STRATEGIC ALLIANCES AS AN ENTRY STRATEGY INTO
MARKETS DOMINATED BY MAJOR CORPORATIONS
Khai Sheang Lee, Guan Hua Lim and Soo Jiuan Tan
Abstract
Although the benefits of strategic alliances are well documented, whether strategic alliances can be a viable entry
strategy option for SMEs to successfully penetrate markets held by major incumbent suppliers, is less clear. In this
paper, we show that strategic alliances can be an effective entry cum deterrence strategy for SMEs to successfully
penetrate markets that are well established and dominated by major corporations. In addition, we illustrate how
SMEs can use strategic alliances as an entry strategy without restricting themselves to target only those markets
ignored by bigger firms. This paper uses a deductive approach -- one based on game theory, to explicitly examine
the reactions of bigger firms to the entry of SMEs into their markets, specifically taking into account the resource
limitations faced by SMEs. We examine two cases of the use of strategic alliances by SMEs as an entry strategy to
penetrate markets dominated by major corporations. The practices and experiences of these SMEs were found to be
consistent with the game theoretic arguments presented here.
Introduction
In an increasingly competitive environment and in the face of competition from bigger firms that possess plentiful
resources, the ability of SMEs to survive and expand their businesses hinges on the formulation of effective
competitive strategies. However, although there is an extensive literature on competitive strategies, the majority of
this literature does not explicitly consider the specific difficulties faced by SMEs, in terms of their lack of
resources. The latter is important as it inhibits the ability of SMEs to acquire sustainable competitive advantages.
Instead, existing literature on competitive strategies implicitly assume that resources required to implement the
strategies as prescribed in these literature are a given. Thus, the impact of resource constraints on strategy
formulation has been overlooked. The applicability of such strategy prescriptions to SMEs -- whose major obstacle
is resource constraint (Weinrauch et. al., 1991), is therefore suspect. For example, of the three generic strategies
proposed by Porter (1980), it appears that only the focus strategy -- concentrating on particular market segment(s),
seems applicable to SMEs contemplating market entry and penetration. What is known as the focus strategy, is also
commonly referred to as the niching strategy. SMEs have been advised to market niche by identifying an unmet
market need in markets where big firms find it unsuitable to cater to (Perry, 1987). In the marketing literature also,
niching seems to be the only strategy recommended by researchers for SMEs (eg. Waterworth, 1987; Paley, 1989;
Kotler, 1996). Hence, a question that arises is whether the niching strategy is the only strategy option available to
SMEs.
Although the benefits of strategic alliances are well documented, whether strategic alliances can be a viable entry
strategy option for SMEs to successfully penetrate markets held by major incumbent suppliers, is less clear. More
importantly, this paper addresses the feasibility of SMEs entering markets that are already well established and
dominated by major corporations, through the use of strategic alliances. We show that strategic alliances can be a
viable strategy option for SMEs to successfully penetrate markets that are well established and dominated by major
corporations. This is feasible because strategic alliances serve as a signal to major incumbent firms of the SMEs'
commitment to stay and serve the market, which therefore deters these rivals from embarking on aggressive counter
entry actions against the SMEs. This paper thus establishes the effectiveness of strategic alliances as an entry and a
deterrence strategy for SMEs. As such, SMEs, in using strategic alliances as an entry strategy, need not restrict
themselves to target only those markets ignored by bigger firms -- unlike the case with the use of the niching
strategy. This is important as it opens up new opportunities for SMEs in competing for markets.
For the signal of market commitment to be credible, SMEs should pick only alliance partners that possess the
relevant strengths (Brouthers et al., 1995; and Das and Teng, 1997), which allow the SME to overcome its
weaknesses relative to the bigger firms. This may be in terms of overcoming the resource disadvantage, increasing
strengths, acquiring competitive advantages, and/or reducing costs. The formation of strategic alliances will
therefore put the SMEs in a better position to defend and survive against the aggressive actions taken by the bigger
firms, and thus pose a credible threat of prolonging any war of attrition. It is this very threat that deters the bigger
rivals from aggressive counter entry actions in the first place, forcing them to acquiesce to the market entry of the
SMEs instead, when the latter enter the market through strategic alliances.
Literature Review
In the literature on SMEs' strategy decision-making, the studies can be categorised into three main areas. Some
identified success factors for SMEs (e.g., Moore and Longenecker, 1987; and Cook, 1992) while others offer
prescriptions for strategic planning processes (e.g., Waterworth, 1987; Scarborough and Zimmer, 1991; and Bhide,
1994). The last group derived heuristics for day-to-day operations of SMEs (e.g., Bennett, 1989; and Tarkenton and
Boyett, 1991). Studies in the marketing literature, on the other hand, have looked into the marketing mix strategy
formulation of SMEs. For instance, Waterworth (1987) and Paley (1989) discussed how the 4 P's of marketing and
the product life cycle concept, respectively, should be adapted for SMEs. In addition, Williams (1990) and Gerson
(1994) identified a set of new "P's" to assist SMEs in their marketing planning efforts.
Although the focus of these works is on the SMEs, most of them fail to take into account explicitly the resource
limitations faced by SMEs in their prescriptions for SMEs on strategy decision-making. Instead, strategy
frameworks implicitly designed for bigger firms with plentiful resources are liberally borrowed and sold as
solutions to SMEs, with little regards that resource constraint affects competitive strategy formulation. In addition,
the existing literature on SMEs contains strategy recommendations that are naive in that they do not take into
account competitive reactions, especially those from the bigger firms. Competitive reactions from bigger firms are
crucial in determining the survival of SMEs in the market place. This is because the SMEs' margin of error is
narrow by virtue of their resource limitations, and the fact that the bigger firms with their deep pockets can easily
launch aggressive attacks on the SMEs market niches. To explicitly examine the reactions of bigger firms to the
entry of SMEs into their markets, we use a game theoretic approach which takes into account both competitive
interactions and the resource limitations faced by SMEs.
Among frameworks on strategy decision-making, Porter's (1980) framework of 3 generic strategies (which are
differentiation, cost leadership, and focus strategies), is perhaps the more popular one. Following his framework, it
appears that only the focus strategy is applicable for SMEs, given their lack of resources. SMEs have been advised
to market niche by identifying an unmet need in markets where big firms find it unsuitable to cater to (Perry, 1987).
Niching seems to be the only strategy recommended by researchers for SMEs (eg. Waterworth, 1987; Paley, 1989;
and Kotler, 1996). While it is important for SMEs to niche, it is less clear whether this is the only strategy available
to SMEs. Lauenstein (1986) raised the possibility that niching may not be the only strategy option available to the
SMEs. Recognising this, Greenfield (1989) suggested the use of Porter's (1980) three generic strategies by SMEs in
competing for markets. However, the wholesale adoption of Porter's framework for SMEs fails to recognise that
SMEs have their own unique characteristics and are not mere miniature versions of bigger firms. Thus, the liberal
borrowing by SMEs of strategy prescriptions meant for bigger firms may be inappropriate, if not flawed. The
SMEs' resource disadvantages make it difficult or even infeasible for them to follow an industry-wide
differentiation strategy, or a cost leadership strategy, as prescribed by Porter. Even the SMEs' ability to successfully
niche is questionable, as it is uncertain if the niching strategy is sustainable against aggressive assaults by bigger
firms. This is because the focus strategy as prescribed by Porter requires SMEs to acquire differential advantages
and/or cost advantages over the bigger firms in the market niches served. We thus need to examine the ease with
which such advantages can be acquired, and the feasibility of doing so, by SMEs.
In order to carry out Porter's cost leadership strategy, a firm needs to enjoy cost advantages over others in the
industry. However, it is doubtful how SMEs can achieve cost advantages as these are often based on economies of
scale or scope, given the SMEs' frequent limited scale of operations (Pelham and Wilson, 1996). Hence, a SME's
cost advantages can only accrue from either the lowering of operating costs and/or having better cost control
because of its size. This means that, for SMEs, the sustainability of the low cost strategy over time is suspect, as it
becomes vulnerable to technological obsolescence and price competition. In the face of aggressive assaults by
bigger firms with deeper pockets and superior resource efficiency, the bigger firms are most likely to outlast the
SMEs pursuing a low cost strategy.
In addition, the ability of SMEs to follow an industry-wide differentiation strategy is questionable. This is because
such a strategy often requires heavy investments in research and development in product innovation or adaptation.
In addition, substantial investments in marketing support and promotions are required to communicate successfully
to the whole market the uniqueness of the products developed. Only then can the SME achieve the industry-wide
competitive advantage of creating a unique consumer perception of its product. It is precisely the lack of resources
faced by the SME that this industry-wide differentiation strategy is beyond its reach.
Given the difficulty in competing industry wide due to the lack of resources, SMEs have therefore been advised to
focus or to market niche. By concentrating on a few select market segments, the investment demands in terms of
marketing support and promotions can be significantly reduced to the extent that they are within the SMEs'
resource capabilities. In following a niching strategy, SMEs can adopt a marketing orientation to build brand equity
(Pelham and Wilson, 1996), which serves as a competitive advantage against potential rivals. Although the niching
strategy is a viable strategy option for SMEs, it restricts SMEs to target only those markets ignored by bigger firms,
and hence severely constrains the opportunities available to SMEs in competing for markets. We show that this
need not be the case when SMEs use strategic alliances as an entry cum deterrence strategy, which allows them to
target markets dominated by bigger firms.
Strategic Alliances as an Entry cum Deterrence Strategy for SMEs
There are several ways that SMEs can benefit from the formation of strategic alliances. The main problem faced by
SMEs in competing for markets is their lack of resources, which put them in a disadvantaged position vis-à-vis the
major corporations. Thus logically, if the resource disadvantage faced by the SMEs can be overcome, then they
would stand a better chance in competing with their bigger rivals. A SME can achieve this through the formation of
strategic alliances with other SMEs, who share like interests, by combining their resources.
Alternatively, a SME could seek a strategic alliance with non-competing major corporations and/or other SMEs
who possess complementary strengths and expertise. Doing so, the SME would be able to increase its strengths and
gain competitive advantages over its bigger rivals. For example, by forming a strategic alliance with a major
corporation, a SME would gain the backing of its more resourceful partner and access to the latter's expertise and
other resources. This would cause competitors to be hesitant in embarking on aggressive actions against the SME.
Finally, through co-operation with other SMEs in joint operations, SMEs could benefit from economies of scale
and scope, and hence acquire cost advantages. In addition, by acting as one in dealing with suppliers, SMEs could
increase their bargaining power with the suppliers. This is feasible because of the increased dependence of the
suppliers on the alliance that result from the combined purchases by the latter and the elimination of rivalry among
the SMEs in alliance. The ability of the alliance to purchase in bigger quantities might convince suppliers to offer it
more competitive terms in trying to secure its business. These would put the alliance in a much better position to
bargain for better prices, and terms and conditions of supply from the suppliers, thus improving its cost position.
In terms of structure, the alliance could be formal in that it involves cross equity ownership where the parties
involved take equity stakes in each other, or even merge to form a bigger organisation. On the other hand, the
alliance could also be very loose, involving some kind of cooperative outsourcing (Suarez-Villa, 1998), sharing of
market information, joint production facilities, cross selling, or joint marketing and promotional campaigns.
Although the strategic alliance so formed might still be small compared to the incumbent bigger firms, it is still
larger than the SME alone. More importantly, the alliance is better able to sustain a prolonged intense competition
with the bigger firms, and thus raise the costs to the latter of any aggressive actions. This is the threat that must be
conveyed clearly to the incumbent bigger firms to deter them from taking aggressive actions in the first place.
The Game Theoretic Model
To understand why the use of strategic alliances can be effective in influencing incumbent bigger firms into
accommodating the market entry by SMEs, we need to examine the competitive interactions between a SME and an
incumbent bigger firm in market entry. This is shown in Figure 1 (omitted), in the game of market entry strategy,
which compares the bigger firm's responses to the SME's entry when the latter enters the market by itself and when
it does so through a strategic alliance.
Suppose a SME targets for entry a market that is well established and dominated by a major firm. As shown in the
figure, the incumbent bigger firm has two options when faced with market entry by the SME into its market. It can
choose either to accommodate the SME or to fight aggressively against the entry of the SME into its market. The
bigger firm will react aggressively to retain its market share if it believes, in so doing, that it can succeed in causing
the SME to exit the market. Doing so would also earn the bigger firm a reputation of aggressiveness that would be
very useful in helping it deter future market entries into its market by other SMEs. This is despite the fact that, in
taking such aggressive actions, it incurs a cost of retaining the market that may far exceed that of the cost of
accommodation (Figure 1 -- omitted), at least in the short term. If the bigger firm is successful in causing the SME
to exit the market, then it can recoup this cost by returning to the old regime.
If the SME enters the market by itself, then the bigger firm will more likely resort to aggressive actions against the
SME. This is because the bigger firm, with its deep pockets, is in a better position to outlast the SME in intense
competition, and thus evict the SME from the market. However, if the SME can convince the bigger firm that it is
committed to stay in the market by entering the market through a strategic alliance, then there is a possibility that
the bigger firm can be influenced into accommodating the market entry of the SME/alliance instead. This is
possible because, if the SME can credibly commit to stay in the market, then any aggressive actions undertaken by
the bigger firm will be prolonged, causing the latter to incur either an increased cost of prolonged aggressive
actions or an increased cost of regaining the market (Figure 1-- omitted).
With the increased ability of the alliance to defend against aggressive actions undertaken by the bigger firm, the
cost of prolonged aggressive actions to the bigger firm mounts quickly. This cost may be far in excess of the cost of
retaining the market, and even further in excess of the cost of accommodation, incurred by the bigger firm. What is
more, there is also no certainty that, through aggressive actions, the bigger firm can succeed in causing the alliance
to exit. In fact the bigger firm's chances of success in ousting the alliance from the market is reduced, due to the
alliance's increased ability to fend off aggressive actions. Even worse, a prolonged intense competition may weaken
the bigger firm to such an extent that it would become vulnerable to competitive assaults by other major rivals.
It is the threat of increased cost of prolonged aggressive actions that will prevent the bigger firm from initiating
aggressive actions against the SME in the first place. This threat can be made credible if the SME enters the market
through a strategic alliance. Doing so, the SME increases its ability to sustain a prolonged intense competition with
the bigger firm, through the acquisition of various advantages of strategic alliance formation as discussed earlier
(§3). Hence, as a deterrence strategy, credible commitment to stay in the market by the SME through strategic
alliance is achieved by the alliance's increased ability to sustain a prolonged intense competition with the bigger
firm.
Conditions for the Use of Strategic Alliances as an Entry cum Deterrence Strategy
Table 1 provides a summary of the conditions for the successful use of strategic alliances by SMEs. As discussed
earlier, strategic alliances are effective as an entry cum deterrence strategy against bigger firms to deter them from
taking aggressive actions against market entry by SMEs and is useful when there is a high chance that the bigger
firms will behave aggressively. Given the possibility of aggressive actions taken by the bigger firms, the alliance
(the SME and its partners) must therefore have at least sufficient resources to sustain a reasonable period of intense
competition. This also implies that there is a possibility of failure, although the chances of success may be good.
Therefore, in using strategic alliance as a deterrence strategy, SMEs must have the aptitude for taking risks, and be
willing and prepared to suffer potential losses, especially in the initial stages of market entry.
Table 1 - Conditions for the Use of Strategic Alliances
as an Entry cum Deterrence Strategy by SMEs
Criteria
Conditions
Target Market
The market is sufficiently large and well established by an existing dominant firm
Competitor's
Behaviour
There is a likelihood that the bigger firm will react aggressively to entry into its market
Resources
The SME and its partners in strategic alliance must together possess sufficient resources to
sustain a reasonable period of intense competition that may be initiated by the bigger firm
Complement
The SME and its partners in strategic alliance should possess complementary strengths and
expertise, such that by coming together the alliance can acquire competitive advantages over the
bigger rivals
Synergy
There must be significant synergistic gains resulting from the formation of the strategic alliance.
These could be in terms of economies of scale and scope, increase in channel power, creation of
monopolistic position, enhancement of promotion efforts, etc.
Risk Taking
The SME and its partners in strategic alliance must be prepared and willing to take the risk of
losses especially in the initial stage of market entry.
In forming strategic alliance, it is important that synergistic gains are achieved. This is in fact the key motivation
for the formation of any alliance, and is what makes an alliance strategic in the first place. Such gains result from
the partners of an alliance acting jointly, as opposed to each of the partner acting independently on its own, and
could be in terms of economies of scale and scope, increase in channel power, creation of monopolistic position,
enhancement of promotion efforts, etc. Finally by selecting partners strategically, such that the partners forming the
alliance possess complementary strengths and expertise, the resulting strategic alliance could achieve greater
synergistic gains as well as acquire competitive advantages over its bigger rivals.
Case Study 1: Provision Supplies Corporation Limited
The 1973 oil crisis sparked off by the quadrupling of oil prices by OPEC led to rising rice and food prices and
severe shortages in Singapore. This presented a grave challenge to the more than 2,000 provision shops in
Singapore who compete in a market that was very crowded and competitive. Provision shops were individually
very small and more often ran as family businesses. They were also localised and did not have the resources,
financial or managerial, to expand. Competition faced by the provision shops was intense and came from many
sources. These include (a) supermarket chains like Cold Storage and Fitzpatrick's that were traditionally patronised
by expatriates, (b) Yaohan which is a Japan-based supermarket chain catering to the middle income groups, (c)
supermarkets in departmental stores, and (d) cooperative supermarkets ran by the trade unions.
In the face of competition from these much larger organisations, the small provision shops found it difficult to
survive. They lacked the necessary financial resources to sustain any intense competition on price. They also did
not have the sales volume to leverage bargains for deeper discounts from suppliers. They could not afford to order
in bulk, given their tight money situation and the lack of storage space. Most of the provision shops doubled as
residences for the owners who lived above their shops. Traditionally, the provision shops competed on the
advantages of (1) proximity to consumers, (2) easy credit and free delivery services for their clients, and (3) flexible
and longer operating hours. The first competitive advantage came under serious challenge when 'NTUC Welcome'
supermarkets were set up in the heavily populated housing districts and hence, entered into markets traditionally
served by the provision shops. The supermarkets were no longer downtown operations that the provision shops
could ignore. This was where most of the shopping for provisions, undertaken essentially by housewives, occurred.
Going into town (in particular, the Orchard Road area which is in the tourist belt) to buy daily provisions was out of
the question for most of most households.
Granting of easy credit and provision of free delivery services by the provision shops were made difficult with
rising interest rates, imports prices, and the tight labour conditions. With higher interest rates and the limited
resources of the individual provision shop owners, the provision shops found it increasingly difficult to grant credit
other than to their most loyal customers. Even this was getting tough. The newer entrants to the market (the private
as well as union-organised supermarkets) were also willing to operate long hours. Finding employees willing to
work long hours and to do delivery rounds was also a problem. Furthermore, wages had gone up and this had
affected the ability of provision shop owners to get the necessary manpower to do home delivery.
To counter these challenges and to ensure their continued survival, some 150 provision shop owners merged to
form the Provisions Supplies Corporation (PSC) in 1974. PSC was to act as the central purchasing body for
members of the Singapore Provisions Shop Friendly Association, which had a membership of 1,200 provision shop
owners. The aim for the establishment of PSC was to purchase in bulk, which therefore allowed the provision shop
owners to benefit from better discounts and competitive terms. Further more, through centralised purchasing, PSC
would be in a much better position to bargain for better terms and conditions of supply from its suppliers. Its
bargaining power would be significantly increased, as it represented a large number of provision shops spread-out
across the country, and hence provided suppliers an access to a large part of the market.
The combined resources of the alliances making-up PSC also allowed it to build centralised warehousing facilities
for storage of goods and to provide inventory support to the individual provision shop owners, hence freeing up
storage space in the individual provision shops. The availability of warehousing facilities in turn allowed PSC to
purchase in even bigger quantities collectively. Finally, it would also be easier for PSC to secure bank loans to
finance purchases and/or to obtain longer credit terms from its suppliers and hence, reduce its working capital
requirements. This was because PSC would now be considered a major corporation, and hence would be rated more
favourably in terms of credit risk rating.
With its initial success, PSC next planned for an even more sophisticated form of strategic alliance to counter the
ever-increasing pressures from major competitors. In 1983, PSC launched the Econ Minimart concept -- a
voluntary "chain store", beginning with forty-nine retail outlets (Mehta, Faheem, and Mehta, 1994). Under this
concept, members of the chain would project a common image and standardise some aspects of their operations
allowing it to reap the benefits of economies of scale of promotion efforts. In addition, a reduction of competitive
intensity among individual provision shops would result as more and more of them sign up on the concept. Through
the Econ Minimart concept, PSC thus established a major chain of provision retailers comparable to any of that setup by other major competitors. In addition, PSC had a distinct advantage in market coverage and location, in that
all the Econ Minimart retail outlets were located in the major heartlands of residential areas in Singapore. Members
of the Econ Minimart chain were also able to benefit from a host of supporting services provided by PSC. These
include assistance to obtain low-cost loans of up to S$30,000, promotional support, management advice on retailing
(for example, merchandising, point of sales displays, pricing, inventory management, cash flow management, etc.),
staff training, and credit on all purchases of up to sixty days. Hence, the alliance between PSC and members of
Econ Minimart was mutually beneficial, and based on complementary strengths and expertise. The combined
purchases from members of the Econ Minimart chain further enhanced PSC's purchasing power, while the retailing
expertise and supporting services provided by PSC improved the retail productivity of individual members of the
chain. The strategic alliance of PSC and the small provision shops through the establishment of Econ Minimart
therefore resulted in the achievement of greater synergistic gains, and allowed it to acquire competitive advantages
over the major competitors in the market.
Case Study 2: Distribution of Industrial Products
Industrial Supplies Corporation of Malaysia (ISCM) is a wholly owned subsidiary of a public listed business
conglomerate in Malaysia. With its main business in the distribution of industrial products (generators,
compressors, industrial engines, welders, and industrial parts and components), ISCM held exclusive
distributorship for a number of brands of industrial products in Malaysia. In order to cover the market effectively,
ISCM adopted a mixed distribution channel structure. For large accounts, ISCM had a direct sales force that sold
directly to corporate clients, and institutional and governmental buyers. In addition, it had a conventional
distribution structure that consisted of wholesalers and retailers, to cover smaller accounts.
ISCM appointed a wholesaler in each of the eleven states in Peninsula Malaysia. Each of these wholesalers was
located strategically in the capital of each state -- this was one of the criteria imposed by ISCM to select authorised
wholesalers for ISCM's products. Each wholesaler was given exclusive territorial rights. This meant that ISCM
agreed not to appoint any other dealers in the territory covered by the appointed wholesaler. In return, the appointed
wholesalers were required to commit to an annual sales quota that was commensurate with the size of the assigned
territory. In addition, these wholesalers agreed to carry stock of ISCM's products, develop a distribution network of
machinery retailers in its territory, and to provide sales and after-sales services to these retailers and their
customers.
For the small machinery and parts and components product categories, it was generally acknowledged by the
industry that control of distribution was a key success factor. In addition, in this market, the distribution system in
which the distributor covered the market via wholesalers and retailers (distributor -- dealer -- retailer -- end user)
was the most efficient. For this reason, all distributors of small machinery, and parts and components, followed this
distribution system. Under this distribution system, ISCM required only three salespersons to cover the whole
Peninsula Malaysia market, with each salesperson being allocated a specific regional territory. The sales person
called on the appointed wholesalers and some key retailers in his territory, to provide sales support services,
maintain relationships, and to gather market information, in addition to closing sales.
Mr. Lee was the marketing manager for ISCM, whose responsibilities included the management of the distribution
system. One morning, Mr. Lee received a telephone call from Mr. Lim, one of the appointed wholesalers for ISCM
informing him that a few of the company's appointed wholesalers have decided to form a new company, and
wished to be able to continue represent ISCM's products. Mr. Lee was further informed that the new company,
Kartel Sendirian Berhad (KSB) had already approached and secured the distributorships of a few other brands of
industrial products. The new company included 9 of the company's 11 appointed dealers and accounted for 75% of
his total sales of small machinery and parts and components in Peninsula Malaysia. The other two appointed
dealers were left out of the cartel because of personal differences.
Before this incident, Mr. Lee used to think that these dealers were small set-ups that were highly dependent on
ISCM for supplies. This was because of the strong market share leadership of, and market pull for, ISCM's
products. In addition, there was little threat from competing brands as they were weak. Thus, there was little
possibility that the dealers would switch allegiance to ISCM's competitors. It was also difficult for any of these
dealers, acting alone, to secure exclusive distributorship rights from manufacturers of industrial products. This was
because each dealer could provide only limited market coverage, and lacked the resources to develop the market
and to set up the necessary distribution and after-sales facilities to support sales of industrial products. Furthermore,
it was a known fact that there was intense rivalry among the dealers. This was because of the extensive practice of
grey marketing by the appointed dealers. Although each dealer was given an exclusive territory, and was not
allowed to supply retailers outside of its territory, nevertheless this was blatantly ignored. Competition among the
appointed dealers was therefore intense, in the sales of ISCM's products. This was further aggravated by the quota
commitments imposed on the appointed dealers by ISCM. The intense competition among the appointed dealers to
fulfil the quota requirements set by ISCM caused wholesale margins to be severely depressed -- some dealers made
a gross profit of as low as 2% for some of ISCM's products, making the dealers unhappy. The dealers had
complained repeatedly to Mr. Lee about the occurrence of grey marketing of, and the low wholesale margins for,
ISCM's products. However, given the strong market position of ISCM's products, it was generally felt by ISCM's
management (including Mr. Lee) that these problems would not pose a serious a threat to ISCM.
The establishment of the dealers' cartel changed the equation on the balance of channel power. KSB would also be
well positioned to acquire its own exclusive distributorship rights directly from manufacturers of industrial
products, instead of merely being a middleman for existing distributors. This made KSB a serious contender for a
direct share of the lucrative industrial products market. With the combined resources of the nine dealers, KSB was
able to embark on several key strategies to maximise its profits and improve the position of its individual partners.
For a start, all members of KSB could co-operate to minimise the practice of grey marketing in each other's
territory, and hence their profit margins. KSB could also act as the central purchaser for all its members making it
possible for it to negotiate with all existing suppliers for better prices, terms, and conditions. In addition, KSB could
also follow a free-riding strategy by parallel importing industrial products of established brands. This would add
further pressure on authorised distributors of such brands to offer even more competitive terms to KSB, in order to
discourage KSB from parallel importing. With its resources and the market access that it offered, KSB could also
secure direct exclusive distributorship with manufacturers. In this regard, KSB could source for exclusive
distributorships of new brands. Alternatively, KSB could attempt to wrest away exclusive distributorships currently
held by other distributors.
The nine dealers in coming together had created a potent force in KSB. Recognising this, it was therefore of no
surprise that many distributors chose to accommodate KSB by working with it, instead of against it. However, this
may not be the best of solution for these distributors in the long term. As KSB grew bigger over time, and
consolidated its hold on the market, KSB's chances of success in wresting control of exclusive distributorships held
by these distributors who accommodate could only increase. Existing distributors, including ISCM, therefore faced
the dilemma not unlike that of the "chain store paradox" (Selten, 1978). A refusal to deal with KSB could result in
severe loss of sales revenue, while dealing with KSB could result in the eventual loss of exclusive distributorship.
In the case of ISCM, Mr. Lee realised that if he did not accede to Mr. Lim's request, his sales would suffer
immediately, as his products would not be distributed in nine out of the eleven states in the Peninsula. Even if he
chose to replace the nine dealers who formed KSB, it would take quite a while to recruit alternative dealers in these
states. In any case, even if he were successful in recruiting replacement dealers, these new dealers might face a
tough job in convincing existing customers to buy from them rather than from the nine "errant" dealers. This was
because the existing dealers had a close business relationship with these customers and had created a strong pull for
their services.
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About the Authors
Khai Sheang Lee
Assistant professor of Marketing at the Faculty of Business Administration
National University of Singapore
Guan Hua Lim
Assistant professor of Finance and Accounting at the Faculty of Business Administration
National University of Singapore
Soo Jiuan Tan
Assistant professor of Marketing at the Faculty of Business Administration
NationalUniversity of Singa pore
Contact person:
Dr. Khai Sheang Lee
Department of Marketing
Faculty of Business Administration
National University of Singapore
10 Kent Ridge Crescent
Singapore 119260
Tel: +65 8743163
Fax: +65 7795941
E-mail: [email protected]