Competence in Strategic Purchasing:
The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
COMPETENCE IN STRATEGIC PURCHASING:
THE COMPETITIVE STRATEGY OF MANAGING
(BACKWARD) VERTICAL BUSINESS RELATIONSHIPS.
Peter White
University of the West of England
United Kingdom
Stuart Hanmer-Lloyd
University of the West of England
United Kingdom
ABSTRACT
The intended contribution of a firm's purchasing function, is to
effectively, and efficiently, manage the firm's input market.
Essentially, therefore, the purchaser's primary strategic
contribution is necessarily associated with, and indeed limited
to, the manipulation and exploitation of his or her firm's input
market, with the express intent of altering, to the firm's
advantage, its competitive position in its output market. Output
market competitive strategy, however, is underpinned by the
inherent need to seek an advantageous and sustainable
difference between a firm and its competitors. The strategic
purchaser's role and responsibility, therefore, is necessarily to
seek an advantageous difference between the purchaser firm
and its competitors, by utilising his or her empowerment to
influence supplier selection. It is argued, however, that
incumbent purchasers are seldom mandated to challenge the
orthodoxy and routine, inherent in supplier selection
paradigms, and that this invariably results in the purchaser
selecting suppliers that are equally available to competitors. In
other words, the orthodoxy contained within purchasing
convention, and accepted practice, is unlikely to result in the
differences from which a sustainable competitive advantage
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could be derived. This working paper considers whether the
competitiveness of a firm is as dependent on its ability to
differentiate itself in its input market, as it is dependent on
differentiating itself in its output market, and that the strategic
purchaser needs to accept the premise that the input market
offers few competitive opportunities unless, selectively, its
convenience and its conventions are vigorously and
uncompromisingly rejected. Also discussed is the need to
separate pivotally important purchases from the less important,
and the need to understand the purchase requirement in terms
of a competence deficit. A supplier's competencies, and not its
existing involvement in a particular input market, it is argued,
is a more appropriate determinate of a firm's eligibility as a
supplier. The concepts of "spilt milk" and "reverse marketing"
are also discussed. In addition, the CEO's use of the notion of
"stretch" to influence the preparedness of the purchaser to be
both proactive and suitably creative, together with the
importance of the relationship between purchaser and supplier
being equatable, if exclusive access is to be sustainable, is also
considered. Overall, the following propositions are concluded to
be the most germane in understanding the strategic
opportunities potentially inherent in the backward vertical
relationship;
A competitive advantage, even if achieved, cannot be
sustained if it is derived wholly from a source which is
shared among existing or potential competitors.
For each firm active in a particular input market, there may
be many other firms that would supply the market, if
persuaded to do so.
It is a fallacy to assume that the most eligible firm to supply
a particular input market will already be actively supplying
that market.
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Competence in Strategic Purchasing:
The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
INTRODUCTION
Prahalad and Hamel (1990) suggest that firms should "escape
the myopia of the served market". They believe that firms
too infrequently use their unique and distinctive competencies,
or core competencies, to provide competitive products and
services to markets other than those markets where the firm is
already represented. In these circumstances, it is suggested, the
firm fails to exploit the "new business" opportunities available
to it, as well as becoming increasingly transparent and
predictable to its competitors. Prahalad and Hamel believe,
therefore, that a firm should expediently utilize the
competitiveness inherent in its core competencies to enter
whichever market offers an attractive new business
opportunity, irrespective of whether the firm has an existing
involvement
in that market
attractiveness
and
competitiveness being solely determined by whether the firm's
core competencies are likely to be sufficiently valued in that
market1 . Prahalad and Hamel are suggesting that the principles
of market segmentation are as applicable to a firm moving from
market to market, as they are to a firm moving from segment to
segment within a market. It is not an unprecedented or radical
realisation, therefore, that a firm should attempt to maximize
its competitiveness by choosing to serve those customers who
consider its services, or competencies, to be more valuable than
the competencies of other firms actively supplying those same
customers. Hence, the choice of the market, and the customers
that comprise that market, is uncompromisingly linked to a
firm's competitive strategy. Firms, however, operate in both
input and output markets - they need customers, but they also
need suppliers. This working paper considers whether a firm's
choice of input market, and the suppliers that comprise that
The expression "sufficiently valued" embodies an assessment of whether
those competencies sufficiently exceed the competencies already being
supplied to that market.
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Peter White and Stuart Hanmer-Lloyd
market, should be similarly linked to a firm's competitive
strategy or, in other words, should the firm endeavour to
"escape the myopia of the serving market"?
The initial direction and impetus for this research, stems from a
series of articles published in the journal, Flight International,
concerning a new entrant to the light aviation industry, ARV
Ltd. The success of this venture into aircraft design and
manufacture, was almost entirely dependent on a key
component - the power plant, that was to be sourced, or
purchased, from an external supplier. It was evident that for
this already ambitious project to succeed, ARV would have to
produce an aeroplane with a considerable market advantage. It
would be clearly advantageous if a viable2 and yet radically new
power plant could be found that was sufficiently powerful, light,
fuel efficient and aerodynamic.
ARV eventually reached agreement with Hewland Engineering
Ltd., of Maidenhead in Berkshire, to design and manufacture a
suitable new engine. This sourcing arrangement was unusual for
a variety of reasons. Hewland Engineering were market leaders
in the design and manufacture of gears and gearbox assemblies
used by, among others, Formula One racing cars. Hewland did
not manufacture engines or engine components as part of its
main business and had little connection with the aviation
industry. It is quite apparent that ARV were sufficiently
convinced of the necessity of a new source of engine, that they
were prepared to accept the risks associated with an unproven
source of supply. The risks were, it would seem, adequately
compensated for by the potential benefits. It is apparent that
ARV's solution to their strategic sourcing problem was to
identify a firm that was eminently qualified in terms of
competence, while disregarding whether it was already active
in a particular market place. In other words, ARV Aviation had
indeed "escaped the myopia of the serving market"?
"Viable" embraces the acceptability of the engine's whole life costs
acquisition, operating and maintenance.
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Competence in Strategic Purchasing:
The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
The objectives, therefore, of this paper are:
1.
To selectively apply fundamental concepts of strategic
thinking to the task of purchasing and supply
management, the intention being to explore the concept of
strategic purchasing.
2.
To investigate the nature of the barriers that may prevent
the professional purchaser from being able to fully exploit
the opportunities of strategic purchasing.
METHODOLOGY
This research uses a qualitative methodology. To facilitate the
identification of suitable interviewees, a list of organisations,
located in the West of England counties of Avon,
Gloucestershire, Somerset and Wiltshire was obtained from the
online Kompass electronic database. Since this research was
specifically concerned with an organisation's purchasing
function, it was considered appropriate to include in the list
only those firms that identified, in their Kompass listing, a
named individual as their purchasing manager or purchasing
director. In addition, to ensure that the listed organisations
would have a sufficiently complex organisational structure for
the purchasing function to be an independent entity within the
firm, only those firms that employed 200 or more employees (an
arbitrarily chosen number) were included in the list. There was
no intended significance in listing only those firms located in
the West of England, apart from ensuring that informants were
conveniently (geographically) accessible to the researcher.
A postal questionnaire was sent to each of the 180 companies on
the list. This questionnaire invited the named purchasing
manager/director to provide information about the training and
educational status of those employed within the purchasing
function of their companies. An addressed envelope, with the
correct postage, was provided for the return of the
questionnaire. 40 companies responded to the questionnaire.
Two companies stated that it was not their company's policy to
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complete questionnaires, a further three companies indicated
that due to reorganisation, the named purchaser was either no
longer employed by the company or was now employed at a
different location. 35 companies, therefore, returned completed
and useable questionnaires.
Access to cooperative informants is a fundamental requirement
of a qualitative methodology. The 35 individuals who responded
to the questionnaire were noted as potential interviewees. The
questionnaire, therefore, had a dual purpose. It identified
purchasers prepared to disclose information about themselves
and their firm, and it confirmed the location and identity of
potential interviewees. The questionnaire included a question
which asked whether the respondent would be prepared to
participate in other research about purchasing. Of the 35
completed and returned questionnaires, 13 respondents
indicated that they would be prepared to participate in other
research. These 13 individuals, therefore, were noted as
potential informants.
Of these 13 firms, 9 firms were arbitrarily selected and
contacted. All of those contacted readily agreed to be
interviewed. Using in-depth interviewing, eight purchasing
managers and one purchasing director were individually
interviewed on separate occasions. The CEOs of the last four
purchasing managers interviewed, were also interviewed. All
interviews were undertaken in the interviewee's office and,
with the permission of the interviewee, the conversations were
recorded using an audio tape-recorder. It was not possible for
any other individual to overhear the nature of the questions
being asked or any part of the answers. All informants were
informed that the information they provided would not be used
for any purpose other than as academic research data. The
interviewees were also informed that their name and the name
of their employer would not be published in an academic paper,
report or thesis.
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Competence in Strategic Purchasing:
The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
RESULTS
The data suggests that purchasing is unlikely to be routinely
involved in a firm's strategic management - its status, within
the firm, being inadequate to be commensurate with more than
a merely reactive (or follower) role. The cause of purchasing's
poor status is, as perceived by the purchasers themselves, the
belief among non-purchasers, that those performing the
purchasing function are inadequately trained or qualified to
reliably undertake other than administrative
tasks.
Alternatively, it is not so much perceived as an issue of status,
that inhibits the purchaser's involvement, but the issue of trust.
Many purchasers are undeniably positioned to directly and
personally benefit from the hospitality offered by supplier firms.
It is, therefore, of paramount importance, if the purchaser is to
achieve the trust from which status may evolve, that the
purchaser is seen to be impartial and objective in establishing a
relationship with a particular supplier.
Notwithstanding, however, this need to exhibit impartiality,
there is often the need to establish an equitable relationship
with a supplier that is founded on harmonious cooperation,
rather than adversarial aggression. The professional purchaser,
therefore, must attain, and retain, the trust and respect of his
colleagues and peers, while building a mutually cooperative
partnership with a supplier. In these circumstances, purchasing
professionalism requires a sensitivity to the internal
acceptability of the purchaser's relationship with a supplier,
coupled with an ability to convey to an external supplier, the
expectation of a justifiable reward from, in some circumstances,
a long-term relationship. For purchasing to achieve sufficient
professionalism requires not only a capable purchaser but also a
management that is commensurate with the importance of
purchasing's role. Unfortunately, the data suggests that, in some
instances, the executive management responsible for the
purchasing function, seems unconvinced of the importance of
purchasing's role - an acquiescence that exacerbates the
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perception among non-purchasers, that purchasing has been
approvingly excluded from the strategic management process.
Overall, the issues that inhibit the purchaser from proactively
contributing to a firm's strategic management include;
inadequate status and authority, a lack of cooperative support
from
non-purchasers,
and
purchasing
performance
measurements that routinely emphasise the quantifiable,
irrespective of the impact that the measurement has on
encouraging or discouraging proactive initiatives.
It remains uncertain whether it was purely a coincidence that
the solitary purchasing director interviewed, provided, by far,
the most elucidating, and yet instinctively spontaneous,
assessment of purchasing's contribution to competitive strategy.
This respondent was unequivocal in suggesting that a
competitive strategy that required, or relied on, the acquisition
of strategically important components, or materials, from
suppliers that were, or were likely to be, shared with
competitors, would be, in some way, jeopardised or endangered.
Purchasing's contribution to a firm's competitive strategy,
involves securing exclusive access to strategic suppliers and,
tacitly, exclusive access to the supplier's technology. Also
acknowledged, however, is the need to trade exclusivity or, in
the purchasing director's own words; "you don't get or give
exclusivity for free, if you do it's probably not worth having."
A firm's competitive advantage is often dependent on exclusive
access to an innovative technology, irrespective of whether the
technology is internally or externally sourced. It must be
reasoned, therefore, that exclusive access to an externally
sourced technology, that is sufficiently innovative to provide, or
contribute to, a competitive advantage, cannot be achieved
without the supplier achieving a comparable benefit. It might be
argued, therefore, that the purchaser's strategic role is to
conceive or devise the circumstances which will enable the
purchaser firm to successfully acquire (negotiate) exclusive
access to externally sourced innovative technology - an
exclusivity that must involve an equitable (or win win) benefit
for the supplier.
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Competence in Strategic Purchasing:
The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
In practice, purchasing managers are complacently tolerant of
what they perceive to be an inevitability that their important
suppliers will be shared with competitors. Since, however, what
is considered to be important is determined by the purchaser, it
is permissively easy to avoid the competitive significance of
sharing a strategically important supplier, by the simple virtue
of disclaiming or repudiating that a purchase has strategic
importance - the purchaser himself, or herself, is unlikely to
voluntarily "stretch" the complexity of his or her own workload.
Individually, the CEOs provided, mostly without hesitation, a
well defined, although sometimes succinct, stratagem of ideas
and opinions concerning the role of the purchaser, and of
purchasing. Nevertheless, there is scant evidence to suggest
that the interviewed CEOs took sufficient interest in the tasks
and activities delegated to the purchasing function, to ensure
their policies were either understood or correctly enacted. In
these circumstances, it is improbable that an estranged
purchasing function will offer an unsolicited opinion to its
executive management. The CEOs readily admitted a meagre
involvement in purchasing matters, although this lack of
involvement was equally as readily excused on the grounds that,
although purchasing was undoubtedly important, there was
little opportunity for purchasing to instigate competitively
meaningful innovation within the limitations, and vagaries, of
their (respective) input markets. Despite there being, at least to
some extent, an apparently dismissive regime within firms,
regarding the strategic significance of purchasing, all the CEOs
interviewed
provided
statements
which,
arguably,
unequivocally link purchasing with a firm's competitive
strategy. These comments were as follows:
I don't know... I suppose obtaining technology that wasn't
already available to our competitors, although, as I've
already said, that is not likely in this industry. There are
some suppliers that we would like to get into bed with but
can't. They will not supply us. They are owned and
operated by our major competitors and only supply
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themselves. We would all like to be like that. Our company
is too small [approximately £100,000,000 turnover] to
control the availability of key... important technology.
I would like a supplier to have a new patented process that
was the envy of the industry and I would like this supplier
to refuse to supply my competitors! And also not take
advantage of me.
A unique advantage to us would be a source of supply that
was twice as good as anyone else had available to them...
A uniquely advantageous source of supply would be one
where I had access to technologies which were not
available to my competitors. With infinite resource, one
would always try and find unique differentiating products
and components.
If something offered to a market is sufficiently different,
however, to enable the provider of that something to achieve a
market advantage, then that something might equally be
rejected by the market as being too experimental - what
Lamming (1993, p.77) refers to as anticipatory retardation.
Other interview data, particularly that obtained from the CEOs,
expressed similar concerns that "being different" involved
unacceptable and unnecessary risks. A purchasing manager
suggested, for example, that his input market was already "too
fragmented" to be efficient - if it was even more fragmented, he
suggested, it would be "a total disaster". Indeed, external
sourcing, especially of important components, creates a sense of
vulnerability among some CEOs - a sense of vulnerability that
is, if anything, undoubtedly intensified if the firm is buying from
different suppliers to those used by its competitors.
Similarly, it is apparent that some purchasing managers may
prefer to buy from established firms, firms that are widely
perceived as competitive, because the purchaser prefers the
protective and comforting reassurance that his or her choice of
supplier is sufficiently innocuous and uncontroversial to avoid
the purchaser being rebuked, if the supplier should
subsequently prove less than tenable.
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Competence in Strategic Purchasing:
The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
Is it merely a coincidence that the sole purchasing director
interviewed, acknowledged, and was able to define, a strategic
category of purchase? None of the purchasing managers or the
CEOs interviewed readily offered a comparable explanation of
what constitutes a strategic purchase, let alone distinguish
between strategic and other categories of purchasing task. To
what extent, therefore, are firms unable to exploit their input
market opportunities as readily as they are invariably eager to
exploit their output market opportunities, simply because a
suitable, and comparably empowered, input market manager is
unavailable?
DISCUSSION
For many firms, supplier selection is an opportunity to create a
distinctive difference between themselves
and their
competitors. To what extent is this opportunity to be different, a
means by which purchasing can more closely associate itself
with a firm's competitive strategy and, thereby, increase its
status within the firm? Three references, when considered
together, provide a complementary synopsis of what are,
perhaps, the most significant issues. Porter (1985) discusses
WHY being different is important. Venkatesan (1992)
recommends WHEN it is necessary to be different. Leenders
and Blenkhorn (1988) suggest HOW to be different.
According to Porter (1985, p.11-21), difference or uniqueness
is the foundation of all competitive strategy. Similarly, Kay
(1993, p. 10) suggests that "successful strategy is rarely copycat
strategy. It is based on doing well what rivals cannot do or
cannot do readily, not what they can do or are already doing."
The overwhelming issue, therefore, that appears to influence
the purchaser's ability to be involved in strategy and, thereby,
provide a significant contribution to a firm's competitiveness, is
the fundamental difficulty of deriving a competitive advantage
from a source of supply that is, in most respects, equally
available to their competitors (Porter 1985, p. 11-21; Kay 1993b,
p. 10; Bleeke 1989; Ellram 1990; Spekman 1988). In these
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Peter White and Stuart Hanmer-Lloyd
circumstances the purchaser has little opportunity to become
involved in strategic management. In addition, a competitive
advantage requires a distinctive and advantageous difference to
exist between rivals, that cannot be easily imitated or replicated
(Porter 1985, p.11-21; Henderson 1989; Hamel and Prahalad
1990). Hamel and Prahalad suggest the "essence of strategy
involves creating tomorrow's competitive advantage faster than
competitors can mimic the ones you possess today."
Venkatesan (1992); Womack, Jones and Roos (1990, p.147);
Asmus and Griffin (1993); Adamson (1980) and Lengnick-Hall
(1992) distinguish between purchases that require this
difference, and those where a difference would be strategically
immaterial and, therefore, unimportant. The term "spilt milk" is
used by Venkatesan to describe the loss of product
differentiation that, he suggests, will inevitably occur if
strategically important parts, components or materials, are
externally sourced. Walker (1988) uses the term "diffusion risk"
to describe a parallel concept, that of technology being
unavoidably transferred to a competitor through a supplier. The
challenge for the strategic purchaser, it would seem, is to buy
"spilt milk" without the consequential loss of opportunity to be
different, that Venkatesan (1992), Reck and Long (1988) and
Morgan (1991) surmise to be inevitable if strategically important
suppliers are shared with competitors. Reverse marketing,
suggested by Blenkhorn and Leenders (1988), may offer a
solution to the impasse that Venkatesan believes confronts the
prospective strategic purchaser. Reverse marketing involves
the purchaser identifying a potential source of supply that is
judged capable of exceeding whatever the existing market is
prepared to offer. This source of supply is then, necessarily,
persuaded (reverse marketed) to provide the required "spilt
milk". In this scenario, the seller is not, as convention invariably
dictates, involved in persuading a prospective purchaser to buy.
It is the purchaser who proactively offers the seller a mutually
beneficial relationship (Kay 1993, p33; Pilling and Zhang 1992;
Hamel Doz and Prahalad 1989). There is, if the purchaser has
correctly identified a strategically opportune source of external
competence, a mutual advantage for both buyer and seller in
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Competence in Strategic Purchasing:
The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
sustaining the relationship, a relationship that would not be as
viable for the purchaser, if the supplier offered the same
competence to the purchaser's competitors. Indeed, it is the
exclusive nature of the relationship which provides the impetus
for the purchaser to closely associate itself with what may be a
relatively unproven source of supply. The supplier, in turn, is
given access to a market that it may not be familiar with. If the
market, in the semblance of the existing suppliers to that
market, is allowed, as convention dictates, to control the
introduction and availability of competence to that market, the
inevitable result is that these competencies, and their
associated competitive advantage, become available to all firms
almost simultaneously (Porter 1985, p. 164). Williams (1992);
Reed and DeFillippi (1990); Teece, Pisano and Shuen (1990,
p. 12) and Kay (1993b, p.68-69) argue that, expediently, a
complex relationship with a supplier, as well as providing an
opportunity to be different, establishes an effective barrier to
imitation. In these circumstances, it is no longer improbable
that purchasing can significantly contribute to, and sustain, the
"difference between rivals" that is the cornerstone of
competitive strategy. The strategic purchaser is now a principal
player in the firm's effort to create a competitive difference and,
since a strategy that cannot be defended has Limited value, just
as importantly, to protect these differences from imitators
(Lamming 1993, p.77; Dixit and Nalebuff 1991, p.10).
Lengnick-Hall (1992) believes that, irrespective of the
purchaser's endeavour to be creative, innovations that have
merit but lack the support of relatively influential and
"prominent individuals", are unlikely to succeed. Ellram (1990)
also notes that "senior management incompatibility" may limit
the purchaser's ability to form a close working relationship with
particular suppliers. To what extent, therefore, is a firm,
despite the efforts of its purchasing management, unlikely to be
able to use supply innovation, as a means of increasing its
competitiveness, beyond the vision of its executive or senior
managers?
DeRose (1962) argues that supplier selection is concerned with
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an evaluation of a firm's internal competence deficit, followed by
the identification of an external source of competence to oppose,
or "reverse", that deficit. In other words, professional
purchasing is concerned with locating and acquiring competence
from external sources. DeRose implies, therefore, that it is, in
principle, important for professional purchasers to appreciate
that their purpose is to acquire, above all else, competence. This
appreciation delegates, to the purchaser, the task of correcting
a firm's competence deficit. Whether consciously or
unconsciously, firms routinely undertake a comparative
evaluation of competencies available, and competencies
required - the make or buy decision. Inevitably, if too few
competencies are available, the buy option is adopted. In these
circumstances, the reactive purchaser is presented merely with
a requisition that describes what the item to be purchased is to
do (a specification), rather than being presented with a
requisition that is accompanied by a competence deficit profile,
that describes what the supplier should have the competence of
doing. Even where a buy outcome is inevitable, a pretend or
simulated make or buy decision, would provide the purchaser
with objective information that could be used to assess the
suitability of potential suppliers. Evaluating the products
offered by suppliers, while identifying what may be the most
expedient supplier, may not identify the ideal source of
competence. Indeed, the ideal or most suitable source of
competence for a particular market may either have no interest
in supplying that market or not be aware of its opportunities
(Welch and Nayak, 1992).
The market place is an expedient promoter and regulator of
competition, and, as a consequence, the purchaser may
incorrectly assume that his or her best choice of supplier is
limited to those firms choosing to supply a particular market.
Hahn, Kim and Kim (1986), warn of a need to avoid presuming
that competition within a market is an unqualified guarantor
that a market will remain healthily efficient. They suggest that
a supplier's efforts to remain competitive, by introducing
product innovations, for example, are primarily driven by the
competitive strategies of its competitors, rather than by the
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The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
requirements of the customers that comprise its market. It is, it
would seem, necessary and appropriate for the purchaser to
induce change within its input market, rather than waiting
patiently for the market to provide what is required, if and
when it decides to. DeRose's interpretation of the fundamental
purpose of suppliers, suggests a role for purchasing that
involves orchestrating the release of competencies into a
market - competencies that would otherwise remain unavailable
to that market. The purchaser, it might be said, becomes a
competence release agent. It is suggested, therefore, that a
purchaser is capable of altering the balance of competition
within a firm's input market, by using his or her empowerment
to influence supplier selection and to, thereby, secure external
competencies that are more advantageous than the
competencies previously available. Strategic management,
however, is ultimately more interested in altering the balance of
competition in a firm's output market. Strategic purchasing is
necessarily, therefore, the use of competence sourced in a firm's
input market, to increase the firm's competitiveness in its
output market.
In summary, it is apparent that Prahalad and Hamel (1990) are
suggesting that provider firms use their unique and distinctive
competencies to enter new output markets, and DeRose (1962)
is suggesting that user firms persuasively encourage those same
provider firms to use their unique and distinctive competencies
to enter new input markets. In both situations the pursuit of a
competitive advantage is the underpinning objective.
The impossibility of achieving a close working relationship with
a relatively large number of suppliers suggests that a
manageable supplier base is a pre-requisite if consummate
cooperative relationships are intended. The purchaser,
however, has a vested interest in maintaining a multiple source
policy. The ability to switch to another supplier offers the
inherent safety of expediently de-selecting poorly performing
suppliers, and an opportunity to bargain more effectively. It is
evident that purchasers, and their CEOs, perceive the
purchaser's primary role to be the cost controller of externally
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sourced parts and materials. It is inevitable, therefore, that
purchasers will associate low switching costs with low prices.
For this reason, it is important that the purchaser is encouraged
to think beyond his or her cost controller role, if cooperative
partnerships, from which sustainable competitive advantage can
be derived, are to exist.
It is, at best, hopeful and, at worst, naive, to base a competitive
strategy on "supply me with something that is better than what
you supply to your other customers". Should it ever be assumed
that a supplier would provide one of its customers with
something that it did not offer, tacitly or explicitly, to all of its
customers? Also, when the source of a firm's advantage is
successfully copied, the imitator does not acquire the same
advantage, the imitator merely disposes of their opponent's
advantage. Whether a firm is leading or following, sustainable
advantages are seldom shared. It is fundamentally important,
therefore, that competitive strategy is founded on sustainable
difference. The strategic purchaser needs to accept that the
input market offers few competitive opportunities unless its
convenience and its conventions are vigorously and
uncompromisingly rejected.
What makes the future increasingly difficult to anticipate,
according to Hamel and Prahalad, is not that the future is
inherently unknowable, but that the future often lies well
outside the CEO's preparedness to investigate the unknown.
Prahalad and Hamel (1994, p.86) cite the example of the
whiteboard or the flipchart. The next generation of whiteboards
and flipcharts are electronic and, using a built-in scanner and
copying system, enable multiple copies of whatever is written
on the board, to be immediately available for distribution. It was
not, however, a whiteboard manufacturer that invented the
product. To create the future of their industry, Prahalad and
Hamel (p.91) believe that CEOs must develop a "deep and
boundless curiosity" - a curiosity that must accommodate the
time and intellectual energy necessary to understand, and then
influence, the future of their industry. The CEO should realise
that what he or she knows most about, is likely to be the past.
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The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
The CEO should, therefore, be prepared to participate, as an
equal, in debates about a firm's future, providing leadership, but
not domination - and listen to those in the firm who appear
unconventional, are less experienced, or raise questions for
which there are no immediate answers. Hamel and Prahalad
(p.98) refer to the importance of the contrarian. If, they believe,
firms are to "create the future", they need "rebels, subversives"
and individuals prepared to "break the rules". The professional
purchaser, as much as others in the firm, must be prepared and
willing to break with convention. The CEO achieves little
perspective of what might be achieved, or what needs to be
achieved, if those around him or her provide little more than a
regurgitation of past or existing practice. It might be argued,
therefore, that the purchaser has a responsibility to be
"contrary", if only to stimulate and support the CEO's effort to
understand and plan for the future.
CONCLUSIONS
As already stated, the intention of any competitive strategy is to
provide a sustainable competitive advantage in an output
market. The function and empowerment, however, of the
purchaser is to manage the firm's input market. Strategic
purchasing, therefore, is necessarily limited to the purchaser's
manipulation of a firm's input market with the intent of
altering, to the firm's advantage, the competitive balance in its
output market. The
diagram,
therefore,
necessarily
acknowledges the strategic purchasers' need to manipulate the
input market, while understanding the impact of this
manipulation on the firm's output market. The competitiveness
of a firm in its output market is dependent on its ability to
differentiate itself from its competitors. This research suggests
that the competitiveness of a firm is no less dependent on its
ability to differentiate itself in its input market, although this is
frequently ignored and, therefore, represents an unexploited
opportunity. It is, however, inevitable that a competitive
advantage founded on a difference will be attacked by the
competitor in an effort to erode the damaging impact of that
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difference. It is also inescapable that not all of what needs to be
procured in a firm's input market, is capable of significantly
influencing its competitiveness in its output market. It remains
as important to correctly identify the strategic purchase, as it is
to subsequently select a suitable strategic supplier. Indeed,
identifying the purchase or purchases that have pivotal
importance is of paramount necessity, if strategic purchasing is
not to consume the purchaser in unnecessary complication.
Nevertheless, there is little evidence to suggest that purchasers
attempt to sufficiently discriminate between what is, and what
is not, a strategically important purchase. The application of
"reverse marketing" creates the opportunity, for the purchaser
firm, to manipulate its input market, with the intention of
creating a difference between itself and its competitors, an
input market difference that is, it is concluded, the foundation
of strategic purchasing. Reverse marketing, however, requires a
purchaser to be capable of creative innovation. Innovation,
however, is often impeded by uncertainty and perceived risk. A
regime in which innovation can flourish is singularly dependent
on the policies and demeanour of the CEO. The CEO is,
therefore, indivisibly bundled with the task of strategic
purchasing. The most crucial single aspect of strategic
purchasing is what could be described as "proactive stretch".
Stretch requires the purchaser's CEO to "create an extreme
misfit" between "what is required" and "what is available". The
purchaser is, thereby, challenged to "quantum leap" and close
the gap. In practice, the purchaser progresses in incremental
stages, although the magnitude of the misfit provides the
purchaser with the impetus to attempt, and perhaps achieve, far
more than he or she would have considered practical or feasible.
If a firm does not challenge its purchasers, using, for example,
"stretch" as the catalyst for the purchaser's invention, it is
inevitable that the firm's purchasers will not volunteer to
experiment, choosing instead to pursue a risk minimisation
strategy. Nor will they seek, or expect to be afforded, the
necessary empowerment to undertake experiments. Challenges
are a legitimate means of fostering the acquisition of
competitive advantage, if competitiveness is to be derived from
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The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
innovation. It is, therefore, necessary and appropriate that
CEOs "stretch" their purchasers, a "stretch" that causes the
purchaser to attempt to achieve what may, ordinarily, be
assumed to be impractical or impossible. Hamel and Prahalad
(1990), describe an incumbent's greatest vulnerability as "an
unquestioning belief in accepted practice" or, in other words, an
acute reticence to experiment. Competitive strategies that seek
to utilise the input market to achieve output market
competitiveness, inexorably requires a purchaser with a
preparedness to experiment.
Clearly, however, a CEO is unlikely to utilise the notion of
input market "stretch", if he or she is unconvinced of the
exploitable opportunities that being different, represents.
Indeed, it is apparent that some CEOs prefer to minimise the
input market differences that exist between themselves and
their competitors. It is vital, therefore, that CEOs understand
and support the fundamental supposition upon which, it is
concluded, strategic purchasing is necessarily underpinned - a
supposition that suggests that a competitive advantage, even if
achieved, cannot be sustained if it is derived from an open input
market or, in other words, an input market that is openly
accessible to existing or potential competitors. The attitudes
and beliefs of purchasers and CEOs, however, were found to be
quite similar. What a firm's executive managers cannot
appreciate, or will not endorse, is unlikely to be given credence
by its purchasing function. The inadequacy of a firm's strategic
purchasing is, therefore, the consequence of poor or uninformed
leadership from its executive management.
The most significant articles, and the most influential, in
explaining the strategic opportunities that are afforded to a
suitably empowered purchaser, are:
Hamel, G. and Prahalad, C. (1990), Strategic Intent, The
Mckinsey Quarterly. Spring, p.36-61.
Prahalad, C. and Hamel, G. (1990), The Core Competence
of the Corporation, Harvard Business Review. MayJun, p.79-91.
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Indeed, it is also acknowledged that this research has been
singularly and significantly swayed by the compelling
persuasiveness of Hamel and Prahalad or, perhaps, more
hopefully, this research has defined, independently, the
importance of understanding the competitiveness role of core
competence, not in terms of re-defining or re-inventing an
industry, but as a means of acquiring competitiveness by
persuading (and encouraging) other firms to recognise the
competitive opportunities of alternative output markets.
In a recent conference paper, Groom-Morgan (1995) discusses
the links between strategic management, competitive advantage
and purchasing. This paper, despite incorporating more than 90
references, does not discount, attempt to discount, or even
acknowledge the fundamental proposition of this research, a
proposition that advocates the impracticability of a competitive
advantage that incorporates a supplier, or suppliers, that is, or
are, shared with, or equally available to, competing companies.
This research aspires to extend the underlying premise of
competitiveness into the arena of purchasing. Competitiveness
is founded on the premise that distinctive and unique
differences need to exist between competing firms. The
strategic purchaser, therefore, should be meaningfully
conversant with the fundamental need to establish differences
between the "pivotally important" suppliers used by a firm, and
the "pivotally important" suppliers used by competing firms. It
is noted, however, that relatively few purchasing tasks are
likely to have a strategic significance, and that alliances, for
example, with both competing firms and with suppliers that
supply competitors, may have benefits. What is undoubtedly
true, however, is that any discussion concerning competitive
advantage and effective purchasing should not ignore the
significance of a firm's input market being, invariably, an open
market.
This research sought to centrally and directly involve the
professional purchaser (and the purchasing function) in a firm's
strategic management. It remains doubtful, however, that the
purchasing function is capable of singularly, or taking the lead
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The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
role in, devising or implementing a procedure that would result
in strategic purchasing, as suggested and proposed by this
research. Strategic purchasing, or strategically thoughtful
supplier selection, is capable of significantly contributing to a
firm's endeavour to achieve a sustainable competitive
advantage. The purchasing function - the firm's activity centre
specifically tasked with administering the firm's outsource
operations - is, however, unlikely to be capable of delivering the
competitive advantage, fundamentally inherent in procurement
with "strategic intent". The purchasing function is pre-occupied
with best practice or procedural purchasing. Its frequent use of
the term strategic to strengthen the significance of its
administrative role, falsely suggests an involvement in
strategically significant activity. Few, if any, of purchasing's
administrative tasks are capable of achieving, for the purchaser
firm, a sustainable competitive advantage. Purchasing has,
undoubtedly, a need to continue developing its options for
achieving best practice. It is argued, however, that this
development is seldom associated with a firm's strategic
management. Outsourcing, however, is, for many firms, an
opportunity to top up strategically important skills, expertise
and technology, an opportunity that attaches a strategic
significance to a firm's supplier selection. The option, however,
of establishing strategic partnerships and alliances with
external suppliers, is indubitably beyond the scope of the
purchasing function. It is evident, and acknowledged, however,
that the purchasing silo has a portfolio of operationally
important tasks - tasks that have little, if any, strategic
importance but, nevertheless, need to be undertaken in a
professional and proficient manner. The opportunities of
strategic supplier selection exist, but it remains an unexploited
and neglected opportunity in many firms. It is, regrettably, our
conviction that the purchasing function is unlikely to be an
appropriate instigator or facilitator of this aspect of a firm's
strategic management, other than as part of a multi-disciplinary
team. The firm, however, must be cautiously aware that the
purchaser is increasingly seeking to elevate the apparent
importance of his or her role by pre-fixing the term strategic to
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his or her routines, whenever they can. Academics, involved in
researching and writing about purchasing's essentially
administrative role, are particularly guilty of this ruse to,
through the expedience of the vernacular, improve their
standing. The firm that is unduly impressed by this ploy, is in
danger of mistakingly believing that the strategic opportunities
of outsourcing are understood by its purchasing function and,
perhaps, are being vigorously pursued. Even Richard Lamming's
much heralded concept of "lean supply" is, at best, only capable
of fostering a "catch up" mentality among its advocates, rather
than a "getting out in front" opportunism. "Lean supply" is about
process strategy, not about competitive strategy. Being "lean"
is, increasingly, merely the pre-requisite for entry to a market,
whereas sustainable competitiveness is a capacity to create
fundamentally new products and businesses (Hamel and
Prahalad, 1994 p. 12-14). Strategic purchasing cannot be
delegated to a function that is, as a matter of necessity,
invariably involved in interminable and routine administration.
Strategic does not mean important, it concerns the fundamental
means by which firms endeavour to achieve a sustainable
competitive advantage. There are many activities that are
important. The need, however, for a firm to appreciate the
origins of its competitive advantage, goes beyond the merely
important. Purchasing is, almost entirely, located within the
merely important category of a firm's activities. It would be
appropriate, therefore, if the term strategic was more
circumspectly used.
Although the professional purchaser, or purchasing function, is
not, it would seem, the appropriate regime within which to
delegate the firm's strategic purchasing, it remains necessary to
delegate to suitably empowered and qualified individuals, the
task of coordinating a firm's efforts to locate and acquire
strategically important externally sourced competencies.
Therefore, the term strategic purchaser should be restricted to
those genuinely involved in strategic outsourcing, irrespective
of their position within the firm's functional structure,
In a similar vein, and given the richness of the responses from
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The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
the sole purchasing director interviewed, it would seem
desirable to extend this research to include other senior
purchasers with the status of purchasing director. These
additional sources of data would undoubtedly provide a further
perspective of what, within industry, is perceived as strategic
purchasing.
RECOMMENDATIONS
The exploratory nature of this research, inevitably places a
limit on what can usefully be concluded and, therefore, viably
recommended. However, the following recommendations are
considered to be both prudent and viable.
The strategic purchaser needs to accept the premise that the
input market offers few competitive opportunities unless,
selectively, its convenience and its conventions are vigorously
and uncompromisingly rejected.
It must be appreciated that the purchaser is unlikely to
abandon the safe haven of accepted practice unless the CEO
uses "stretch" to stimulate the strategic purchaser's
"proactivity".
It should also be appreciated that CEOs need to be involved in
purchasing - without the CEOs' presence and leadership,
purchasing will not be able to assume the status it needs, to
exploit the opportunities of strategic purchasing.
It should be realised that a supplier's competencies, and not
its existing involvement in a particular input market, should
be used to determine its eligibility as a supplier.
It should also be appreciated that although the
competitiveness of a firm is dependent on its ability to
differentiate itself in its output market, it is no less
dependent on its ability to differentiate itself in its input
market.
It should be assumed that as well as the firms that are already
active in a particular input market, other firms with
comparable or even better competencies may be available that
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can be persuaded to enter that market.
It is important that firms are as capable of unlearning, as they
are of learning. A firm must be capable of challenging, and
prepared to challenge, its own orthodoxies. In this context,
both CEOs and purchasers must be prepared to be contrary in
their review of their firm's purchasing orthodoxies.
Strategic purchasers must identify their firm's "spilt milk". A
firm's "spilt milk" represents an opportunity for the strategic
purchaser, to demonstrably illustrate the function and
importance of entrepreneurial purchasing.
The CEO needs to appreciate that strategic purchasing cannot
be delegated to a function that is, as a matter of necessity,
invariably
involved
in
interminable
and
routine
administration.
A variety of definitions emerged from the preceding
discussion, regarding the most appropriate definition for
strategic purchasing. They include the following:
Strategic purchasing is about securing the exclusive use of
the best suppliers.
Strategic purchasing is, necessarily, the use of
competencies sourced in a firm's input market, to increase
the firm's competitiveness in its output market.
Strategic purchasing might be defined as a firm
manoeuvring to expediently seek to form a mutually
beneficial relationship with another firm located in its
backward supply chain.
The final recommendation is that a firm should endeavour to
understand, and vigorously utilise, the opportunities that the
input market represents, and to consider, impartially and
creatively, the following definition, which, it is proposed, offers
an overview of these recommendations:
The purchaser's strategic role is to conceive or
devise the circumstances which will enable the
purchaser firm to successfully acquire exclusive
access to externally sourced innovative technology.
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LIST OF REFERENCES
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Bleeke, J. A. (1989), Peak Strategies, The Mckinsey Quarterly.
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Blenkhorn, D. L. and Leenders, M. R. (1988), Reverse
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Groom-Morgan, S. (1995), Competitive Advantage Through
Effective Purchasing: The Strategic Management Of
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Worldwide Symposium on Purchasing and Supply Chain
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L. (1962), Negotiated
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Materials
Dixit, A. and Nalebuff, B. (1991), Thinking Strategically: The
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Ellram, L. (1990), The Supplier Selection Decision In Strategic
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Hamel, G., Doz, Y. and Prahalad, C.K. (1989), Collaborate With
Your Competitors - And Win, Harvard Business Review.
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The Competitive Strategy of Managing (Backward) Vertical Business Relationships.
Morgan, J. P. (1991), Purchasing 2000: When Sourcing Begins To
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Prahalad, C. K. and Hamel, Gary. (1990), The Core Competence
Of The Corporation, Harvard Business Review. May-Jim,
p.79-91.
Reck, R. F. and Long, B. G. (1988), Purchasing: A Competitive
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24 (3), p.2-8.
Reed, R. and Defillippi, R. (1990), Causal Ambiguity, Barriers To
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Williams, J. R. (1992), How Sustainable Is Your Competitive
Advantage, California Management Review. 34 (3), p.29-51.
Womack, J., Jones, D. and Roos, D. (1990), The Machine That
Changed The World. - Chapter 6, Coordinating The Supply
Chain: Macmillan.
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