as buying
(assembly of goods). An examination of
the early literature shows a strong interest
in the organization of these functions
performed by different companies in
assembling,
storing,
bearing
risk,
financing,
rearranging,
selling
and
transporting products (Cherington, 1920).
This functional view dominated distribution
and marketing for long time and has been
described as the concept that contributed
most to the development of marketing as a
science (Hunt and Goolsby 1988).
Wroe Alderson was the great man
involved in making the study of marketing
and distribution scientific. Alderson was a
practitioner who ran an advertising agency
and under these circumstances his
contributions to the science of marketing
must be considered remarkable. Thus far
The IMP Journal
Volume 2, number 3
he is the only scholar who really tried to
develop an all-encompassing theory of
business exchange.
We will illustrate
some of the most obvious inspirations
from Alderson’s work for some of the
fundamental assumptions underlying the
industrial network approach.
The
contributions are discussed under five
headings: the nature of business
exchange, a holistic view, resource
heterogeneity, channel relationships, and
channel dynamics.
The Nature of Business Exchange
Alderson contributed greatly to the
analysis of the utilities originating from
distribution/marketing functions.
He
refined the concepts of time, place and
form utility and showed how variations in
the levels of these utilities impact on value
generation
for
customers.
The
understanding of this interplay required
extensive cost and revenue calculations
because various types of business
exchange are associated with different
economic outcomes. The following quote
illustrates Alderson’s scepticism towards
established economic theory – a
scepticism later shared by researchers
involved in developing the industrial
network theory:
“Economic analysis of the
factors in price equilibrium
generally rests on the
assumption that exchange
transactions are costless.
Marketing analysis directed
towards an understanding of
trade channels must begin
with a recognition of the
costs involved in the creation
of time, place and form
utility”. (Alderson 1954:8)
The actual levels of time, place,
and form utility depend on how distribution
functions are undertaken and where they
are allocated.
Therefore, a central
research question for Alderson and others
concerned the division of labour in the
marketing system. Their investigations
dealt with questions such as which
activities should be retained by producers
or delegated to intermediaries and when
38
producers and intermediaries should
integrate themselves into a single
organisation.
These questions were
frequently addressed in terms of the
“Discrepancy of Assortments”, or the
group of goods and activities that it is
logical to combine at each level in a
channel. For example, it is logical for a
manufacturer to produce an assortment of
products based on a limited number of
process technologies, but with a variety of
applications. It would be logical for a
wholesaler or a retailer to assemble a
quite different assortment of products from
many different suppliers that enabled their
respective customers to have an
appropriate range of choice (Craig and
Gabler 1940).
A Holistic View of the World
Alderson built further on previous
holistic approaches to distribution. His
main argument is that the primary function
of distribution is to connect the
“‘technology of production” with the
“technology of use”, since what is
exchanged in the economic landscape
“appears at very different settings at these
two levels” (Alderson 1965:12). In his
examination of the distribution functions he
concludes that a marketing channel is “a
system of action of which individual firms
are elements” and the activities of one firm
are “supplementing the activities of other
firms”. Consequently, the more complex
the marketing task becomes, the more
necessary it will be for a channel to
operate as an integrated whole in order to
be efficient. Therefore, what Alderson
identifies as “coordinated action” is a
prerequisite for efficient behaviour, since
the utility-creating processes “cannot
function without sustained cooperation in
which each party knows what to expect
from its opposite number” (Alderson
1965:239).
Writers within the channel tradition
were strongly aware of the differences in
the views of individual companies, whether
producers, wholesalers or retailers about
the actions of others and of the channel as
a whole. In Alderson’s time channels were
not seen to be designed by any one
company, but to be the outcome of the
decisions, aims and interactions of many
The IMP Journal
Volume 2, number 3
39
companies. These characteristics of the
distribution reality are illustrated in the
following quote about the role of
middlemen or intermediaries – always a
central issue in distribution.
collusion imposing restrictions on the
market.
Such coalitions tend to take
different forms and be characterized by
variety in terms of the connection between
the firms illustrated by the following quote:
“The middleman is not a
hired link in a chain forged by
a manufacturer, but rather an
independent market, the
focus of a large group of
customers for whom he
buys.
After
some
experimentation he settles
upon a method of operation,
performing….functions
he
deems inescapable in the
light
of
his
own
objectives….He is subject to
much
influence
from
competitors, from aggressive
suppliers, from inadequate
finances
and
faulty
information, as well as from
habit”. (McVey 1960:62).
“...they
are
sufficiently
integrated to permit the
system to operate as a
whole, but the bond is loose
enough to allow for the
replacement or addition of
components……In cohesive
channels the firms think of
themselves as being highly
interdependent.
In other
cases
the
relationships
between firms are loosely
structured
and
fluid”
(Alderson 1957).
The intermediary is thus seen as a
nexus of influences from customers,
suppliers,
and
competitors,
which
constrains its behaviour. Nonetheless,
McVey concludes that many of his choices
are independent implying that “integrated
action up and down a channel is a rare
luxury” (op.cit.).
These conditions call for what
Alderson defined as coordinated action. In
the discussion of coordinated action
Alderson hints at both the role of
relationships and the roles of what may be
identified as networks, as follows:
First, he argues that coordination
may take place across the boundaries of
firms on the basis of the conclusion that
channel productivity rests in “making the
flow of goods semiautomatic even though
the successive units are autonomous”.
Thus ownership is not a prerequisite for
coordinated action.
Second,
he
declares
that
‘coalitions’ have been discussed in recent
economic literature with a growing
understanding
that
they
represent
essential cooperation for getting a job
done and not necessarily monopolistic
Alderson then acknowledges that
even in situations when relationships are
loosely structured and fluid there is
interaction and interdependency between
firms.
Resource Heterogeneity
Alderson is very specific when it
comes to the view of resources and how
they may be connected. He argues that
traditional market models tend to ignore
one of the most crucial features of
resources in the claim that ‘real’ markets
are imperfect.
Alderson criticizes the
basic assumptions of the established
market view by saying that:
“The economist finds it useful
for some purposes to use a
model of a homogeneous
market. This writer, for quite
different purposes presents a
model
of
a
perfectly
heterogeneous
market”.
(Alderson 1965:29).
In a perfectly heterogeneous
market, unique demands can be satisfied
only through unique supply (“meaningless
heterogeneity is being sorted into
meaningful heterogeneity”). This implies
that the function of the market is to match
unique demand and unique supply in
processes
where
adaptations
are
The IMP Journal
Volume 2, number 3
important. Alderson does not use this
word but argues that what is finally
delivered to the end customer is “a
relatively refined and specialised article
shaped to a type of need fitted to the
specific requirements of the individual
customer who buys it”.
Both the
heterogeneity assumption and the crucial
role
of
customer-supplier
specific
adjustments would later become central
building-blocks in the industrial network
approach.
Channel Relationships
A major pre-occupation throughout
the channel literature, both early and later,
has been with the political aspects of
channel behaviour. One of the central
issues is the conflicts that frequently occur
between companies since they both have
to simultaneously handle their common
interests and their self-interests. Another
issue concerns which type of company is
likely to become the most powerful and
take the position of “Channel Captain”
under different circumstances (Revzan,
1961, Grether, 1937, Balderston 1958). A
particularly important aspect of power and
conflict in channels that concerned
researchers is the tendency of companies
to form alliances with others to increase
their power over other types of channel
members (see for example the discussion
of countervailing-power in Palamountain
1955).
Alderson pointed out the problems
in channel relationships due to the
simultaneous occurrence of conflicting
issues and need of cooperation.
Cooperation is required since economic
processes require coordination between
marketing and other business functions.
Alderson’s conclusion was that the
cooperative aspect had not been
considered to the extent it deserved,
despite the fact that “cooperation is as
prevalent in economic activity as
competition” (Alderson 1965:239).
“The cooperative aspect of
economic behaviour has
been relatively neglected.
Economists
speak
of
competitive theory, of pure
and perfect competition.
40
There is no corresponding
development of cooperative
theory, no concepts of pure
and perfect cooperation”.
Acknowledging the fact that there
is a general recognition of the importance
of team work and the value of vertical
coordination, Alderson concludes that
“marketing cries out for a theory of
cooperation to match the theory of
competition” (op. cit.).
Channel Dynamics
Many
channel
writers
were
interested in the difficulties that a company
faces when trying to achieve change in a
channel.
Because of the basic
atmosphere of power and conflict in a
channel, reorganization often takes place
against the opposition of surrounding
companies. Researchers also tried to
explain the inertia of both individual
channel members and of channels as a
whole and their tendency to react
negatively towards change.
These
observations of opposition and inertia
pointed to the stability of distribution
channels and to the fact that most major
changes in distribution channels seem to
have its origin outside of the channel itself
and to be initiated by “outsiders” who do
not have a stake in the status-quo (Hoffer,
1951, Kriesberg, 1955, McCammon,
1963).
Alderson argued that industry
dynamics result from the efforts of
particular firms involved in “improving its
position within a system”. Similarly to
other scholars, he emphasises the role of
technological changes in these dynamics.
Technological changes may lead to
changed operations in distribution or
production which make new distribution
arrangements
possible.
New
arrangements often occur through the
entrance of newcomers and these
newcomers tend to deviate from existing
channel members.
Another important
issue is that adjustment to new conditions
is not instantaneous and this implies that
the current structure is always “a
compromise between past structure and
present requirements” (Alderson 1965).
Finally, Alderson concludes that “the
The IMP Journal
Volume 2, number 3
network in distribution can never come into
a final stage of equilibrium”. This is
because any state provides opportunities
for new firms and the entry of these firms
leads to new opportunities. In Alderson’s
terms these conditions are identified as
“proliferation of opportunities”, while in
other
contexts
they
have
been
characterized as “change breeds change”.
3. Distribution Research And
Industrial Network Approach
The
In this section we will analyse the
similarities and dissimilarities between the
concepts and models in early distribution
research that we have highlighted and
central features of the industrial network
approach:
The first issue concerns the holistic
view of the world and the nature of
business exchange. Alderson did not
explicitly use the term “network”, but it was
used by one of his colleagues when
discussing how single channels are
connected to form what he identified as
“channel groups”.
Breyer’s conclusion
was that “the channel group is obviously
more than a mere collection of individual
channels - it is in the nature a network”
(1964). This idea is essentially the same
as the notion of synergetic network effects
in
contemporary
industrial
network
modelling.
There are also striking
similarities between the two schools of
thought when it comes to Alderson’s claim
that a channel cannot be designed by an
actor
since
there
are
numerous
connections between huge numbers of
firms. There are also similarities when it
comes to the role of adaptations and the
idea that various configurations of
activities and division of labour will provide
diverse utilities and economic outcome. In
contrast, Alderson’s systemic analysis of
sorting (in terms of sorting out,
accumulation, allocation and assorting)
tends to constrain the analysis of channel
dynamics. This is because it seems to be
an underlying assumption that various
types of sorting are best performed by one
particular institutional level (wholesale,
retail etc).
When it comes to resource
heterogeneity and the subsequent call for
41
coordinated action in terms of adaptations,
the similarities between the approaches
are striking. It is difficult to see any major
contradictions in this respect since
Alderson’s view is that coordination cannot
be achieved only from the perspective of a
single company.
Perhaps
the
most
obvious
difference between the network and the
channels literature is in their perspectives
on the relationships between actors. The
channel literature concentrated on intercompany conflict, but the network
approach
emphasises
cooperation,
complementarity and coordinaton (Easton,
1992). As we have discussed above, the
mainstream channel literature did not
adopt Alderson’s view that researchers
concentrated too much on the conflict
between companies.
That literature
emphasised conflict and only considered
co-operation between companies as part
of their conflict resolution with others. In
contrast, the developing network literature
has followed the relationship literature and
emphasised the collaborative aspect of
business behaviour.
Over time these
diverse standpoints have been modified.
With the growing insight into the costs
associated with cooperation and close
relationships, network scholars today
agree that the cooperative dimension may
have been overemphasised (see e.g. Ford
et al 2003). In the same way more recent
channel research advocates the benefits
of cooperative relationships (Weitz and
Jaap 1995).
The issue of control is related to
power and conflict and both the channels
and networks literature have been
concerned with the role of control and its
impact on efficiency.
The channel
literature plotted the evolution of channels
in terms of the rise and fall in the power of
wholesalers, manufacturers or retailers,
but it later concluded that power was both
limited in any one company and widely
distributed throughout the channel (McVey
1960). Despite this conclusion, much of
the distribution literature inferred that it is
the producer that has the power to choose
the means to market, to manage its own
evolution and to add or drop agents or
sales-subsidiaries etc. There is a thread
in the network literature that suggests that
The IMP Journal
Volume 2, number 3
a company can be the “hub” of a network,
or design its “own” network (Jarillo, 1988,
Sydow, 1992). However, most network
literature has suggested that control over
what may be described as a “network” is
extremely rare and that where it does
occur it is likely to reduce the efficiency of
the network as a whole (Hakansson and
Ford, 2002).
Both the channels and network
areas gain an understanding of what
happens between companies by taking a
unit of analysis beyond that of the
individual firm. As will be discussed later
however,
the
mainstream
channel
literature
drifted
away
from
this
perspective and started to focus on the
single firm. The early channel literature
developed a linear view of the movement
of goods to consumers, although it did
examine
the
competition
between
alternative linear channels.
A similar
simple, linear view is also explicit in the
supply-chain literature.
This literature
compounds the problem by looking at the
process from the perspective of a single
company. The network literature on the
other hand shows how relationships within
any apparent “chain” or “channel” are
affected by each company’s relationships
in or relatedness to other “chains” or
“channels” as well as by those
relationships that may seemingly be
unconnected to it.
Understanding the restrictions and
the opportunities facing a single company
requires an analysis of its position in the
context of a network of relationships. It is
of course possible to explain a company’s
position at any one time as the effect of its
own strategy.
But an equally valid
explanation of its position can be found in
what has happened in its relationships
(Hakansson and Ford 2002). Network
position can also be of help in examining
the alternatives open to a company. Such
an analysis often shows a company just
how relatively insignificant it really is, at
least compared to its own perceived selfimportance! The channel literature used
the position concept extensively, but it lay
dormant, until expanded upon by the
network literature a quarter of a century
later.
42
The channels literature saw a
company’s relationships as important
resources for its development. But it also
recognised that relationship inertia and
conflicting interests were simultaneously
strong constraints on that development.
The channel literature highlights the role in
achieving change of outsiders who do not
know, or may choose to ignore the
unwritten “rules of the game” that have led
to inertia in the channel. The paradox of
relationship counterparts as simultaneous
bases and impediments to change was
“re-recognised” and made explicit in the
network literature much later (Hakansson
and Ford, op cit). The network literature
takes the issue further by emphasising
that many of the resources on which a
company depends are not inside a
company but are actually located,
developed
and
exploited
in
its
relationships with others. The network
literature suggests that new ways of
working may have to be developed within
existing relationships, or that new
relationships will often have to be built with
similar companies to those in a company’s
current portfolio. Each area of literature
shows at least implicitly that internal and
external evolution is as much a function of
unplanned events as it is of analysis and
strategy.
Finally, frameworks for analysis of
reality are mirrored by significant features
of that reality. The early channel literature
was developed during an era of mass
production. This was when products were
produced speculatively and then had to be
sold and distributed.
The literature
reflected the need for producers to
establish efficient channels to dispose of
their products and for intermediaries to
develop links with the optimum range of
speculative producers, to satisfy their
customers’ requirements. In contrast, the
network literature developed during a
much less stable period when many new
types of companies entered the network
providing a wider range of offerings, less
strongly based on physical products.
Because of this developing diversity, the
old distinctions between manufacturer,
wholesaler, and retailer no longer apply
and the idea of a single fixed channel for a
previously manufactured product is less
The IMP Journal
Volume 2, number 3
applicable. Thus, the network literature
relates much more closely to an era of
postponement and flexibility in production
and distribution (Bucklin, 1965; Lampel
and Mintzberg, 1996).
4. Developments
Research
In
Distribution
The
Aldersonian
view
of
distribution never achieved the impact it
deserved.
The reasons for this are
somewhat unclear and are not the concern
of this paper. However it does seem that
inspiration from neoclassical economics
shifted the focus of attention in distribution
and marketing away from the previous
building blocks derived from institutional
economics. The new frame of reference
slowly moved distribution research “from a
system-wide perspective to a focus on
how the channel captain should behave to
secure an efficient distribution of his
products”
(Gripsrud
2004:195).
Increasingly, a strong manufacturer
orientation was adopted and the channel
was seen “through the eyes of marketing
management in production firms” and
dealt with “the route taken by a product as
it moves from the producer to the user”
(Rosenbloom 1995).
The unit of analysis for the
examination
of
marketing
issues
subsequently expanded, but it stayed at
the level of the dyad. Firstly, concepts and
models for analysis of the behavioural
dimension of business activity were
introduced by Stern (1969) and others.
These dealt with the role of power, control,
and conflict in business exchange. This
framework was widely applied in channel
research and it is most likely that it
negatively affected Alderson’s call for
further
research
on
cooperation.
Secondly, the increasing attention to
transaction-cost analysis also made the
supplier-customer dyad the predominant
level of analysis.
Issues related to
physical distribution lost their importance
when marketing tended to focus on the
legal and psychological aspects of
exchange (Gripsrud 2004).
Physical
distribution
issues
became the subject of a new academic
43
discipline; logistics. Bartels (1988) talks
about “the two halves of marketing”; the
social aspects of exchange (studied in
mainstream marketing) and the physical
aspects of exchange (logistics). Since that
time, the two disciplines have mainly
developed independently of each other
despite some attempts to integrate them
(e.g. Drucker 1962, Rosen and Manrodt
1995, Gripsrud 2004). Figure 1 shows
some of the main characteristics of the
development of distribution research over
time.
Following these developments, the
two disciplines have come to focus on
different issues. Juttner et al (2006) claim
that
logistics
and
supply
chain
management primarily concentrate on
efficiency and are thus cost-orientated
while marketing emphasises the revenue
side in its concern with demand
generation. The consequence of these
developments is that the holistic
perspective applied in the early distribution
literature has been lost. Unfortunately this
loss of perspective also means that some
important distribution issues are neglected
by mainstream channel research. Thus, it
has been suggested by a number of
authors that complementary approaches
are necessary in distribution research.
Network models have been advocated by
scholars
with
various
theoretical
backgrounds; for example supply chain
management (Christopher 2005); agency
theory (Rokkan and Haugland 2002) and
transaction cost economies (Wahtne and
Heide 2004).
5. Developments
Practice
In
Distribution
The main argument for suggesting
an industrial network approach to the
analysis of distribution is because
distribution
reality
has
become
increasingly
network-like
in
recent
decades. For example, in a study of
distribution innovators in the US the
“forward looking companies” identified
were
characterized
as
“webs
of
capabilities embedded in an extended
enterprise”.
(Narus and Anderson,
1996:112). This conclusion was based
The IMP Journal
Fig. 1.
Volume 2, number 3
44
A Classification of Distribution Research over Time (Gripsrud 2004:198)
on the fact that the distribution innovators
in the study relied to a large extent on
access to resources controlled by other
firms. Other authors have described the
evolving structures of distribution as
“networks of value-adding partnerships
like
confederations
of
specialists”
(Anderson et al 1997).
More recent
advocates of the need for a holistic
perspective argue that firms can no longer
rely only on the resources that once were
assembled within their organizational
boundary. Rather, they increasingly need
to depend on the resources of others and
thereby “be able to combine resources in
new ways, gain additional resources, and
dispose of superfluous resources” (Wilson
and Daniel 2007:10).
Some of the reasons for the
increasing attention to access to the
resources of others lie in transformations
in the activity configurations of distribution
networks. One of the most significant
changes that have occurred in distribution
is an increasing reliance on postponement
in comparison with the previous strong
emphasis on speculation.
Mass
production, mass distribution, and huge
inventories characterized the activity
configurations when the “technology of
production” and speculation ruled the
game. Therefore, the focus of distribution
improvements in the past was to achieve
improved efficiency in the output
operations of the supplier’s factory.
Over time, however, buying firms
increasingly have come to require
customized offerings from their suppliers
and are no longer satisfied with
standardized distribution arrangements for
products or services (see for example da
Silveira et al 2001; Jiao et al 2003; Cao et
al 2006). This development implies that
distribution solutions need to be tailored to
individual end-user requirements. Thus
some buyers may prefer distribution
solutions at the lowest possible cost, while
others have an interest in more advanced
(and costly) arrangements as these
support the efforts of the customer buying
firm to economize in other dimensions.
Examples of such arrangements are justin-time deliveries (Kannan and Tan 2005)
and systems for efficient consumer
response (Kurnia and Johnston 2001).
These conditions have made it
both
possible
and
necessary
to
increasingly take the efficiency and
effectiveness of the input operations of the
user firm into consideration. Therefore the
“technology of use” and its inherent logic
have become more important for the
configuration of distribution arrangements.
This change shifts strategic attention to
the principle of postponement. According
to this principle, cost savings from reduced
uncertainty may be obtained if the
differentiation of the product is postponed
until as close as possible to the time of the
purchase (Bucklin 1965:68). Distribution
arrangements, relying on the principle of
postponement enable actors to cope with
diverse
and
changing
customer
requirements.
The ultimate form of
postponement is build-to-order production
where the individual customer order
The IMP Journal
Volume 2, number 3
directs the activities of the supplier (e.g.
Gunasekaran and Ngai 2005).
Technological developments in
manufacturing, logistics, and systems for
information exchange have enabled
suppliers to meet these changing
requirements
with
new
distribution
solutions building on customization, JIT,
build-to-order etc. A common feature of
these activity configurations is an
increasing
interdependence
among
distribution
activities.
Previous
arrangements relied on inventories as
buffers, which imposed only loose
couplings between activities. When these
inventories are reduced the resulting
interdependencies have to be handled
through integration of processes and thus
increased coordination of activities. In
many cases these integrative efforts span
the
organizational
boundaries
of
companies.
Efficiency in operations
therefore calls for coordinated action and
partner-specific
activity
adjustments
among several companies, in terms of
materials flow design, logistics facilities
and joint information systems. In order to
exploit these conditions companies are
required to “embark on co-operative
alliances to address the never-ending
battle to reduce costs while maintaining
and improving quality and service”
(Wagner et al 2002:254).
These changes in distribution
practice indicate that companies are
increasingly dependent on resources
controlled by other firms.
Narus and
Anderson (1996) conclude that a
significant characteristic of innovators in
distribution is that they “realize that by
sharing their resources and capabilities in
novel ways and new situations they can
take
advantage
of
profit-making
opportunities that they could not exploit on
their own” (ibid. p. 112).
Similarly,
“companies have moved away from
hierarchical, integrated supply chains in
favour of fragmented networks of strategic
partnerships with external entities” (Bitran
et al 2007:30).
One of the main reasons for the
development of interdependence is the
increasing specialization that has occurred
in distribution.
Actors specializing in
specific distribution functions have been
45
able to strengthen their positions in
distribution networks.
For example,
warehousing firms (Faber et al 2002),
third-party logistics providers (Carbone
and Stone 2005), firms specializing in
information provision (Clarke and Flaherty
2003), electronic intermediaries (Tamilia et
al 2002) etc. have all become significant
actors in today’s distribution processes.
These specialized firms have challenged
the “traditional” industrial distributor who
tends to perform a broad range of
activities.
For example the traditional
distributor “contacts customers and makes
the product available by providing
necessary supporting services such as
delivery, credit, technical advice, repair
service, assembly, and promotion” (Herbig
and O’Hara 1994:199).
The benefits obtained through
enhanced specialization are explained by
the theory of non-proportional change
(Boulding 1962). Technical developments
in
information
technology
and
transportation have provided opportunities
for efficiency improvements in distribution
operations. Companies wishing to benefit
from these new conditions have to invest
in sophisticated equipment.
In these
situations specialization is necessary for
operative performance because it makes
possible for each separate activity to be
undertaken at its optimum scale. These
conditions are difficult to obtain for an
integrated company involved in many
operations
with
different
scale
requirements. Evolving networks are
based on pooling of complementary skills
and resources among a huge number of
actors, the activities of which have to be
coordinated and integrated.
Changes to the distribution reality
have affected views of resource control
and resource sharing.
Previous
recommendations for resource control
through ownership are now supplemented
with a focus on gaining access to
resources controlled by others. Weber
(2001) even argues that resource sharing
in distribution is the foundation for building
sustainable competitive advantage. These
conditions increase the resource body
available to a company as well as its
flexibility.
They also call for the
The IMP Journal
Volume 2, number 3
cooperative atmosphere in relationships
that Alderson once asked for.
Figure 2 is an attempt to
summarize some contemporary dynamics
in distribution. The left-hand side of the
figure shows some of the typical features
of what may be identified as “traditional
channels”. The right-hand side illustrates
the central features of the network
structures that are now evolving1.
Established frameworks of the appropriate
conceptualizations for and the crucial
issues in distribution are mainly based on
the features in the traditional channel
column. Therefore, an industrial network
approach should contribute to a more
holistic frame of reference for the
understanding of distribution.
6. A Network View Of Distribution
On the basis of the changes of the
distribution reality that we have discussed,
an industrial network view would
emphasize four things:
Variety
of
Customer
Demands:
Distribution arrangements have to be able
to handle postponement and speculation,
mass production and customization,
loosely coupled activities and closely
interdependent etc. The increasing need
for variety and differentiation of distribution
arrangements is recognized by numerous
authors.
A typical illustration of this
recognition
is
that
distribution
configurations “should be made following
the determination of the value proposition
relevant to the customer.... that a company
wishes to serve and may involve a
combination of those [alternatives] shown
above” (Payne and Frow 2004:529). This
point of departure fits well with our
argument that the technology of use
should
determine
distribution
configurations rather than the technology
of production. However, when it comes to
the task of making sense of how to bridge
the two technologies, it appears that most
authors are still trapped in the construct of
a channel. The issues of differentiation
1
Although we should note that all distribution arrangements
involve a mixture of the attributes of traditional channels
and evolving networks.
46
and variety in relation to customers are
almost entirely dealt with in frameworks of
what is identified as ‘multi-channel
marketing’ (see for example Alptekinogli
and Tang 2005; Balasubramanian et al
2005; Wirtz 2007). Despite the concern
with customer needs, issues related to
distribution
arrangements
are
still
approached from the perspective of the
selling firm and are seen “through the eyes
of marketing management in production
firms” and deal with “the route taken by a
product as it moves from the producer to
the user” as argued by Rosenbloom
(1995). These conditions are illustrated
through the following issues dealt with in
three papers: “the alignment of route to
market” (Wilson and Daniel 2007);
“developing a multichannel strategy”
(Payne and Frow 2004); “multichannelling
your actions” (Weinberg et al. 2007).
These approaches seems somewhat
misdirected because successful means of
dealing
with
postponement
and
customization have to “start with the
customer” (Holweg and Pil 2001).
Problems with the Concept of the
Channel: The second point of emphasis
for a network view of distribution is that the
“channel” is a rather misleading concept
for what actually takes place in current
distribution arrangements. A network view
of distribution makes us question whether
“multi-channels” is the most appropriate
conceptualization
of
distribution
arrangements in a reality characterized by
postponement and customization. The
notion of a channel might be an adequate
conceptualization when mass production
and speculation are ruling the game. In
these arrangements it is economizing in
manufacturing facilities that sets the
conditions for distribution performance.
Distribution
activity
coordination
is
subordinated to the efficient organization
of factory operations and to the
“channelling out’ of standardized objects.
These
arrangements
have
a
predetermined starting point in the factory
but no predetermined final destination,
because the end-user identity is unknown
until the final purchase.
The
channel
construct
is
misleading when distribution arrange-
The IMP Journal
Volume 2, number 3
47
.
Fig. 2. Central Features of “Traditional Channels” and “Evolving Networks” (Gadde 2004:
168)
-ments are based on postponement and
customization.
Here, speculatively
produced products are not “channelled”
out from the factory on the basis of
speculation. Instead, more complex and
non-standardised offerings are customised
much closer to the user.
This is
particularly the case with build-to-order
production. In these situations the final
destination of what is distributed is
predetermined while the starting points for
the various elements of the total offering
are not. These distribution arrangements
have to be built in line with the context in
which the user operates.
When
speculation and mass production is
replaced
with
postponement
and
customization it is difficult to design these
configurations beforehand as they have to
start with the customer.
The main
question
in
these
distribution
arrangements is how to exploit networks
resources that are at hand in terms of “the
infrastructure of logistics resources
available ‘out there’, consisting of
transportation equipment, warehouses,
shipping lines, distribution hubs, trucking
routes, etc.,” (Hulthén and Gadde
2007:198). This approach makes possible
the sharing of resources with others and
also explains the increasing specialization
that
has
occurred
in
distribution
arrangements.
Redefinition of the Concept of the
Intermediary:
One of the main
characteristics of the current distribution
reality is the increasing specialization of
and interdependence between actors.
These conditions mean that we have to
reconsider the concept of an intermediary
as some sort of subset of those involved in
distribution. In a network, all the actors
are intermediaries. Networks consist of
connected exchange relationships (Cook
and Emerson 1978). Therefore, every
actor is connected to other actors,
vertically, horizontally, diagonally and in all
other possible directions. Hence all actors
intermediate between others. Moreover,
the diversity of relationships and
interdependencies in a network mean that
it is not possible to make a clear distinction
between what apparently homogeneous
categories of firms actually do in
distribution, irrespective of whether they
are called manufacturers, distributors,
users etc. Even more important is that the
view of intermediation in a network
perspective will be different from that of a
channel view. In the channel view a
middleman is perceived as a means to
connect a large number of manufacturers
with a large number of users. Its main
mission is to reduce the number of
contacts and thus promote economic
The IMP Journal
Volume 2, number 3
efficiency.
But in a network view,
intermediation is not only about connecting
two individual firms with each other.
Intermediation is also about connecting all
the relationships of these two firms and
with those of the inter-mediator. In this
way, a network view emphasises that what
happens between actors is a process of
interaction rather than simple of exchange.
The network view of intermediation is also
affected by the major transformations that
have occurred in the overall business
landscape. Firms tend to focus on a more
and more limited part of the total activityconfiguration in which they are involved,
by outsourcing activities not perceived to
be core.
These changes towards
increasing
specialization
imply
a
reconfiguration of the activity patterns for
manufacturing, assembly, and distribution
with
subsequent
implications
for
integration and coordination. The main
issue for distribution intermediaries used
to be the distribution of “finished” products
that obtained their physical features in the
manufacturing facility and then stayed
more or less unchanged during the “flow
through the channel”.
In today’s
fragmented structures that increasingly
rely on postponement and modularity, the
physical features of an offering are
changed in successive steps and final
assembly may be undertaken by various
actors at different locations in the network.
One of the most typical examples of this is
the configuration of the PC-industry.
According to established channel views,
Dell Computer would probably be
identified as a manufacturer. However,
Dell’s approach to postponement and
customization is linked primarily to
capabilities within what was previously
identified as distribution.
Similarly,
operations related to changes of physical
features
that
we
used
to
call
“manufacturing” are now often undertaken
by firms that we tended to classify as
distributors and middlemen. For example,
transportation firms and various service
providers operating logistics hubs are
increasingly involved in final assembly
close to the locations of customers.
Finally, a network view of
distribution leads to a reinterpretation of a
48
concept that relates to both channels and
intermediaries. It is generally perceived
that until recently Dell Computers worked
entirely with a “direct channel” approach
(see e.g. Erevelles and Stevenson 2005),
i.e. they have not used intermediaries. It
is true that no other title-holding firms have
been involved in Dell’s business with PCcustomers. However, the so-called “direct
approach” applied by Dell and others is
heavily dependent on business partners of
various types e.g. transportation firms,
logistics service providers, systems
integrators, warehouse operators, final
assemblers etc. The total number of firms
actually involved in this “direct” approach
is by no means fewer than in traditional
speculative
arrangements
involving
wholesalers and retailers (Hulthén and
Gadde 2007). The reason why Dell’s
approach is considered “direct” is because
the channel conceptualization excludes
firms that do not take title to the product.
This exclusion makes the channel concept
unrealistic
in
a
business
world
characterised by electronic intermediation,
physical distribution hubs, integrators,
service providers and logisticians.
7. Conclusions: Contributions Of A
Network View.
This paper has been concerned
with the contributions that a network
approach can make to an understanding
of the nature of distribution.
More
fundamentally, we have tried to examine
two apparently different, but clearly
interconnected areas of literature and to
see what their similarities can teach us
about the nature of business and of
business research.
The paper has illustrated that many
of the research problems that we face
when trying to understand something
about the landscape of business have
been faced by previous researchers. The
paper also illustrates how those earlier
researchers had developed a coherent
conceptual approach to examining their
area. Thus, one obvious conclusion from
the paper is that it is important for us to
question whether our supposedly new
insights or approaches are really new, or
are simply re-discovered long-established
The IMP Journal
Volume 2, number 3
concepts. In particular it may well be that
those long-established concepts were
developed in a situation where similar core
variables were present or in a different and
perhaps clearer “experimental situation”.
The availability of this historical data and
conceptual analysis provides an important
route to re-examine many taken-forgranted ideas on the nature of business
(Gadde and Araujo, 2007).
The evolution of distribution
research provides a well-developed casestudy of the way that the direction of study
and the extent of understanding can be
affected by the overall orientation of
research, by its width of focus and its unit
of analysis. Distribution research moved
from at attempt to understand the totality
of the distribution “system” to a narrow
orientation single company or single
channel view and to a managerial and
more normative perspective. In so doing it
became restricted by the ideas that
“distribution is a manufacturers’ problem”;
that fixed products are made and then
distributed and that distribution and the
position and identity of a business actor
can be understood from a single-company
perspective. There are some obvious
parallels between this evolution and what
may be happening in current network
research with its orientation towards a
single “focal actor” or to particular
relationships. This contrasts with early
distribution research that was concerned
with the identity of the company within the
totality of the system
Researchers trying to make sense
of different aspects of business, whether
defined in terms of distribution, channels,
networks or marketing tend to come
across similar basic issues: Business isn’t
something that a company does. It is a
process between many different, but
interdependent actors and which is
completely controlled by none of them.
Business is not a set of discrete activities,
but a process over time where each
episode both affects and is affected by
many others, both in the past and the
future. This paper illustrates that it is
possible for any theme in business
research to become stereotyped, even to
the extent that its proponents refer to it as
a “brand” (Arnould and Thompson 2007).
49
This stereotyping can lead to a failure to
question ideas or to look outside of that
theme (Cunningham 2008). An analysis of
the evolving IMP network literature
indicates a strong orientation towards the
externalities of the business firm and its
relationships and interactions. But there
appears to be no comparable systematic
research into the implications for the
identity of the individual actor within the
wider network world, as occurred in the
early distribution literature. If research is
to develop an understanding of these
interconnections then it will require
integration
between
ideas
from
organisational behaviour and interorganisational behaviour and network
research.
Perhaps the paper also shows that
all of us researchers (and managers) face
similar problems of restricted vision. We
find it difficult to cope with the scale of the
business landscape. We tend to restrict
ourselves to that which can be easily seen
and measured such as products and
companies, transactions and physical
flows. We also face the temptation to
make simplifying assumptions: For our
explanatory variables we rely on price and
costs; for our structural variables we may
use naively defined markets and
processes and we concentrate on
individual transactions. Instead, a network
approach to distribution requires us to
examine things which are less visible,
such
as
relationships
and
interdependencies that form the structure
of the network and patterns of interaction
that comprise its process. A network view
may counter some of the simplifications in
more recent studies.
In so doing, a
network view could lead to a revitalization
of Alderson’s conceptualizations.
For
example, Hulthén and Gadde (2007) use
two of his fundamental concepts - sorting
and transvections – to analyse current
developments in distribution networks.
The network approach also avoids
the danger of an overly normative
approach to the analysis of distribution
and
a
over-willingness
to
make
recommendations on the “right” way to
manage distribution. This is because the
network approach deals with resources
and activities within the context of an
The IMP Journal
Volume 2, number 3
overall
network
process
involving
numerous interdependent actors and
numerous influencing factors. In this way
it emphasises the variable character of
companies and their relationships, the
absence of “final” outcomes of business
activity, the impossibility of predicting the
effects of actions within the network and of
attributing causality between individual
actions and apparent success or failure.
Further, a network approach to
distribution avoids concentration on a
single flow of a particular product by
considering each activity as part of and
affected by wider network processes. A
network
approach
to
distribution
emphasises that resources and activities
are distributed and that the multifarious
interdependencies
between
actors
provides the framework for any single flow,
company or product. A network approach
to distribution reinforces a holistic view
because it emphasises that business
consists of multiple problem-solving by
multiple actors, rather than as the outcome
of a single company’s problem solving or
“strategy”.
A
network
approach
acknowledges that multiple, frequently
interchangeable
activities
may
simultaneously be carried out by a wide
range of actors drawing on their own
resources and those of others.
What does a network view of
distribution say about the current
distribution reality?
A network view
explains this reality as a snapshot of an
evolving process in which resources are
increasingly spread through many, new
and often remote actors. It emphasises
the increasing range and cost of the
resources needed to provide an offering to
cope with the specific problems of any
single actors. It also suggests that the
evolution of the distribution network is the
result of the numerous problems of
numerous actors. A network approach
also emphasises that the initiative for
business evolution may arise from multiple
points within and between numerous
relationships contributing to conscious and
unconscious positioning and repositioning
of numerous actors.
But a network
approach sees change as emanating from
the
interactions
between
multiple
individual actors, rather than being the
50
outcome of generalised or “external”
phenomena. This means that it rules out
any assumption that change is preordained or linear.
A network approach to distribution
does not simplify analysis and certainly
does not provide ready solutions to
distribution problems. However, it builds
on the work of early distribution research
and emphasis the network structure of
relationships and interdependencies and
the process of interaction. In this way it
may provide at least the possibility for
insight building on the work of some of our
research predecessors.
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