IE 463

1. IE 463 Lec 2. Relationships

2. OUTCOMES OF INTERFIRM VALUE CREATION 1. Competitive Advantage To survive and flourish in a competitive business world, each firm develops relationships with its counterparts; sharingresources and producing interdependency. This dependence results in cooperative relations and the gaining of competitive positions. Competitive advantage categories of cooperation are, • investments in relation-specific assets • substantial knowledge exchange • combining of complementary, but scarce resources or capabilities. Relationship-specific asset: assets whose value is greater within a given relationship than outside it. Ex: a supplier who makes investments in order to customize her product for the needs of apurchaser.

3. 2. Customer Satisfaction and Loyalty Interfirmrelationships are developed to ensure customer satisfaction and loyalty and to achieve competitive advantage. A customer-centric orientation needs to be created which is possible through interfirmvalue creating activities. Ex. Improvement of customer service by raising availability and reduced order cycle time (period between placing of one set of orders and the next). 3. Long-term Orientation and Growth In a strategic interfirmrelationship, partners pursue strategic goals through ongoing long-term joint activities that lead to the building of long-term relationships. Credible and reliable behavior by partners increases the long-term orientation of an existing relationship. Joint efforts improve relationships and add value for both sides.

4. BUYER –SELLER RELATIONSHIPS Relationships between buyers and sellers existed since humans began trading goods and services. Relationships developed in a natural way over time as the buyers and sellers developed trust that is supported by mutual benefits. These relationships have become "strategic" and the process of relationship development is accelerated as firms strive to create relationships to achieve their goals. In today’s environment of relationship acceleration, there is less time for the participants to carefully explore the range of long termrelationship development. The expectations of performance have increased, making the development of a satisfactory relationship even more difficult.

5. Ex. Choosing a seller An important phenomenon related to buyer-seller relationships is that many buyers are developing single or few source suppliers because of the pressure to, • increase quality • reduce inventory • develop more effective management systems (like just-in-time) • decrease time to market, etc. The ultimate goal in developing such capabilities is to reduce costs. But not all suppliers are appropriate partners for the type to establish cooperative relationship with. Supplier fitness can be checked by, • the value that the supplier adds to production • the operating risk associated with using the supplier

6. EVALUATING SUPPLIER’S PARTNER QUALITY A supplier firm that falls in the shaded quadrant, • contributes high added value; making him important for competitiveness • represents low risk as a partner; making him a candidate for relationship development low operating risk associated with doing business with seller high high low value added to product by seller

7. BUYER-SELLER RELATIONSHIP DEVELOPMENT Stage 1: Pre-relationship stage • Search for potential partners • Evaluate and select potential partners • Cross-check partners’ competency • Match needs and capabilities Stage 2: Early stage • Contact and establish rapport with partners • Test for compatibility with partners • Determine mutual goals

8. Stage 3: Development stage • Joint planning of activities, responsibilities and relationships • Develop trust • Regular contact and socialization • Trial activities • Adaptation and adjustment through agreement, negotiation and self control Stage 5: Final stage • Long term rewards based on mutual behavior and trust • Termination based on the extent of mutual interest and cost benefit analysis of continuing the relationship

9. OTHER EXAMPLES OF RELATIONSHIPS In addition tocomplex and long term relationships between industrial buyers and sellers, many others exist which are equally important, but different in nature. Consumer Relationships Consumer'schoice amongst a variety of brands is important. But, not only is each purchaseinfluenced by the consumer's attitude to a number of brands (whether ornot he has purchased each of them before) , but perhaps more importantlybrand choice is also influenced by the consumer's relationship with the retailer. That relationship is constructed from the meanings which each partyattaches to each other's actions - on one side,

10. the store's sales person,its merchandising and its overall product assortment; ora company which has a portfolio of customers with whom itdevelops and manipulates a relationship,interacting by mail, telephone andperhaps less importantly through visits to the store • on the other thecustomer's purchase level and pattern and his payment performance etc. These all influence the customer making a brand choiceand the store deciding what should be shown to any individual consumer. Assortment: acollection of various kinds,a variety. Mechandize: to promote the sale of, as by advertising or display.

11. Manufacturer-Retailer Relationships A manufacturer's relationship with retail distributors is a function of thestrength of the manufacturer's brand franchise but also of a whole seriesof factors to do with adaptation of offering terms and the particularthings which are done for individual stores - in tailored product, enhanced delivery, price modification etc. Business Relationships Mutually beneficial relationships including employees,investors and other stakeholders, result in confidenceand trust that can carry an organization through the inevitable hard times. Brand franchise:arrangementbetween a brand name manufacturer and a wholesaler or retailer that gives the wholesaler or retailer the exclusive right to sell the brand manufacturer's product in a specific territory. Stakeholder:any individual or group which has an interest in and/or is affected by the goals, operations or activities of theorganizationor the behavior of its members.

12. Business relations are relations between stakeholders in the business process, such as • employer- employee • employer/employee - business partner • employer/employee -outsourcedemployee relations, etc. In developing a business relationship, after oneestablishes a relationship (by a phone call, personal contact, email, etc.), has to properly maintain and deepen them. Mutually beneficial relationships including employees, investors and other stakeholders, result in confidence and trust that can carry an organization through the inevitable hard times. Franchise: i) the right to sell a company's goods or services in a particular area; ii) a business that is given such a right.

13. Research shows that even with the best products and business practices, still strong relationships are needed to succeed in the marketplace, therefore the relationships must be carefully managed. Business relationship management is a formal approach to understanding, defining, and supporting a broad spectrum of inter-business activities related to providing and consuming knowledge and services via networks, with an emphasis on the emergence of online networks as a primary medium through which business relationships are conducted.

14. SUMMING-UP A relationship provides functions for each actor (resource collection, innovation, productivity improvement etc.) and thus becomes part of the organizational structure. Each relationship eventually leads to new relationships with third parties. A real relationship is already a “quasi-organization” in itself. The boundary of a firm is blurred as a result of its relationships with the outside world ! Quasi: almost, resembling, seeming.

15. RELATIONSHIPS IN INDUSTRIAL MARKETS Relationships between actors (people,organizations) in industrialmarkets define a structure in which, • flows of tangibles (materials) and • flows of intangibles (information, capabilities etc.) take place (a medium or space of flows). This is an exchange structure in which often lasting patterns of interaction emerge. Flows act as the intermediaries of value creation during the exchange, in fact they sustain the industrial market. A relationship that starts with initial contact and communication develops into an interaction through exchange and adaptation.

16. RELATIONSHIPS - INTERACTIONS relationship interaction • exchange processes • - product/service exchange • - information exchange • - social exchange • adaptation processes • - products • - production • - routines • mutual orientation • - preparedness to • interact • - mutual knowledge • - respect for interests • investments • dependence • bonds

17. connecting mechanism transforming process exchange interaction interaction between three actors Interaction and value ceation in business relationships (eg. in networks)

18. i. In exchange process, parties test how well they fit each other. ii. During interaction, new knowledge and new skills are learned. iii. In adaptation, misfits between parties are eliminated. Parties influence each other toward adaptation in several ways, • technical adaptation (modifying products, production, ..) • logistics adaptation (stock levels, common delivery, ..) • financial adaptation (handling payments, ..) • knowledge adaptation (technical cooperation, ..)

19. STRUCTURES IN RELATIONSHIPS • cooperation results in ties between resources link • cooperation results in • links between activities activity activity tie resource resource bond • cooperation results in bonds • between actors actor actor

20. LEVELS OF ANALYSIS interaction single exchange aggregate of interactions between two actors dyad similar relationships a firm has with other organizations portfolio all the relationships of an actor net a whole structure of an industry or market network (Ritter and Gemünden, 2003)

21. DYAD It is the primary business relationship structure between pairs of three different types of subjects (activities, actors, resources), which represents a function for each of them. Dyad is formed when there is an opportunity • to rationalize • to develop • to exercise influence/power dyad efficiency and flexibility presure network firms

22. DEVELOPMENT OF STRUCTURES

23. NETWORKS: INTERACTION APPROACH • Interaction approach takes the relationshipsas its unit of analysis rather than the individual transaction. • Involves simultaneous analysis of the attitudes and actions of both parties and emphasizes the essentialsimilarity between the purchasing (buying) and marketing (selling) tasks in relationships. • The coordination and mobilization of the company's portfolio of relationships and the mobilization of the resources of both companies through interaction in those relationships enhances a company's network position. Network position: description of a company's portfolio of relationshipsand the rights and obligations that go with it.

24. activities resources actors ACTOR-RESOURCE-ACTIVITY MODEL Håkansson & Snehota (1995) have developed the model presented above for industrial networks in a practical dynamic direction; a dynamic entity that is built by actor bonds, activity links, and resource ties. With the help of these dimensions, the nature of a relationship developed between two actors can be characterised. Additionally, the dimensions can also be used to help illustrate those effects that the relationship has on the dyad itself; on both parties separately; and, lastly, on third parties.

25. Thus, through utilisation of the dimensions, important and holistic information can be obtained concerning the effects of each relationship on the surrounding network. • Actor bonds connect actors together Actor bonds affect the way the actors experience each other and various situations. Actor bonds have an influence on what kinds of identities are formed for the various actors within the network. An identity that is formed affects every activity performed by the parties in the relationship, but also the activities performed change the identities of the parties in the relationship.

26. However, identities are also affected by the images one party in the relationship has of the other. Some of these images are formed through joint, concrete activities, but some are only based on assumptions about the other party. This kind of identity forming can be used to examine the strength of the bonds between the actors. Similarly, the level of mutual commitment and trust between the parties can be used to this kind of examination of the strength of the bonds between the actors. This is because the bonds are created in a relationship where the parties show a certain amount of interest in each other and become mutually committed.

27. ii. Activities are linked to each other There can be identified, e.g., technical, administrative, and commercial links between network activities. An essential element is that development of the activity links is affected by development of the overall relationship between the actors. Activity links can be seen as forming broader entities of activity chains, in which the activities carried out by a single actor are based on the activities that have been carried out by another actor. This idea is in line with the expanded idea of “value chain” as an inter-organisational value constellation, in which the interrelated activities of different organisational actors are looked as one entity.

28. The notion of value constellation emphasizes the notion of end customer, thus a downstream movement along the overall value chain. iii. Resources are possessed by the actors and also shared and distributed by the actors Resources include different types of elements, such as various forms of technology, materials, and information. The role of the resource ties is to connect the resource elements possessed by two or more network actors. In addition to the activity links, also the resource ties are affected by the development of the relationship between the actors involved. Relationships are important business resources.

29. RELATIONSHIP VARIABLES The development of close relationships is a function many essential processes. • Exchange In a relationship, four main exchanges take place: product or service; money; information, and social. Exchange of these elements may become routinized over time which leads to the development of a clear set of roles or responsibilities that each partner is expected to carry out. i. Product/Service exchange As the exchange of a product/service provides the impetus for buyer-seller interaction, the characteristics of the product/service exchanged are likely to have a significant effect on the processes of interaction which develop between the two parties. Importance of the product/service to the buyer links it to his interaction goals.

30. ii. Information exchange Strategies giving rise to the partnerships between industrial actors, such as joint product development and just-in-time systems, require extensive exchange of technical and commercial information. The complexity of the product/service being purchased has profound effects on the amount of information exchange which is required and the length of time over which this occurs. For instance, • the exchange of technical specifications for a standard product would not necessarily yield intense ties between buyer and seller; • yet the purchase of a complex product may require close collaboration and exchange of information between buyer and seller over a period of months or even years.

31. iii. Social exchange Social exchange refers to the interpersonal relationships which exist between members of organizations. Interpersonal contacts are critical in the establishment of close, long-term relationships between industrial actors. Social exchange facilitates problem solving and is particularly important in overcoming barriers to communication. The degree of social exchange reflects the decision maker's need to trust his counterpart. Personal relationships between members of the interacting firms build mutual trust which serves as a risk reduction mechanism. Following the exchanges between two firms and the resulting cooperation, adaptation take place which either firm may make in the elements exchanged or the process of exchange.

32. Commitment The desire to continue the relationship and towork to ensure its continuance. Commitment implies importance of the relationship to the partners and a desire to continue the relationship into the future. • Cooperation Similar or complementary coordinated actions taken by firms ininterdependent relationships to achieve mutual outcomes orsingular outcomes with expected reciprocation over time. Cooperation is a product of the exchange episodes that take place between partners. As representatives of organizations interact over time, agreement is reached as to the appropriate role and scope of both firms. The activities of both partners are "geared into each other with a maximum of effectiveness and efficiency”.

33. Thus, cooperation refers to the extent that the work of buyer and seller is coordinated. Buyers and sellers who relate to one another in a cooperative mode intentionally seek common goals. Furthermore, it has been shown that members of buying and selling firms are often willing to engage in cooperative behavior in order to maintain a relationship which is viewed as being mutually beneficial. The interaction of cooperation and commitment results in cooperative behavior allowing the partnership to work ensuring that both parties receive the benefits of the relationship.

34. 4. Adaptation Adaptation occurs when one party in a relationship alters its processes or the item exchanged to accommodate the other party. It refers to the extent to which the buyer and seller make substantial investments in the relationship. By virtue of having committed resources to the relationship, the party making the investment has adapted to the needs of his counterpart. Adaptations may be made by either partner with regard to basic business procedures, such as inventory management and the collection and dissemination of information, and/or product or process technology. One or both parties may even adapt their attitudes, values, and goals in order to further the exchange process or enhance the relationship.

35. The adaptation process may be initiated by either party and adaptations may either be mutual or one-sided. Adaptations such as just-in-time purchasing and production, joint research and development processes, or training of the customer's workforce by the manufacturer may result in considerable gains in efficiency. 5. Interdependence and Power Imbalance: The power of the buyer or seller is closely tied to the interdependence of the partners in a relationship. Power imbalance is the ability of one partner to get the other partner to do something they would not normally do. Power imbalance leads to asymmetries in the relationship outcomes such as decision making, conflict resolution, information sharing or appropriation of the benefit. Such asymmetries can adversely affect trust.

36. Trust A belief that one relationship partner will act in the best interests of the other partner. Trust is a fundamental relationship building factor. One party believes that its needs will be fulfilled in the future by actions taken by the other party. • Mutual Goals The degree to which partners share goals that can only be accomplished through joint action and the maintenance of the relationship. Mutual goals provide a strong reason for relationship continuance; influence performance satisfaction which, in turn, influences the level of commitment to the relationship. 8. Non-Retrievable Investments The relationship specific commitment of resources which a partner invests in the relationship. These non retrievable investments (capital improvements, training, and equipment) cannot be recovered if the relationship terminates.

37. 10. Bonds i. Structural Bonds: Structural bonds are forged when two partiesmake investments that can not be retrieved when the relationship breaks down, so the relationship is prevented from coming to an end. Structural bonds develop over time as the level of the investments, adaptations and shared technology grows until a point is reached when it may be very difficult to terminate a relationship. Firms with high levels of structural bonding have a higher level of commitment to the continuance of the relationship than firms with lower levels of structural bonding. Ex. A machine tool manufacturer providing training tothe customers’ operators would inhibit the customer from switching toanother supplier due to the cost and disruption caused by retraining.

38. Ex. Company A has involved his customer B in product development projects with knowledge and expertese exchange. As a result, resources are shared and activities are jointly performed. B would prefer to remain as the customer of A, since joint knowledge and improved production processes reduce operating costs. The bond is so deep because it offers a value added that the customer can’t give up. Structural bonds represent the strategy to built up long-term relationships. Transaction: i) a business deal (an occurrence in which goods, services, or money are passed from one person, account, etc., to another), ii) the act or process of doing business with another person, company, etc.

39. ii. Social Bonds: The degree to which individuals are integrated into group or society through social interaction. Individuals may develop strong personal relationships which tend to hold a relationship together. Buyers and sellers who have a strong personal relationship are more committed to maintaining the relationship. Socialbonding is found in positive interpersonal relationships betweenbuyer and seller. They may be easier to break than structural bonds asbuyers can find it difficult to justify an inferior decision based on friendship. It is important that suppliers understand the value that differenttypes of bonds bring to customers.

40. COOPERATION and COLLABORATION • Cooperation is the process of working or acting together; joint operation or action of autonomous organizations. It is a form of behavior and refers to the practice of individuals and groups working in common with commonly agreed-upon goals and possibly methods, instead of working separately in competition. ii. Collaboration is working with each other to do a task or a project. It is a recursive process where two or more people or organizations work together to realize shared goals, (this is more than the intersection of common goals seen in cooperative ventures, but a deep, collective, determination to reach an identical objective).

41. COOPERATIVE AND COMPETITIVE ASPECTS OF INTERFIRM RELATIONS i. In competitive interactions the relevant goals of both parties cannot be simultaneously satisfied. • A relationship where there are mutual and positive bonds between the parties is seen as cooperative, whereas a competitive relationship is characterized by an absence of bonds or negative mutual bonds. • Non cooperation is usually regarded as opportunism and conflict. • Interfirmcompetition comprises the behaviors and sentiments which are directed towards impeding trading partners from reaching their goals while facilitating reaching one’s own goals. • It is often argued that cooperation and competition coexist in relations.

42. Firms manufacturing the same product may be cooperative with regard to expanding the total market but competitive with regard to the share of it each attains. Within a buyer-seller relationship parties may cooperate to achieve reliable quality, delivery, and acceptable price but compete for the most favourable payment terms. Parties may continue to compete for more advantageous financial terms within the context of an otherwise cooperative relationship. ii. All activity undertaken jointly or in collaboration with others which is directed towards common interests or achieving rewards is covered by the definition of cooperation. • Cooperation contains, sentiments, behavior and expectations of future behavior.

43. In buyer-seller relationships cooperative behavior includes the coordination of tasks which are undertaken jointly and singly to pursue common and/or compatible goals and activities undertaken to develop and maintain the relationship. • Cooperative expectations arise between firms as a result of cooperative behavior and sentiments and also support and sustain that behavior. • Firms specializing in different production and marketing activities participate in a complex form of cooperative behavior where different and complementary actions are executed simultaneously and with reference to each other. In part this is possible as a result of the operation of common understandings about the way business is conducted. These system norms (behavior that contribute to maintenance of a system) facilitate interactions occurring in social systems. A considerable portion of commercial behavior is organized through such norms.

44. Cooperation is also facilitated by relationship norms (that maintain a relationship). In relationships cooperation can be part of the norms, e.g. through time the division of tasks and the way in which these will be performed are embedded into the relationship. • Cooperative expectations include the attitudes, perceptions and sentiments (including concern for the other party’s well-being, trust, and personal bonds arising among the people involved. Alternatively cooperative behavior can be overt (open) where a person or firm may direct the actions of another as a means of organizing a joint action; or people or firms may jointly organize their activities to achieve a given end.

45. STRUCTURES OF COOPERATION: EXTREME CASES • Market transaction: customer placing the order - supplier supplying the goods – customer reimbursing the supplierfor the goods received (customer is free to seek another supplier). • Integrated company: coordination takes place within the same organization creating a hierarchy. The market mechanism (price) is supposed to take care of resource allocation, but there are other relational needs and problems that require the fitting of internal activities with those of external counterparts like “suppliers and customers”. They are much “thicker” then depicted by market models. market transaction integrated company alternative types of cooperations nocooperation / collaboration complete cooperation / collaboration

46. Therefore; the market mechanism (price) is supposed to take care of resource allocation, but there are other relational needs and problems that require the fitting of internal activities with those of external counterparts like “suppliers and customers”. They are much “thicker” then depicted by market models.

47. RELATIONSHIP PORTFOLIO A firm can manage the connections between its relationships in terms of the relationship portfolios. These portfolios are a part of firm’s strategic resources and comprises all the relationships with other organizations the firm is involved in. Portfolios include exchange and other type of relationships with actual and potential • suppliers • customers • distributors • other org.s like government agencies, competitors and complementors

48. Portfolio Management: Balancing the benefits and costs of exploitation vs. exploration Exploitation: refinement and extension of existing competencies, technologies and paradigms (returns are positive, proximate and predictable) Exploitation, ie. developing close, cooperative long lasting relationships helps firms to adapt their products, operations and services to meet each other’s needs better.

49. Exploration: experimentation with new alternatives (returns are uncertain, distant and often negative). Exploration, ie. developing new relationships with customers, suppliers and other types of org.s provide new relationships that become important sources of learning and development that challenge old routines and patterns of thinking. The appropriate balance of exploitation vs. exploration depends on the nature of environment and the benefits of learning and knowledge development. Exploration is more advantageous in dynamic environments, like the computer industry.

50. ALLIANCES Organizations have been placing greater priority on managing external environment by building stronger relationships with customers and suppliers. These relationships however, do not always reach the level of organizational partnerships. Recently, org.s have moved beyond customer/supplier relationships to establish alliances with their competitors. These inter-firm alliances often take the form of formal partnerships, ranging from joint product development to R&D collaboration. Strategic alliances are voluntary agreements involving sharing, co-development of • products • technologies • services