Manging B2B relationships in industrial markets, Dispense di Marketing Business-to-business (B2B)

Scarica Manging B2B relationships in industrial markets e più Dispense in PDF di Marketing Business-to-business (B2B) solo su Docsity! 1 MANAGING B2B RELATIONSHIPS IN INDUSTRIAL MARKETS Sommario 1. VALUE CREATION IN BUSINESS RELATIONSHIPS AND NETWORKS ....................................................... 5 1.1 VALUE CREATION in B2B.......................................................................................................................... 5 1.2 CREATING AND DELIVERING VALUE ........................................................................................................ 6 1.3 COMMUNICATING VALUE ....................................................................................................................... 6 1.4 TAILORED OR STANDARD OFFERINGS? ................................................................................................. 10 1.5 FROM THE FIRM ALONE TO THE “INTERACTING” FIRM ........................................................................ 10 1.6 REINTERPRETING THE 4 Ps .................................................................................................................... 12 1.7 MARKETS AND NETWORKS.................................................................................................................... 15 1.8 WHAT IS A NETWORK? .......................................................................................................................... 17 1.9 THE NETWORK VIEW OF STRATEGY ...................................................................................................... 17 1.10 THE FIRST NETWORK PARADOX .......................................................................................................... 19 1.11 THE SECOND NETWORK PARADOX...................................................................................................... 20 1.12 THE THIRD NETWORK PARADOX ......................................................................................................... 22 1.13 Business relationships ......................................................................................................................... 23 1.14 Relationships and business enterprise ................................................................................................ 24 1.15 Business relationships interconnectedness ........................................................................................ 25 1.16 Connectedness of business relationships ............................................................................................ 27 1.17 Business relationships in market networks ......................................................................................... 28 1.18 The concept of relationship ................................................................................................................. 30 1.19 ARA MODEL ......................................................................................................................................... 33 1.20 DEVELOPMENT OF BUSINESS RELATIONSHIPS .................................................................................... 36 1.21 COPING WITH RELATIONSHIPS ............................................................................................................ 37 2.MANAGING CUSTOMER RELATIONSHIPS AND PORTFOLIO ................................................................... 39 2.1 Organizational purchasing ..................................................................................................................... 40 2.2 Characteristics of industrial marketing.................................................................................................. 42 2.3 THE FACETS OF RELATIONSHIPS ............................................................................................................ 42 2.4 THE RELATIONSHIP AS A DEVICE ........................................................................................................... 43 2.5 CUSTOMERS’ UNCERTAINTIES ............................................................................................................... 44 2.6 SUPPLIER’S INFLUENCE TACTICS ............................................................................................................ 44 2.7 SUPPLIERS’ UNCERTAINTIES AND CUSTOMERS’ INFLUENCE ................................................................ 45 2 2.8 CUSTOMERS’ INFLUENCE TACTICS ........................................................................................................ 45 2.9 RELATIONSHIPS AS ASSETS .................................................................................................................... 46 2.10 Stages in relationship development .................................................................................................... 46 2.11 RELATIONSHIPS AS PROBLEMS ............................................................................................................ 49 2.12 RELATIONSHIPS WITH CUSTOMERS .................................................................................................... 50 2.13 The characteristics of customer relationship ...................................................................................... 50 2.14 How a relationship develops ............................................................................................................... 52 2.15 Involvement in a relationship .............................................................................................................. 53 2.16 The economic value of customer relationship .................................................................................... 54 2.17 Managing a relationship with a single customer ................................................................................. 54 2.17.1 ASSESSING THE RELATIONSHIP ......................................................................................................... 54 2.17.2 MAJOR ACTIVITIES IN CUSTOMER RELATIONSHIP MANAGEMENT .................................................. 56 2.18 Managing a portfolio of relationships ................................................................................................. 58 2.19 3D ANALYSIS ........................................................................................................................................ 59 2.20 STRUCTURE, SCOPE & POSTURE .......................................................................................................... 60 2.21 Dyadic Business Relationships Within a Business Network Context ................................................... 63 3. MANAGING CUSTOMER PROFITABILITY .......................................................................................... 67 3.1 Pricing in business relationships ............................................................................................................ 67 3.2 Which customers shall we prioritize? .................................................................................................... 69 3.3 Which customers are profitable? .......................................................................................................... 69 3.4 Cost analysis study: ABC ........................................................................................................................ 71 3.5 The “customer profitability whale” ....................................................................................................... 73 3.6 Customer profitability in percentages ................................................................................................... 73 3.7 Managing customer profitability ........................................................................................................... 73 3.8 Customer accounting techniques and inter-organizational interfaces ................................................. 74 3.9 CUSTOMERS’ RELATIONSHIP TYPES ...................................................................................................... 75 3.10 CUSTOMERS’ ACCOUNTING TECHNIQUES .......................................................................................... 76 3.10.1 CUSTOMER SEGMENT PROFITABILITY ANALYSIS ............................................................................. 76 3.10.2 CUSTOMER PROFITABILITY ANALYSIS .............................................................................................. 76 3.10.3 LIFETIME CUSTOMER PROFITABILITY ANALYSIS ............................................................................... 76 3.10.4 CUSTOMER VALUATION ANALYSIS ................................................................................................... 77 4. COMMUNICATION AND ICT IN BUSINESS RELATIONSHIPS ................................................................ 80 4.1 Communication in business relationships ............................................................................................. 80 4.2 Communication in B2B: Gadde’s model ................................................................................................ 80 4.3 What is “electronic” communication? .................................................................................................. 81 4.4 History of B2B e-solutions and business models ................................................................................... 82 5 1. VALUE CREATION IN BUSINESS RELATIONSHIPS AND NETWORKS (CHAPTER 1) Why are we in business? To provide value to customers, which essentially means find solutions (standard or tailored) to needs. Our offering must create customer value, but what does it mean? • Value is subjective: depending on the specific customer/user who EVALUATES selected features of an offering • Value includes benefits & costs → it can be: o Functional → practical impact from using a certain product o Emotional → not very important in B2B relationships o Transactional → what it takes to find, obtain and manage a product o Economic → price, savings etc.. (quantifiable value) • Value is INSIDE or AROUND the product/offering: exchange value (similar to transactional value) and use value • Partly quantifiable in economic terms: cost savings or revenue increases 1.1 VALUE CREATION in B2B Fundamental to quantify value in B2B. buyers wan to know the economic value of the offering, meaning how it impacts on their profit/loss account. In order to convince buyers, it is essential to have a good value proposition. However, price is not the only factor to consider; it is only the tip of the iceberg. It is important to consider also all effects on costs/revenues at customers and even at customer’s customers 6 1.2 CREATING AND DELIVERING VALUE Customer Satisfaction = delivered value (values – costs)/expected value Very often, the delivered value is lower than the expected value. however, it does not necessarily means that the customer will not come back; maybe he realizes that his expectations were too high. If the ratio is high, it leads to: • customer loyalty & retention → the basis for any relationships because loyal customers are customers who will come back. • customer profitability & lifetime value → it is important to consider that maybe the 1st time, a customer is not that profitable (small quantities purchased) but it will be if he comes back. How is value created? Focus on value-creating ACTIVITIES • Value chain (Porter), supply chain (Volvo), network (info storage) • “Make or buy”: decide scope of activities (vertical integration level) → the more activities you control and the more vertically integrated you are. Ex: • Specialize & outsource → it is impossible do all inside one company. Interaction strategies are key in order to allow a company to specialize on its core activities and be successful anyway. Generic value chain 1.3 COMMUNICATING VALUE There are different ways to have a “Customer value propositions” but not all of them are equally effective: 1. List all benefits → but careful, not all features are valuable to users 2. Benchmark benefits to competitors’ offerings → but be careful, “better than competitors” does not mean “better for the buyer” 3. Grasp critical customer needs + offer benefits addressing them → this is the smartest and most effective way to make a value proposition. Of course, it is essential to know the customers deeply and to focus on 2 or 3 7 key elements that are particularly useful for consumers. In order to achieve this goal, customer analysis is required. Some managers view the customer value proposition as a form of spin (propaganda) their marketing departments develop for advertising and promotional copy. This short-sighted view neglects the very real contribution of value propositions to superior business performance. Only after companies become disciplined about understanding customers, they can make smarter choices about where to allocate scarce company resources in developing new offerings. We have classified the ways that suppliers use the term “value proposition” into three types: all benefits, favourable points of difference, and resonating focus. the least knowledge about customers and competitors and, thus, the least amount of work to construct Managers may claim advantages for features that actually provide no benefit to target customers. Another pitfall of the all benefits value proposition is that many, even most, of the benefits may be points of parity with those of the next best alternative, diluting the effect of the few genuine points of difference. 10 1.4 TAILORED OR STANDARD OFFERINGS? Tailored solutions provide max value to customers but entail highest costs for suppliers. If the customer is ready to pay a surplus for having a tailored offering than there is no problem. Otherwise, we have a TRADE-OFF between CUSTOMIZATION (enhanced value) and STANDARDIZATION (scale economies). FACING THE CUSTOMIZATION-STANDARDIZATION TRADE-OFF: Some tips to face the trade-off: • look inside your firm: are own resources and technologies flexible enough for tailoring? (rigid process Vs adaptive shop) • look at your customers: are their needs homogeneous? willingness to pay? Can you easily separate needs + detach the related product features? • modularization: standardize some parts of your offering, while you customize high-value parts (e.g., vertical solutions) • business relationships: view adaptations as investments that will pay off in future repeated exchanges! Or risk of losing profitable customers 1.5 FROM THE FIRM ALONE TO THE “INTERACTING” FIRM What almost all marketing models have in common, is the idea that the market is a non-dynamic arena. The main characteristics of this stylised marketplace are: • Economic agents, that are independent and rational, acting to reach goals that are absolute and consistent, do not influence each other • The resources exchanged in order to reach these goals are homogeneous, meaning that their value is independent of how they are combined Challenging traditional marketing/NPD (Kotler) with reality: The typical marketing actor is assumed to be independent from other actors, including the buyers from which they have different or even conflicting interests. Therefore, the boundaries between them are clear and distinct. Moreover, marketers and their customers are considered to act in a context characterised by exchange processes allowing optimal resource allocation, where the price is the most important exchange mechanism. The role of the marketing actor is essentially to identify targets and compete. According to Kotler, the role of marketing actors is to strive for organizational goals of the company being more effective than its competitors in creating, delivering and communicating customer value to its chosen target market. 11 Neither professional purchasers nor consumers are regarded as having an active role in the process of product development and value creation. Their function is more of destruction than production: they consume and digest what others have created. In the modern view, marketing tends to be an issue between exchange partners who are organised in networks-like structures → relationships have become a key phenomenon. The core of any marketing process is to create combinations of resources, within organizations, within relationships between organizations etc…. In order to analyse such processes, we need research tools that allow us to capture the interactions between any kind of business or organizational actors engaged in exchanging heterogeneous resources. What is left to consumers is to make passive choices between given offers. When economic actors are understood as independent, the exchanges that take place are considered as transaction (when an object of value is exchanged for another). Transactions have no history. The average industrial customer-supplier relationship is more than 10 years old. There are several functions (production, technological development, administration and distribution…) which engage in exchange process. Competitors co-operate in alliances; suppliers and customers engage in joint ventures; suppliers create networks in order to engage in logistic partnerships… Both buying companies and buying consumers rely more often on their own experiences or the experiences of others as a guideline for future action, rather than efficiently utilize all available sources of information. Both professional buyers and consumers are actively involved in using and changing the nature of the consumption object in different ways. Companies like IKEA and Dell Computers provide examples of how such interactive development can be organized. Instead of managing the value creation process, these companies co-ordinate development interaction over several organizational borders. 12 There are 3 main economic arguments that underline the benefits that can be created by the development of a network-like market exchange: 1. Through relationships it is possible to reduce production and other costs since activities can be linked to each other across firm boundaries (scale effects). Moreover, the parties can develop a solution where standardized parts are combined with unique ones. The long-term effect of having efficient relationships is affecting consumers’ short-term behaviour → consumers will take part in value creation through increased involvement within the context of the relationship. 2. Relationships can be used to increase innovation or technical development. Resources can be combined and confronted, and new features and uses can be found. 3. Relationships can be used to influence others. Such influence however can also be a negative factor creating inefficient solutions. A significant finding is that consumers actually do not seek market information in most decision making but they rely on others’ experiences and recommendations (word of mouth). 1.6 REINTERPRETING THE 4 Ps The traditional 4Ps model was a resource allocation model, based on the assumption that the relevant resources involved in the exchange process are homogeneous. When a resource is considered to be homogeneous, its economic value becomes independent of how and with which other resources it is combined. Another important assumption to make the model works, is that each mean must be assumed to have a specific influence on the outcome. In the modern view, we can no longer assume that companies are searching for optimal allocation of given resources rather, companies will try to develop non-given resources through interactions with active counterparts in order to create economic value. The “resource homogeneity assumption” must be replaced with the “resource heterogeneity assumption” which leads to the view that exchange deals with dynamic creation of new solutions. A dynamic perspective on marketing calls for a broader perspective on the resources and functions involved in the exchange process. For example, distribution has always been considered a cost but in an interactive, resource heterogeneity perspective also appears as an important source for creation of benefits. Resources have been combined and embedded in highly integrated structures that stretch beyond the borders of companies and organizations. The famous “4P concept” has a microeconomics-inspired focus on the single firm Vs the anonymous market (users + competitors) To reflect reality of marketing/NPD we need to study: • a firm’s interactions within the external network • the actors a firm interacts with to innovate → suppliers, customers… The “4Ps model” identifies four features that are important ingredients in the exchange process. However, these 4Ps appear quite different when viewing them from an assumption of resources heterogeneity versus homogeneity. How to revise them? 15 1.7 MARKETS AND NETWORKS The traditional view of the position of a business manager can be illustrated in this figure: A company operates by taking products and services from a supply market. It then combines these inputs and direct them to its customer markets. The company chooses between different competing suppliers and in the same way it competes with its competitors. However, the realistic view of a business manager’s position is the following: This view takes into consideration the fact that customer and supplier markets are not homogeneous. Some customers are more important than others, both because they buy more and because their requirements are difficult to meet. Similarly, some suppliers are more important than others, either because they supply a large volume of the company’s purchases or because what they supply is critical for the success of the company’s own products. Finally, some competitors are larger or more effective than others. 16 The manager operating in a network must deal with several complications: • Company’s customers, suppliers and competitors are different in their importance, they are also likely to operate in very different ways and have a wide range of relationships with other customers and suppliers. Therefore, a supplier will face customers with access to very different resources and with different problems BUT the supplier must specialize only in a limited number of customers’ problems and ignore others. • The company will face competitors that operate in many different ways. Indeed, it is not possible to allocate companies in precise categories like “manufacturer”, “whole sales” or “retailers”. o A large proportion of the offering of many manufacturers is in fact purchased by other suppliers Ex: Nike buys most or all of the products that they sell from other. o Many wholesalers are not simply distributors of the products of others, but distinctive value-added assemblers of the product and service offerings of numerous companies o Retailers often design and develop their own products which then they will be produced by others. • Companies are not subject simply to “5 forces” but are affected by many and varied forces that contribute to the increased dynamism and rate of change in the business world. Volatility and dynamism are not simply infrequent adaptive changes that can be dealt with in order to create longer periods of stability. • A manager’s discretion to act independently and direct his own company is limited by the technological and resource dependencies between companies that are necessary to meet the requirements of final consumers. The world managers operate in, consists of a complex pattern of relationships between customers and suppliers or between development partners or competitors. These relationships are themselves inter-related into a network that forms the arena for managerial action and the basis for company activity. • Strategy is not an ordered process of analysing the environment, building and implementing strategy against the world or to achieve control over some part of it. Strategy for the firm is a process of building, managing and exploiting relationships with others. Without relationships, business would be impossible, and a company would be isolated in the network. Without relationships a company would be reduced to a collection of unusable equipment and real estate. Strategy is a process of reacting and re-reacting to the actions of other companies in its relationships. In the long-run, the manager’s strategy is likely to be concerned with situation-specific action within the overall view. Relationships are the outcome of the changes that are occurring in the business world. It is through these relationships that companies cope with their increasingly widespread technological dependence on others and the need to develop and tailor offerings to more specific requirements. It is within relationships that technologies are not only exploited but are also developed. What happens in these relationships influence what happens inside the companies involved. Interaction within relationships forms the basis for companies to buy and sell products and services, to learn, to invest, to exploit and acquire technology. 17 1.8 WHAT IS A NETWORK? A network is a structure where a number of nodes are related to each other by specific threads: the business market can be seen as a part of a network where the nodes are business units (producers, customers, service companies, suppliers etc..) and the threads are the relationships between the companies. The business units (nodes) consist of physical, technical and human resources bound together in a variety of different ways. The network is the result of complex interactions between companies in relationships overtime. No single interaction can be understood without reference to the relationship of which it is a part and to what has contributed to that relationship. No single relationship can be understood without reference to the network itself. As a result of the investments and actions of the company and of other parties, the company gains benefits and incurs costs from the network. 1.9 THE NETWORK VIEW OF STRATEGY Strategy means setting and achieving a firm’s goals. The goals must be defined: 1. in relation to the network 2. through the network 3. despite the network Moreover, it is essential to • consider other actors’ goals • combine your resources with external resources • establish a position in the network and towards other actors Business relationships are essential for your strategy in the network, both for good and for bad → having a good system of relationships will help you achieve your goals, while having bad relationships will prevent you from achieving your goals. Against three strategy myths (assumptions) REMEMBER: no company owns the network and no firm manages it, but they all try to manage in it The myths • ACTION → Freely setting your course of action, without having interactions with suppliers, customers, distributors etc… • INDEPENDENCE → SWOT analysis to choose strategy. Trying to leverage own strengths and overcome weaknesses independently from other actors. • COMPLETENESS → You have all the resources it takes to achieve your goals The network reality • INTERACTION → Each action implies a reaction from others • INTERDEPENDENCE → you are not alone and your outcomes depend on others • INCOMPLETENESS → It is impossible to have everything you need to achieve your goals. You need others to succeed 20 1.11 THE SECOND NETWORK PARADOX A) Relationships have a profound impact on the evolution of both involved firms → If a BR goes well, both firms will benefit from it and go well. B) But relationships are also created by the firms and evolve with them → Each firm will shape a BR to achieve own goals and to have it fit with its other BRs Each of the producers may be seen to have established relationships with suppliers, customers and competitors as part of its strategy. However, the current position of those companies is also the outcome of their relationships. Each company tries to develop the relationship in ways that suit themselves, their other relationships and their overall strategies. Managerial implications of Paradox 2: • Firms are conditioned by their BRs: the knowledge, understandings, norms and values that the companies have acquired are a source of strength, efficiency and comfort BUT they can also be an impediment to change • Firms need to look for similar BRS → the cost and the time involved in building relationships and in adjusting to them mean that there is always a risk when trying to develop new relationships. • Standardize as much as possible across your BRs → a company cannot afford to make all the adaptations needed to satisfy the requirements of each of its relationship counterparts. The company will try to reduce its costs and enhance its benefits by standardise its relationships, in terms of contents, level of commitment etc… • Major choices concern relationship investment and adaptation → The most important choices for a company concern the processes of adaptation and investment. Therefore, it is not simply a matter of selling and purchasing. • Strategy is interactive → your goals and outcomes depend on actions and reactions of others. • Resource dependence → You always need others’ resources and you need others for exploiting or developing your own resources. Indeed, no company has sufficient resources itself to satisfy the requirements of any customer and so, it is dependent from the skills, technologies, resources, actions…of suppliers. 21 Implications for the process of relationship development: Implications for individual managers → the more important the threads are, the more important the actors who are involved in the interaction in those threads will be. Threads are between nodes, relationships are between companies, but the ineractions within those relationships are between individuals and are based on their self-knowledge and knowledge of each other. How can we manage our interactions with other companies effectively? Some relationships are easy to recognise as important to a company, maybe because they are with a high/volume customer or a critical supplier. Others will be less important o the company individually, but they may be part of a group of similar relationships which together are significant. In any case, each relationship cannot be considered in isolation → not only is each of them affected by all the other relationships of the companies involved, but each relationship is a thread that is connected through the nodes (or companies) to other threads in the network. The total network structure is determined by how each thread is related to the others and the economic effects of any one relationship on the companies involved are affected by its interconnection with other relationships in the network. These interconnections can have a variety of effects: 22 1.12 THE THIRD NETWORK PARADOX The more successful a company is in imposing its thinking onto the network, the more it is likely to restrict the initiative and change that could be generated by others in the network. This leads us to the 3rd paradox: Managerial implications of Paradox 3: • There are dangers in a self-centred view of the network → a company that sees the network in its own terms and only as a way of solving its own problems will fail to understand both the motivations and problems of others, the dynamics of the network and the interface between the well-being of others and itself. • There are dangers for a company in network control → all companies try to manage their relationships for their own ends but, there is a danger in trying to achieve control over the network. If a company were to achieve such overall control, then the only source of wisdom and innovation in the network would be the company itself. Instead, each company must try to manage within the network to gain advantage from the actions of others. • There is no strategic approach to managing in a network → managing in networks is not a linear process of achieving and maintaining control. Instead, strategy is about developing an interactive approach in each episode, relationship, network situation and strategic move. 25 The link between relationships and performance is working both ways: the overall performance depends on the performance in the individual relationships, but at the same time it is the performance in the whole set of relationships that affects the capacity of the company to perform in a given relationship. Developing continuous, “dense” relationships with others seems to be a way to cope with the complexities and ambiguities which any company is facing in a market. Various episodes in a relationship are generally taking place because there exists a texture of interdependencies, in which the business activity is embedded. What happens in business relationships reflects various technical, knowledge, social, administrative, and legal interdependencies on which every business is build. 1.15 Business relationships interconnectedness Major relationships of a company have been found to be `connected' in the sense that what is happening in one relationship affects the interaction in others. This connectedness of business relationships becomes evident when we consider the numerous interdependencies against the background of which business activity takes place → not only “no firm is an island” but also “no relationship is an island”. A company always operates within a texture of interdependencies that affects its development. This is an example of network between two companies: SweFork (customer) and Systech (supplier) → SweFork produce logistic solutions used to transport pallets and Systech is the supplier (the only supplier) of the core lifting mechanism. However, Systech does not supply nly SweFork but also competitors. Customers of Swefork, are Systech customers’ customers. There is a negative connection between any relationship that the competitors of Swefork can create to Swefork customers and the relationships between SweFork and these customers (red connection) → if the competitors are successful in getting the tender, the would take away business from Swefork and also it will create a negative price effect if SweFork would win the tender. However, there can be also some positive connections between competitors- customers relationships and Swefork-customers relationships. Ex: transfer of knowledge from the competitor to the customer and then to SweFork. There are numerous examples of interdependencies: • Technology → The technical know-how and the technology in use are important to business activities. The flow of exchange and relationships between two companies reflects the technologies employed by the two companies. Linking these technologies poses specific problems and makes certain activities and adaptations more important than others. On an aggregated level, technical interdependencies are characterized by technological systems, in some cases called “paradigms” or “trajectories” that provide the broad frame to business activity in industrial markets. The technical connections reflected in paradigms or trajectories, and their evolution, is one of the major forces shaping the context of a company. 26 Technical development within one company and in its relationships is dependent on other companies' technologies; it is facilitated or constrained not only by those with whom the company maintains direct relationships but also by the technology of other third parties. The technology employed by the parties to a business relationship tends to influence not only the characteristics of the products and services exchanged but also the ways to do business in general, such as logistics, routines, planning and so on. Business relationships can be seen as links that shape and reflect the existing technology. • Knowledge → Every company represents a combination of human and physical resources that makes certain activities possible. The know-how, the tacit knowledge, that is, the combined knowledge of those taking part in a company is regarded as one of its main assets. The know-how of the company reflects not only the knowledge of its personnel but also that of the other companies and organizations to which it is connected through business relationships. Much of the knowledge put in use in a company becomes available from its relationships to others outside the company. The know- how of a company and its competence is dependent on its relationships that are thus an important tool in connecting the knowledge of various different actors. It is in relationships that the existing knowledge is confronted with other parties' knowledge and new knowledge is created. From a knowledge point of view the company can be perceived as a unit that brings together different pieces of knowledge. The impact of knowledge connections on the competence and thus the performance of companies is strong. • Social relations → Business relationships are handled by people with different social roles. Social bonds that arise among individuals in the two companies are important for mutual trust and confidence in interaction between individuals. The individuals inter-acting on behalf of their organizations in a business relationship, take part in other relationships; belong to professional associations, are relatives, neighbours or schoolmates, have perhaps developed other types of personal relationships in other arenas, creating various social bonds in working places, social and sporting clubs, religious organizations etc…Every individual's social network is built up of personal relationships originated for different reasons and it can be used in different ways in order to enhance or develop the business relationships in which the individual takes part. • Administrative routines and systems → A lot of what is going on in a relationship is administrative in nature. There are rules and norms in the context of a business enterprise that impose some activities to be carried out; meetings are held, papers and documents are `processed' to comply with business practice. Information processing and exchange – communication – in business is both extensive and costly. Therefore, within buyer–seller relationships different attempts are made to improve the efficiency of the information processing by establishing rules and administrative routines. The solutions adopted in one or several relationship(s) will affect what is possible or necessary to do in some other relationships. Ex: if a supplier wants to sell to a large car manufacturer it will probably have to join its supplier information system. This will, in turn, affect what it can do for other customers. It will be easier for the supplier to serve other customers who are using the same system than customers using another system. The same applies with respect to industry standards and norms: this is how the administrative systems create connections between the relationships. 27 • Legal ties → The legal texture is of interest as it can connect different business units with privileged ties. This applies especially to different forms of ownership control or other forms of agreements. Some multinational companies are organized in a large number of quite independent companies that have developed through internal growth, by establishing new units in foreign countries or technologies. Other companies belong to more or less extensive conglomerates where the mutual exchange relationships are weaker but seldom insignificant. Other types of legal interdependencies are the different formal cooperation agreements of various types from joint ventures to licensing agreements. The legal ties make certain relationships to suppliers, customers and third parties in a company connected and interdependent. The various interdependencies can be used in order to reach effective solutions in a certain business relationship by connecting it to some other relationships but also to block development of a relationship. They can be used for good and for bad, for short-term or long-term goals, by individuals, companies or departments and units within companies. They can be consciously exploited by a company for its own advantage in some relationships and suffered in other relationships. 1.16 Connectedness of business relationships Connectedness = relationships are connected when a given relationship affects or is affected by what is going on in certain other relationships. Not all the relationships are connected. Ex: A change in a relationship that a company has to a supplier of materials may affect positively or negatively a certain customer relationship. The connectedness of specific relationships of a company is often recognized and held in account by people coping with business relationships in a company. How these connections are handled matters greatly for relationship development and thus for the performance of a company. Ex: If we take, for example, a company's relationship to its major customer, various kinds of connections, to other customers, to suppliers or to other bodies such as consultants, banks or research institutions, can be found as well. A product developed together with the customer can be of advantage for other customers who have similar requirements, but it can become a disadvantage for Customers with different requirements as it absorbs important development resources → the technical and knowledge attributes of that customer relationship can be used in other customer relationships in a positive way, but that the effects may also be negative. Social bonds are developed and have an important function also between relationships. Indeed, one of the most common ways to evaluate a new partner is through references, meaning by investigating how it has handled earlier relationships. Personal connections are often a major tool in trust-building. The importance of connections of a certain customer relationship to supplier relationships is easy to understand if we consider for instance that: • The possibility of offering just-in-time (JIT) deliveries to the customer may depend on a certain supplier's ability to deliver in time. • A certain supplier's know-how can be used to develop or to adapt products for the customer. • Quality assurance in a certain supplier relationship can be a means of getting more business from the customer In a similar way, connections of a relationship to a horizontal unit can be important for the customer relationship. The horizontal units which can affect a certain customer relationship are numerous: banks, owners, lawyers, inter-national committees in standardization or trade etc… Relationships to these may be instrumental for the quality of the products offered, for the services, for the social connections, and so on. 30 BR: always with the same party → production is done in one organization and assembly is done into another organization. They always exchange with the same party so they can coordinate activities. The importance of handling connections to other market actors has significant management implications: 1. The first regards the marketing and purchasing functions in a company, whose task is to handle the relationships. 2. Second, it affects the perception of the means available to management of companies in order to develop the capabilities and potential of the company 3. Third, it affects the very concept of business strategy and of the task of strategy development BRs are the most effective mechanism in a specific case: • Similar activities = activities that can be performed using the same resources • Dissimilar activities = activities for which you need completely different resources • Complementary activities = first comes one activity and then the other one (ex: first develop and then testing) • Closely complementary activities = very tight coordination between the 2 activities. Free market cannot have close complementary activity Ex: no more than 20 min btw production and assembly Hierarchy → requires that you have the resources needed for both activities inside the company BR → you need close complementary between the activities, but the activities require very different resources that a single company cannot coordinate and manage all by itself. 1.18 The concept of relationship It is not easy to define what a relationship is. However, we can say that a relationship is a mutually oriented interaction between two reciprocally committed parties, with the focus on how these companies behave towards each other. We use the term relationship to describe the pattern of interactions and mutual conditioning of behaviour over time, between a company and a customer, a supplier or another organization. As it entails mutual commitment over time, a relationship creates interdependence which is both positive and negative for the parties involved: • Mutual commitment and interdependence of companies in the industrial market constrains their behaviour as much as it creates opportunities. Indeed, relationships are mutually demanding besides being mutually rewarding. • Time is the defining feature of a relationship: both the past and the future affect current behaviour. 31 There is no such thing as “standard relationship” because every relationship always have some unique features in terms of its content, its dynamics, how it evolves etc... However, there is a certain pattern in the effects they produce, and two main dimensions can emerge: • who is affected? → The Function of the relationship This dimension regards the effects a relationship has for different actors. The functions of the relationship are the various layers than can be used by different parties, for different purposes, under different circumstances and they are needed in order to assess the economic consequences of a business relationship. Three different functions can be distinguished: 1. FUNCTION FOR THE DYAD (diade, coppia, paio): it is the conjunction of two actors. This originates in the conjunction of the two companies in terms of their activities, resources and actors. A business relationship is developed as the two companies establish connections in the activity, resource and actor layer. If successful, the resources, activities and actors of the two companies are blended and melted together in a unique way, providing eventually a unique performance. The relationship is a `quasi-organization' that amounts to more than simply the sum of its elements because of the existing links ties and bonds. There is a team effect: jointly, the two companies can perform activities and utilize resources which none of them could accomplish in isolation. The quality of the relationship is the extent to which this function will be exploited: there has to be a significant development of either activity links, resource ties or actor bonds if a relationship between two companies is to become a quasi-organization and the team effects are to materialize. 2. FUNCTION FOR THE INDIVIDUAL COMPANY: a relationship has effects on each of the companies, on what it can do internally and in other relationships. Each of a company's main relationships offers some benefits but also entails substantial costs. In any case, relationships are an important factor in the development of capabilities of a company and thus for the economic outcomes of its operations. Relationships affect: • the resource collection a company can use • the activity structure and activity potential → possibilities of carrying out certain production and development activities within the company • the organization of the company The effects of a certain relationship derive from the combination of the relationship with the activity structure, resource collection and organization of the company and with the set of other relationships it has. Costs and benefits of engaging in a relationship are related to the consequences that a relationship has on the innovativeness, productivity and competence that stem from the impact it has on the activity structure, the set of resources that can be accessed, but also for the perceived goal structure of the actor. The company develops by exploiting the potential offered by the dyadic function and how successful it will be will depend on its ability to perceive and handle the connectedness in the relationships in which it is directly involved. 32 3. FUNCTION FOR THIRD PARTIES: what is produced in a relationship can affect and is affected by other relationships that involve other parties. Every relationship has the network function: activity links are important in the activity pattern, resource ties in the resource constellation and actor bonds in the web of actors. A third party (like the companies C and D) can react to the change in a relationship between two actors (companies A and B) in different ways: -They can try to exploit the development by adjusting their own activity links and resource ties in their own relationships in accordance with how the relationship between A and B looks like in these dimensions. -Alternatively, they can choose to work against the connections created in the relationship (between A and B), attempting to adjust and develop their own relationships in such a way that the focal relationship will become less influential in the overall structure. The structure of business networks has certain peculiar organizational attributes: • The actors (companies) have no common goal, but there exist some shared beliefs about the activity pattern as well as the resource constellation. • A network has no clear boundaries, nor any centre or apex. However, it can be seen as an `organization' as it affects how companies are reciprocally related and positioned. • It will only be kept together as long as the network logic is accepted by enough actors. Since a change in any relationship affects the position of those involved, the whole set of interrelated relationships is subject to change and that has consequences for the outcome of a relationship for those involved. How the relationships develop and unfold is important for the features of the actors' organization, activity pattern and resource constellation and thus on the properties of the network structure such as its stability. The effects of a business relationship originate in activity links, resource ties and actor bonds and affect the dyad, the individual company and the network. There is a problem of balance with regard to the functions of business relationships: • too much emphasis on the functions for the single actor may become counterproductive, as it may destroy the dyadic team function • too much emphasis on the dyadic function could also turn out counterproductive; being overly altruistic may be harmful for the self-interest • disregard for the network functions can produce disastrous effects or mean that a company does not recognize certain development opportunities being offered or constraints which arise It is up to management in each company to handle and take care of the various business relationships in a way that is favourable not just for itself but for important counterparts and third parties. 35 Being a part in a larger structure, any relationship is both a source of change and a source of stability in the whole network. However, some problems arise: • several individuals are usually involved in carrying out the activities related to a business relationship BUT they pursue goals that are not identical. Individuals interact on the basis of their perceptions; they acquire their personal identity and position towards others as they learn and develop in conjunction. • all larger companies consist of several units whose relationships are influenced by who is defined as the `actor'. What can we analyse through actor bonds? • Individual, organisational or collective level • Identify relevant actors: their resources, strengths, weaknesses and roles • How to interact with them? Co-ordination, power-dependence or control • Assigning PRIORITIES to various actors In summary, the bonds developed between companies in business relationships affect their behaviour and identities. Therefore, the analysis of the nature and strength of these bonds is a key point. This is the so-called ARA MODEL → ACTORS control RESOURCES used to perform ACTIVITIES Interplay between the layers of substance in business relationships Every business relationship is an integrated entity, but they can be very different from each other: • There are relationships between companies which mainly consist of actor bonds • In other relationships both actor bonds and resource ties have been developed but without many activity links • Another type can be relationships where the activity links are strong while bonds between actors and resource ties are weak These differences reflect a more or less conscious choice on the part of the companies involved, or just neglect of the existing possibilities. Every relation can be developed in one or several of the substance dimensions. The three layers are not independent but there is an interplay between the actor bonds, activity links and resource ties Actors carry out activities and activate resources. Activities are resource-consuming and evolve as the capabilities of actors develop. Resources limit the range of activities an actor can pursue. The existence of bonds between actors is a prerequisite for them to actively and consciously develop strong activity links and resource ties. 36 There is a tendency towards some kind of balance in activity links, resource ties and actor bonds and this balance can be achieved on different levels. What level will be reached depends on different factors: • how the interaction evolves between the parties • it will be influenced by the characteristics and ambitions of the actors that reflect their situation and circumstances • the features of the aggregate structure – the network – and how the relationship is related to other existing relationships to and between actors directly or indirectly connected 1.20 DEVELOPMENT OF BUSINESS RELATIONSHIPS There is a path dependence in the development of business relationships and networks. Every actor within the network structure will have some discretion in certain areas and at the same time be entirely locked into others → the network of business relationships is both a prison and a tool The activity links, resource ties and actor bonds in a relationship between two companies affect the activity structures, the collections of resources and the organizational structures of the companies involved. At the same time the activity structures, resource collections and organizational structures of the companies will influence what kinds of links, ties and bonds can develop in a relationship → reciprocal conditioning. Development of a relationship between two companies has an organizing effect on the overall network structure and every relationship has a role in it. We can outline a broad analytical scheme to identify where and what effects are likely to occur as a relationship evolves, is established, develops or is interrupted. These schemes can be used in 2 ways: • as a conceptual framework to analyse the effects of change in a relationship and/or to identify the factors that affect the possibilities of development of a relationship. • to single out the critical issues in coping with relationships, to assess the state of a relationship and its development potential. It can thus be used to identify where and how to intervene in relationships in order to get some desired effects and bed to identify the dynamic effects in the development of a business relationship. Any change in a relationship can have three types of effects: 1. One is the direct effect changing the potential of the relationship. This will depend on how it affects the interplay of the different layers of the relationship (column 2). 2. Another type of effect is on the companies involved and their cost-revenue parameters (column 1). 3. A third more indirect effect takes place as the change might lead to different reactions, causing more or less of an `explosion' in the overall network (column 3). If you want to obtain a result at the network level, you cannot only act inside the company BUT you need business relationships, you need to act systematically through the relationships. Any change (in any of the cells of the matrix) can affect the development of a certain relationship. If, for example, one or both of the companies are changing some activities this might have: 37 Direct effects: • in terms of increased or decreased efficiency in the performance of the internal activities of the company (cell 1) • for some third parties who have to adapt to the new link with accompanying positive or negative effects on its outcome (cell 3) Indirect effect: • it can give cause to make further changes within the relationship in terms of new ties (cell 8) or bonds (cell 5) • It can also give cause to make adjustments in relationships to third parties (cell 3). One change can in this way cause a number of reactions which might be both expected and unexpected for the party initiating the change. This scheme is limited from an explanatory point of view, as it only identifies where effects might occur but: • it does not say anything about whichchanges shall produce certain effects • it does not provide guidance in order to assess the likelihood or the magnitude of impact of changes 1.21 COPING WITH RELATIONSHIPS Coping with relationships, exploiting them economically, requires an awareness of their effects and insight to the interdependence that accounts for their dynamics. The main points in our argument are: • In many companies, relationships have an overwhelming impact on their economic performance. When that is the case, meaning that single specific relationships matter, they have to be managed. • Companies cannot unilaterally control and decide the development of relationship; they are part of relationships and of a larger whole that affects both their outcomes and their development potential → interdependence. • The time dimension becomes more important as conduct: its outcomes are rooted in the past and its effects become manifest in time. There are three areas where effects of relationship are important and need to be coped with: A. marketing and purchasing → it is about relationship development. Critical relationships to customers, suppliers and eventually other third parties have to be maintained and possibly developed. The main management task is to keep the customer and supplier relationships `productive': it is a matter of coping with the interplay of the various substance layers in relationships and the mutuality of the interaction process. Develop (or to interrupt) activity links, resource ties and actor bonds in interaction with the counterpart requires an understanding of connections and assessment of their effects, as well as monitoring of changes and their likely impact on the relationship. B. capability development → it is about coping with the effect of relationships on the development potential of a company. 40 Network oriented type of model 2.1 Organizational purchasing What affects the buying decision? • Environmental aspects (ex: crisis like Corona Virus nowadays) • Organizational variables → how technology is organised inside a company? Who make purchasing decisions? Strategy and goal of the organization • The buying centre → usually organizations delegate key purchasing decisions to a group • Individual participants It is very complicated to make purchasing decisions inside companies. Organizational purchasing = the decision to buy a product or a service from an organization. It depends on 3 major issues: 1. What type of product/service and purchase situation? • Raw materials, components, equipment, services • Kraljic Matrix (strategic importance =how important the thing to be bought is & complexity/risk = how risky it is to buy that thing) 2. Customer’s internal variables: • Production technology (unit, mass producing company, process technology like full production) → they will have different ways of purchasing • Organization of purchasing (centralized in a single buying centre-decentralized in a single factory/office of the customer office) • Buyers competence → the higher the competence, the better it is for the supplier 41 3. What is the customer’s purchasing strategy? • Promiscuity = the customer likes to switch supplier every time to obtain the lowest price possible Vs partnership = the customer is interested in creating long term relationship with the goal of obtaining bigger value. • Single = customers accept to have only one supplier for a particular service/product or component Vs multiple sourcing = some customers have a policy that they must have for every product they buy multiple suppliers. Suppliers have limitations: you cannot obtain 100% customer penetration. • Purchasing goals: price = key goal is to reduce price when they buy products. Vs total cost = they look for reduction of the total cost of purchasing Vs development = look for help in developing their products In purchasing, reducing the price is not the only goal. Low prices can create problems to production because of quality issue as well as storage issue because at a low price you buy big amounts. An example of business relationship: Wärtsilä (supplier of engines) & Royal Caribbean Cruises (customer) •Relationship since early 1970s → nowadays there are many W. engines installed in the ships. •Wärtsilä’s diesel engines in 16 of RCC’s 25 cruisers → 65-70% customer penetration •Total of 80 Wärtsilä engines installed and in daily operation on RCC’s boats •RCC’s special needs: exclusive cruises and passengers who are very picking and demanding. •…max comfort on RCC’s ships: catastrophe if motor stop, boats must stay in harbour or no electricity/hot water! → engines must deliver a perfect performance for many many years. •Operating life of 25 years for boat/engine: RCC needs to live with 80 Wärtsilä engines for a long time… must get the best out of it (technically, quality, value and economically) •Close cooperation agreement (2000): transactions/orders efficiency, plan maintenance, reliability/fuel, spare parts → CBM (Condition Based Maintenance): Wärtsilä remotely monitors online each engine to prevent malfunction + optimize fuel consumption (a continuous testing customer, like a rile life lab for Wärtsilä as well!) •Agreement that Wärtsilä manages RCC’s inventories of spare parts, on board or at its local service companies (W. has 70-80 offices spread around the world). •Fundamental to plan together which parts needs to be changed, re-purchased or simply overhauled (in the meantime Wärtsilä provides a substitute part at no extra costs) 42 •Customer’s benefits: reliable fleet, risk sharing, cost efficiency in operations (fuel!) and ordering, technical learning but at a higher price paid, commitment to buy spare parts only from one supplier, technical dependence and risk of missing a new tech from another supplier (GE gas turbines?) •Supplier’s benefits: predictable service sales = ability to forecast which service centre would be engaged in providing service and when, higher price, lower warranty and spare parts handling costs, technical learning from demanding customer but at the cost of dedicating much time/people to RCC and maybe missing other customers. 2.2 Characteristics of industrial marketing B2C: many small, passive buyers and single transactions → not focus on business relationship. Every sale is a separated phenomenon B2B: a few big, active buyers (with complex and powerful purchase strategies) and lasting business relationship The nature of selling in a B2B market is: • continuous process → series of repeated interactions through which sales can be accomplished and sustained. • complex → multidimensional and technical issues. Processes involve also legal, economic, administrative issue…customers want to make a complete evaluation of the supplier’ offering. • time-consuming → several negotiations and adaptations. Before the sales is closed, time is needed to make the changes that are the core of the adaptation. • interacted (actions, reactions & interactions) → reactions from customers who want to have more info or even meeting the supplier. Interaction btw the two counterparts that sustain the selling process. • seller's marketing strategy faces customer's supply strategy • collegial (seldom “one man” show, but a teamwork) → need many different specialists to cover the communication, IT, logistic etc.. aspects. Collegial effort in order to achieve a sale. 2.3 THE FACETS OF RELATIONSHIPS Business relationship are a major challenge for managers for several reasons: i. Most companies must work with a few important customers that account for a major share of their sales. Failure in even one of these relationships can be critical to a company’s operations ii. The supply side of many companies is dominated by few suppliers that provide a large share of its purchases or provide essential offerings for the success of the company’s offerings iii. Companies are likely to have many relationships that are individually insignificant, but collectively very important. Managers may have far less information about these relationships, or they may not justify expensive resources in sales, purchase or management. 45 o Transfer ability enables a supplier to provide a solution to a customer’s problem quickly, easily, consistently and at the promised cost. This ability is likely to influence customers with high transaction uncertainty, but that know what they need and what is available. Transfer abilities may involve investment to reduce internal operations costs, with consequently lower flexibility but higher consistency. 2.7 SUPPLIERS’ UNCERTAINTIES AND CUSTOMERS’ INFLUENCE A supplier’s uncertainties have a number of similarities to those of a customer and these enable the customer to influence their relationship with a supplier in a certain direction. The supplier’s uncertainties may be: • Capacity uncertainty → uncertainty over the amount the supplier is likely to be able to sell in the future. In this situation, a supplier is likely to seek close relationships with at least some of its customers to ensure continuous order volumes, even if at a lower price. • Application uncertainty → the way that an offering can best be used by consumers may be difficult for a supplier to determine or may change rapidly. • Transaction uncertainty → a supplier may not trust a customer to actually take and pay for the volume it has ordered and it may also be uncertain that the customer actually needs what it says it wants. This uncertainty is likely to be acute when the supplier is dealing with a single, large customer, or those with which is unfamiliar. A supplier is likely to interact closely with a few customers to cope with this uncertainty or try to limit its dependence by having low-involvement relationships with a larger number of customers. 2.8 CUSTOMERS’ INFLUENCE TACTICS Customers, just like suppliers, have two available strategies to take advantage of different uncertainties of a supplier and influence their relationship in the direction they wish: • Manipulate suppliers’ uncertainties • Apply its abilities → a customer can try to influence a supplier with particular uncertainties by applying either of two types of abilities. These abilities can make the customer more sought after by suppliers and hence more willing to meet their requirements: • Demand ability enables a customer to advise a supplier of the type of offering that it should produce. Demand ability also enables a customer to offer the supplier both the quantity and the type of demand that meets its requirements. This is an important way to influence suppliers with capacity uncertainty. • Transfer ability includes the customer’s abilities and reliability in transferring information on volume and timing and its skills in logistic, as well as its ability to pay bills. This ability is particularly important for suppliers with transaction uncertainties. Over the time, the abilities of customers that are important to suppliers will change. a supplier that is just starting to develop or market a new offering will have little knowledge about everything and is likely to seek out and be influenced by customers with strong demand ability, even if they are badly organised and have low transfer ability. On the other hand, a more established supplier will not value a customer’s demand ability, but it is likely to favour those customer with strong transfer abilities that are less trouble to deal with. 46 2.9 RELATIONSHIPS AS ASSETS Relationships are a company-s most important assets because without them it cannot gain access to the resources of others, acquire the supplies it needs or solve its customers- problem and thus generate revenue. Relationships are social entities where the possible benefits depend on the involvement of the two parties and the degree to which they are prepared to actively react, adapt, learn and invest. Managing relationship assets over time Relationships have to be built up over time through a process of incremental investment. Because these investments are incremental and carried out by many people, they are often not identified and treated as the general cost of the business. Moreover, since it takes time to build a relationship, there are costs that arise before and sometimes exceed benefits. The task of managing relationship asset is similar for both suppliers and customers, even though relationships themselves are very different from each other: • Some relationships centre on just a single transaction, but it could take years before the deal is made or delivery is completed • Some relationships involve many purchases or continuous delivery • Some relationships comprise a series of brief encounters by telephone or electronic messages, each for a small order • Some relationships may become very productive assets for both parties while others are unsatisfactory for one or both of those involved → it is important to analyse potential relationships before entering into them. These variations are due to the different requirement, uncertainties and abilities of the companies in a relationship. 2.10 Stages in relationship development First of all, it is important to underline that the “relationship lifecycle” is not a deterministic model, meaning that not all relationships move into each of the stages in a pre-determined way: many relationships fail to develop after an initial contact, others are short lived while some others are long-lasting and pass through some of the stages many times. 47 PRE-RELATIONSHIP STAGE → every relationship arises from some pre-existing situation which is the starting point of the relationship lifecycle. Let’s suppose that two companies are dealing with each other in a of sole supply situation or maybe the buyer chooses from a number of suppliers, depending on tis particular requirements at the time. There is likely to be high inertia in this situation for both parties that may decide to look for a new supplier or customer. Whatever the reason for looking for a new partner, companies in this stage face many important questions: • What will each part gain from the relationship and what do each wants to get? • How much do each has to invest to make the relationship works? • How much do each has to adapt to the other? • How much do each has to learn in order to deal with the partner and how much can each learn for the relationship? The evaluation of a new counterpart in the pre-relationship stage will require two-way communication, but there will be no actor bonds between individuals. This means that the conversation will take place without commitment, so how can we develop the needed trust between us to enable a relationship to develop? The distance between the parties involved makes it very difficult to judge all the above-mentioned aspects of a relationship. Consequently, companies will try to build their relationships slowly and will seek to minimise their commitment unit potential outcomes become clearer. EXPLORATORY STAGE → this is the stage when the customer and supplier engage in discussion or negotiation about a possible purchase. In this stage, the amount of learning that is required by the two companies is the greatest; however, the two parties have little experience of working with each other, still have few actor bonds and little idea about what the other party can request of them or even what they hope to gain from the relationship themselves. The key issue is being able to reduce the distance between the parties. In this stage, the relationship will appear to be costly and the future benefits uncertain; there will be lack of trust and a concern about the other company’s commitment: the supplier may doubt that the customer will actually take the quantities it suggests and the customer may doubt that the seller will actually deliver what it is promising. Therefore, each party has to convince the other that they are seriously interested in the relationship and at the same time have to gain the interest of the other party. Since it is very difficult to demonstrate commitment in a concrete way in this stage, the way each company structures the interaction and invest its management time will be important. DEVELOPING STAGE → a relationship is in this stage when the business between the two companies is growing in volume or changing in character in a positive way. The development stage is associate with growing resource ties, activity links and actor bonds, through which the uncertainties of the two companies about each other’s ambitions and abilities are reduced. In this stage, learning is likely to be more directed towards the specifics of the relationship and finding out about the investments and adaptations the company should make. It is important to underline that, beyond a certain point, trust between companies can only be built on actions rather than on promises. Consequently, adaptations become essential: adaptations, or better the willingness to adapt, is the way in which a company shows that it can be trusted to respond to a counterpart’s requirements. The major indicator of commitment to the relationship is given by informal adaptations, which however can be costly (ex: the supplier agrees to a late product redesign or a customer accept a price increase because of an unexpected cost change at the supplier). 50 4. RELATIONSHIPS ARE EXCLUSIVE → developing a relationship means giving priority to a specific counterpart and this tends to exclude others. The extent of this problem depends on the resources demands of each relationship and on how much the counterpart prioritise the company’s own demands. In any case, the exclusiveness of relationships can lead to conflicts in other relationships. 5. RELATIONSHIPS ARE STICKY → through developing a single relationship, a company can become related to a wider network of companies. This can be beneficial, but it can also be a burden. Relationships are not a simple tool that can be used to solve all problems. Instead, they are a necessary tool that must be used with care and with due regard to their costs and problems. Relationships are never static and any understanding of them must include an idea of their dynamics. We have suggested that relationships can be examined according to the stage that they are in. However, this examination is not simple because the stages of a relationship are neither pre-determined nor uni- directional. 2.12 RELATIONSHIPS WITH CUSTOMERS There are 3 main mistakes in this viewpoint: 1. Companies did not have relationships in the past → relationships have been existing since individuals first trade with each other. In fact, a buiness relationship exists when: • What currently happens between companies is affected by what happened between them in the past & • When what happens now is affected by their considerations of what might happen in the future 2. Having a relationship with a customer is automatically positive → relationships can be a problem for companies and involve costs and disadvantages tha may outweight any benefits. Also, relationships involve differences in aims and understaning between the companies, leading to conflicts. 3. A relationship is one-sided and consists of the actions of the supplier alone → both companies in a relationshipwill interact in an attempt to manage that relationship in the best way. 2.13 The characteristics of customer relationship We can see the main characteristics of the relationships and what happens in them: 1. A SALE IS UNLIKELY TO BE A ONE-OFF, EASILY IDENTIFIABLE EVENT → it is difficult to identify a sales as a single event in the complex pattern of interactions that takes place between a supplier and a customer over time. 51 2. OFFERINGS AND PAYMENTS BETWEEN SUPPLIER AND CUSTOMER CAN BE COMPLEX → an offering is not simply a physical product or service. Instead, it consists of a combination of 5 elements: a. Product b. Service c. Advice d. Logistic e. Adaptation Payments between customer and supplier can be complex as well. They may be made: • Initially after the offering has been developed • After each delivery of one or more of the elements of product, service etc.. • At fixed intervals over time or against a certain performance level of the offering • When a pre-determined improvement in the customer’s operations is achieved The costs of customer and supplier go beyond the explicit ones: both will have to consider the costs of the complex interactions between them an the costs of developing and adapting their offerings and operations to coper with each other’s requirements. 3. THE PATTERN OF INTERACTION IN CUSTOMER RELATIONSHIP CAN VARY WIDELY → in the case of a single major purchase, a sale will only occur after many interactions between the companies. Then, after the sale has been formalised, delivery of all elements in the offering may take months, years. The first sale may be the precursor of others in an irregular pattern over many years. Other types of sales may occur frequently by one supplier, or by several suppliers simultaneously. In some other cases, the interaction between the companies may be restricted to EDI (electronic data interchange) or a phone call. In others, there may be complicated interactions to develop or fullfil an offering. Sometimes the characteristics of the offering itself is of less importance to the customer than the supplier’s ability to actually fulfil the offering speedly or reliably 4. THE NATURE AND IMPORTANCE OF A COMPANY’S CUSTOMERS WILL VARY WIDELY → it is unusual for a business company to have a large number of very similar customers. Most companies have few customers that represent the majority of their sales and then other smaller customers. Some customers may buy the same product, but with a different service element or logistic while others buy few products of only one type and require a more limited service element. Some of the relationships between a supplier and its customer may be mutually supportive, friendly and reassuring. Others may be distant, impersonal or even hostile. Some customers may not be the largest, ut will be considered important for other reasons; others may be viewed as individually insignificant, but part of an important group of customers. What happens between a customer and its supplier is not fixed by the characteristics of the supplier’s offering. Instead, it reflects the nature of the two companies involved. 5. CUSTOMERS ARE INVOLVED IN DEFINING THE CONTENT OF A RELATIONSHIP → relationships are not the outcome of unilateral activity by the seller. Bot supplier and customer will have an idea of what they expect from a relationship and of how important it is to them. 52 In many cases, even though the product or service element of the offering may be standardised, other elements will be adapted to meet the demand of each customer. Customers are also likely to adapt their own offerings and operations to suit the requirements of the supplier. The flow of an offering between the companies is the result of the combined intensions and actions of both the supplier and the customer. 6. THE CONTENT OF A CUSTOMER RELATIONSHIP CHANGES OVER TIME → relationships change as customers face new problems or require better solutions to their existing ones, accept changes that are offered by a supplier, or learn new available solutions etc… Similarly, a supplier’s attitude to customers and its skills in managing them are never fixed. No relationship is going to survive without change. 7. A CUSTOMER RELATIONSHIP LINKS A COMPLEX SET OF RESOURCES AND ACTIVITIES → a customer relationship is unlikely to involve only the sales and purchasing functions of the two companies. It also includes planning and allocation of operations facilities and service resources, those who develop offerings, those who fulfil offerings and who administrate the exchange of finance. 8. A SUPPLIER’S MARKET IS NOT DEFINED BY ITS PRODUCTS OR SERVICES → the product, service or other elements of an offering that are exchanged between companies are just part of the many variables in a relationship. A supplier’s offering is intended to provide a solution to a particular problem. Thus, the quality of an offering can only be assessed in terms of its suitability for a particular problem. However, the way that a supplier operates will also depend on its own problems, uncertainties and the abilities it seeks from its customers. 2.14 How a relationship develops It may be helpful to think about how a new relationship develop: • INTERACTION → a customer relationship starts with a first contact by either of the parties. This may lead to interaction, the essence of two-way communication through which the parties become aware of each other and learn (and teach) each other about what they stand for and what they could do for each other. The development of the relationship will depend on the commitment of the two companies, which will require at least some trust between them. The initial uncertainties of the two companies about their relationship do not necessarily disappear as it develops. Instead, these uncertainties are a driver for seeking the abilities of the counterpart. The initial interaction is a prerequisite for any relationship to develop: without it, trust cannot emerge and no substantial relationship can ever develop. • CO-ORDINATING ACTIVITIES → it is necessary to co-ordinate the activities of the two companies. The supplier has to process a first order, requested specifically by the customer, schedule it for operations and fulfil it. This co-ordination defines the nature of a relationship, but it entails costs for both of them and limits their freedom to coordinate with others. • ADAPTATIONS → the pattern of interactions and activities that form the relationship is likely to require adaptations over time. These adaptations may concern different elements of the supplier’s offering or its facilities, equipment or operations. No relationship can evolve without some adaptations, but they may not always be balanced between the two companies. Moreover, adaptations create mutual dependence and involve opportunity costs. 55 History and current stage The history of a business relationship is an important starting point in its assessment. Questions include: • Which company started the relationship and why? • What has happened in the relationship? • What has gone right and what wrong? • Why crisis have occurred? Customers have long memories of a supplier’s good and bad performance which can strongly affect current and future business. Each relationship will vary in its scope, in terms of the volume of business transacted and the content of its offering and in the degree of involvement. It is not too difficult for a supplier to assess the scope of a relationship, but more difficult is to assess the degree of involvement of the two companies because it requires examination of actor bonds, activity links and resource ties between the companies and how each of them is affected by these. A customer and supplier are unlikely to have the same view of the scope and involvement that they would like in a relationship and these difference will affect the marketer’s assessment of the potential of the relationship and the tasks necessary to achieve his aims. The financial performance of a relationship is an important indicator of the value of the relationship to the marketer → the financial analysis for the relationship should extend beyond recording sales volume or superficial profit achieved from each customer. The analysis should show the return achieved by relating sales volume to other direct costs (cost of purchased items, internal operations, logistic…). Potential and investment Even regarding this aspect, there might be differences between the customer and the supplier’s views. These views, in turn, will affect their willingness to undertake the investments that are necessary to fulfil the potential of the relationship. It is common for a supplier to fail to fulfil the potential of a relationship, either because it is unable to convince the customer of that potential, or the marketer is unable to secure the necessary investments from the customer. Atmosphere This is related to the level of commitment of both companies to the relationship, which will be strongly affected by their previous experience and their assessment of its potential. An assessment of the distance between the companies and the levels of dependence and conflict, is an important indicator of whether the supplier will be able to change the current state of the relationship. Network The current status and the potential of a relationship can never be assessed in isolation from the marketer’s other relationships and the wider network position of both companies. By analysing the connected 56 relationships of the customer, the marketer can find out where is offering fits with those of the customer’s other suppliers to provide an offering to meet the needs of a final user. Although both companies are part of the same interconnected set of relationships, the role and importance of these connections may be radically different for the two companies. Current operations It is important for marketers to check that their current operations in a relationship are related to their overall strategy for that relationship. Too often, the actions of individual marketers are out of line with the main strategy or with each other. The pattern of interaction with a customer involves issues like the frequency of sales calls on the customer and the seniority of those making the calls. Paradoxically, this is not a very important aspect of the overall management, but n many companies it receives a disproportionate amount of attention → this happens because these companies are too concerned with short term cost and revenue issue. 2.17.2 MAJOR ACTIVITIES IN CUSTOMER RELATIONSHIP MANAGEMENT Managing a company’s customer relationship is not just about deciding the features of its product, its communication mix, its price or distribution system. Instead, there are a set of activities that must be performed by the marketer continuously and in parallel: • COMMUNICATION → this is the basis of interaction between supplier and customer. Communication in the business relationships is intense, varied, two-way and often impersonal. In any case, through communication, the relationship is assessed, commitment is demonstrated, trust is built, offerings are developed and fulfilled, and problems are solved. “Sales” is the most obvious communication activity by a supplier; however, communication in a customer relationship tends to be broader. it is possible to identify 5 roles of interpersonal communication in a relationship: o Information exchange role → mutual trust and personal friendship allow confidential info to be exchanged o Negotiation and adaptation role → personal contacts provide a context in which negotiation can take place o Crisis insurance role → not all inter-personal contacts are established for immediately obvious reasons, but some are established by the companies as a form of crisis insurance o Social role → not all interpersonal contacts serve clear organizational objectives, and some exists purely for private social reasons. Social relationships can lead to actor bonds that can benefit the companies BUT they can also work against the interests of a company → “side-changing” = when a salesperson identifies more closely with the interests of a customer than with those of his employer. o Ego-enhancement role → when an individual tries to establish a contact with senior people in a counterpart company as a way of enhancing his own status in his organization. 57 Social contacts are an inevitable consequence of good functional contracts. If a supplier tries to restrict them, it may lose the benefits that come from the actor bonds that could be formed. Social contacts are particularly important in the early stages of a relationship when they can help to reduce the distance between companies. Another communication issue is how to manage consistency in the complex flow of info with customer: consistency in communication enables a coherent message to be delivered to each customer. However, sometimes, it may be necessary to be inconsistent and to communicate a different message at different times (ex: when the customer knows what it can get away with). In any case, even when the same message is planned to be communicated, this may be difficult to achieve and a major part of the marketer’s job is to monitor the communication of his colleagues and to tell them exactly what is required in a particular relationship. • DEFINING AND REDEFINING THE OFFERING → the initial offering for a particular customer will usually be defined interactively between the customer and the supplier. This offering will obviously have to change over the time as the problems and abilities of the two companies evolve. Therefore, new offering must be identified, evaluated and fulfilled. Managing the evolution of an offering is likely to be less problematic when a major part of it consists of a tangible product or logistic while it is more complex when the value of the offering rests on less tangible advice or adaptations. • FULFILLING THE OFFERING → value for a customer depends on the promise of a supplier’s offering and on the supplier’s ability to fulfil that promise. Fulfilment means that the offering actually solves the customer’s problem on time, consistently and to the extent that was promised. A broad range of activities will be needed in many relationships to fulfil all the elements of the supplier’s offering. • MONITORING PERFORMANCE → monitoring a customer relationship will involve assessing a large number of factors, but ultimately it is revenue and cost considerations that will determine what happens in it. Assessing even short-term costs and achieved revenues can be difficult and this causes problems when the marketer is negotiating or determining the price. The activity links, resources ties and actor bonds in a relationship can provide value to bot companies in many ways: o Lower operational costs because the supplier or customer has modified their offering so that it fits easily with that of the counterpart o Reduced development expenses for both companies based on information from each other about the capabilities or use of the offering o Improved material flow for both companies thanks to reduced inventories due to changes in delivery frequency and lot size o Quicker and cheaper problem solving through familiarity with each other’s way of working and through trust in each other o Reduced administration costs through more integrated information systems o Both customers and suppliers may be able to apply what they have learned in any one relationship to other relationships o They may be able to gain access to other parts of a network through their relationship with particular customers and suppliers These values need to be assessed by the marketer and communicated to the customer. 60 = ΔBR handling costs / DBR sales this can be ><= 1. There are 8 alternatives in this cube but we are going to see 6 potential types of relationships, considering that the best ones are those with high relationship value (cell 1), low relationship cost (cell 7) and high net price achieved (cell 3) • KEEP → this type of relationship has high relationship value, high net price achieved and low relationship costs. Just the way they are, they generate good profits and are not expensive to handle. For this reason, they are important for the future. • CASH → this type of relationships has low relationship value, high net price achieved and low relationship costs. They generate positive profitability and are efficiently handled (when we put an extra dollar in handling them you obtain more in return than the cost itself) but they do not have long-term value. Sqeeze these relationship to abtain as much cash as we can in the present. • PUSH MARGINS → this type of relationships has low relationship value, low net price achieved and low relationship costs. Therefore, they can be handled efficiently but the profitability is not so good. These relationships have the potential to go on a higher level if you push on them upward. • CUT → this type of relationships has low relationship value, low net price achieved and high relationship costs. They have negative features in the 3 dimensions and the only solution is to cut these relationships since they do not have any positive sides. • R&D → this type of relationships has high relationship value, high net price achieved and high relationship costs. Therefore, they can generate positive profitability but they require a lot of effort for every interaction with the customer (need of a lot of specific customer care in order to achieve a sale) • QUESTION MARKS → this type of relationships has low relationship value, high net price achieved and high relationship costs. Despite having high net price achieved, they are problematic relationships since every penny you invest in them does not generate equal/superior returns. Moreover, they do not have long term value. 2.20 STRUCTURE, SCOPE & POSTURE Managing a portfolio of customer relationships involves some strategic issues: • STRUCTURE OF THE CUSTOMER BASE → it refers to the number and type of customers of a supplier and of course it can vary enormously. Typically, there tends to be some concentration in a customer base so that a few customers account for a major part of the business. A typical problem is the tendency of the current customer base to decay: in order to maintain or develop the volume of business, a supplier must identify alternative ways to grow. Broadening, maintaining or restricting the customer base are options for suppliers to consider, depending on their own resources, the nature of the competition and the problems/resources of customers. • THE SCOPE OF CUSTOMER RELATIONSHIPS → it has two main aspects: o Extent of the offering for customers (quantitative aspect) in terms of 61 ▪ Financial value: % of total purchases or per product class (or share of wallet = how much the customer is the paying for a certain product class) ▪ Criticality of your product/service to customer operations: e.g., % of final value o Content of the offering to customers in terms of ▪ Product: product development jointly with customers & internal process development/changes ▪ Distribution and logistics (place): investments to ensure precise deliveries (guarantee high service) ▪ Promotion: complex, two ways communication, personal interaction ▪ Price: not only for product but the whole BR (tech transfer, adaptations…) The scope of a supplier’s relationships can vary even when its customers all buy an identical product, but they have different problems. Attempts to change the scope of the relationship in a company-s portfolio is likely to take a long time and to be expensive and will depend on the willingness of both supplier and customer. Therefore, any attempt to make a change in scope at either the individual or the general level is only taken after careful evaluation of the resource, cost, customer and revenue implications. • POSTURE (RELATIONSHIP INVOLVEMENT) → it is likely that a customer portfolio will contain relaionships with different levels of involvement. There are several reasons for that and one is that all customers will not have the same view of the benefits of a paricular level of involvement. Therefore, posture means how you handle the single relationship and how close you want to be with a customer. The role of personal contacts in a BR is fundamental and one example is the KAM (key account manager) a person in the sale department who receive the task to take care of a particular customer/account. He: • reduce uncertainties (build trust & commitment) • communicate complex offering (info exchange) • negotiation + grant/obtain adaptations • rescue the situation from crisis and emergencies • develop purely social functions (may even harm the company if the KAM starts making decisions that are not for the benefit of the company but for the benefit of the customer.) • ego enhancement (obtain career benefits in own organization) → operate for your own personal benefit rather than for the benefit of the company. They might do that because they are planning to leave the company and bring along the key customer. • not only salesmen: also R&D, administrative, executives etc. • different attitude in different BR, depending on: o stage of the BR o types of product & technology o involvement from both parties 62 • FINANCIAL PERFORMANCE AND PROFITABILITY → profitability is likely to vary widely across a customer portfolio. A significant proportion of the customer of many businesses will not produce acceptable profits at the level of direct costs and even more will be unsatisfactory or even loss making. It is all about deciding when these loss-making customers should be dropped. However, the problem has several aspects: o Concern about the quality of data on which assessments are made o The supplier must question whether an apparently unprofitable customer relationship actually makes a contribution in some other non-financial way; whether it has a promising future and whether it is important for overall productivity, innovativeness or identification of opportunities. Conclusions Customer relationships are a way for a supplier to solve its problems by providing solutions to the problems of its customers. These solutions are developed through the interaction between customers and suppliers. The way that a single relationship or a whole set of relationships evolves, can never be fully controlled by the supplier or customer alone. Many companies have embraced the idea of “account management” of individual relationships: what do we want from this particular customer relationship? What do we want the customer to think of us? Etc… It is important for suppliers to appreciate that account managers may not be aware of how their relationships relate to others of the company, or to the wider context of the investment and operations strategy. Even if it is difficult to prescribe universal rules of relationship management, it is easier to think of some rules of effective relationship behaviour → planning and talking of the future together, using “we” problem- solving, showing appreciation and honesty in communication. Many managers base their customer relationships solely on actor bonds, but they are insufficient to ensure the productive development of a relationship in the absence of investment in resource ties and activity links. Many relationships are costly to establish and maintain; they require substantial investment which need to be planned and managed in the same way as investments in capital plant and offerings. EXAMPLE Customer portfolio at GE Healthcare Uppsala GE Uppsala: worldwide leader in protein separation equipment for protein, from lab scale to full production plant (columns and gels) Total sales separation: $400million (2005) Four types of customers with different sales interfaces: ➢ Strategic customers: $1-10 million/year. 20 big pharmaceutical companies (Pfizer, Abbot, Merck, Schering, Sanofi, GSK, Bayer, Genentech, Amgen) •buy big full-scale plants + many gels/columns (fully customized) 65 relaunching the drink with a new label, Softdrink accepts the higher price. Danprint also works in cooperation with its ink supplier to be able to print on the new paper to satisfy Softdrink and its customer and distributors. Since Danprint learns from the cooperation with the foreign mill, it now returns to the old Danish paper maker in a stronger position and induces this supplier to produce the new paper in competition with the foreign mill. As we can understand, by analysing both cases several network effects can be identified. These cases are extremely important because both reveal that the focal relationship is affected by other connected relationships, so that activities and resources of other actors determine what is achieved in the focal relationship. They also show that relationships can be both positively and negatively connected with other relationships simultaneously. Finally, these cases highlight the importance of time dependence, in the sense that relationships can be positively connected in one time period but negatively connected in another. Constructs That Capture the Embedded Context of Dyadic Business Relationships In these two cases analysed, cooperation emerges as a fundamental need for firms that do business with one another. Therefore, it is important to conceptualize some network constructs that in some way can influence the cooperation in dyadic business relationships. The two constructs, formulated by the authors, which explain the connectedness of a focal relationship are: • anticipated constructive effects on network identity → can be defined as the extent to which engaging in an exchange relation with a partner firm is perceived as positive and advantageous for the network identity of the focal firm. It aims at capturing the effect" of positive connections between the focal relationship and all other relationships from the focal firm’s point of view. This construct has effects on three aspects: o anticipated resource transferability that reflects the extent to which resources, such as knowledge, can be conveyed from one relationship to another o anticipated activity complementarity that reflects the fact that the outcomes from activities in a relationship are dependent upon activities performed in the focal relationship, in other words the focal relationship activities have positive volume and qualitative effects o anticipated actor-relationship generalizability that refers to the fact that engaging in cooperation with a particular actor might reinforce other firm’s network perception of the focal firm • anticipated deleterious effects on network identity → can be defined as the extent to which engaging in an exchange interaction with a partner firm has negative and harmful effect on the firm’s network identity. As before, this construct has effects on three aspects: o anticipated resource particularity that refers to the scarce nature of resources, so that using them in more than one relation can be problematic o anticipated activity irreconcilability that reflects the difficulty of integrating activities in many different relations with each other o anticipated actor-relationship incompatibility that reflects the fact that when engaging in a focal relationship, the relations with specific actors can be perceived as a threat by other actors. This means that a focal business relationship has positive and negative effects on the focal firm’s network identity, as found before in the study of the two cases. Outcomes Given Comparison Level and Comparison Level for Alternatives as Network Constructs In order to evaluate the outcomes obtained from working together, the concepts of comparison level and comparison level for alternatives are used. They are standards expressed by a firm; the former represents the expectations of benefit obtained from a relation based on experience with similar relations, while the 66 latter represents the benefit available in the best alternative relation. So, in order to evaluate outcomes that occur within the focal relationship we refer to these two constructs. However, the procedure is different in the case in which we want to evaluate the outcomes that occur in the other relations: in this case it is better to opt for the two constructs of anticipated constructive and deleterious effects on network identity. Two more constructs that characterize dyadic business relationships are those of: • cooperation → is defined as the implementation of complementary activities by firms in a business relationship with the aim of producing mutual outcomes with expected reciprocity over time • commitment → is defined as the perceived continuity in the relationship between two firms. After the prior analysis of the two cases, a positive causal path can be assumed from the anticipated constructive effects on network identity to cooperation and commitment. While a negative causal path can be hypothesized from the anticipated deleterious effects on network identity to cooperation and commitment. Conclusions To better understand the business relationships, greater attention must be directed to the business network context within which dyadic business relationships take place. Although research on business networks is challenging, it has the potential to make significant contributions to not only business marketing theory, but evolving business practice as well. 67 3. MANAGING CUSTOMER PROFITABILITY (CHAPTER 3) Companies in business-to-business markets engage in a mixture of customer relationships, from close ones to more arms-length ones. Customer relationships and their resource interfaces develop over time and there are two basic types of resource interfaces: technical and organizational. Variation in interfaces creates heterogeneous customer relationships thus, a company will apply different customer accounting techniques according to the different customer interfaces. 3.1 Pricing in business relationships The price perception by customer is based on: • direct procurement cost (the bare product price) → this is the visible level of price and represents what the customer gets in the invoice: unit price * amount purchased • relationship handling cost → other costs under the surface that are assessed on the basis of three levels of benefits to customer: o from immediate product (core) characteristics → evaluate how much the product features match the requirements they made before the purchase o from the whole BR now → customers assess the whole relationship they have with you as a supplier and evaluate how much you contribute to reduce the cost or generate benefits. o from the whole BR in future → evaluate the benefit of the relationship in the future (long-term value) The price assumes a different role according to different types of BRs: • Pricing in TRANSACTIONAL BRs → non-unique offering that can be easily compared with the one of competitors The price is defined with mark-up method: based on their own costs, supplier set a mark-up, which is a % of profit that they want to obtain. Moreover, it is based on competitor pricing, market share and customer need share (share of wallet you want to obtain about a particular customer). The supplier tries to estimate the maximum a customer is willing to pay, but it could be problematic if you have never met the customer. Of course, if the mark-up brings the price over the competitor price level, you will be in trouble because the customer will make a comparison with other suppliers. Indeed, customers put suppliers against each other in order to obtain price reduction. As a consequence, negotiations are harder because based only on immediate aspects connected to benefits that can be achieved immediately. There is no commitment on future exchanges. • Pricing in INTEGRATIVE BRs → totally unique offering which is difficult to compare with the offerings of other suppliers In this case, negotiation on both offering and price is fundamental, but it is necessary to reason with a long- term logic. One example could be setting different prices on the basis of the level of commitment of 70 Profit margin 16.9% 15.5% Sales – cost of sold goods = gross margin Gross margin– administration, sales and support cost = net income The net income represents the resulting profit when you have taken away all possible costs attributable to the 2 customers. Here, the strategy is to apply a fixed % for all of the indirect costs (administration, sales and support cost) but this way of applying a single % to all customers can possibly hide something very important. KANTHAL CASE Kanthal is a successful profitable company but there is a problem about the level of profit and how efficient they are in utilizing internal resources (time of salespeople, production system etc…) to supply various types of customers. The top executive of this company has realized that there is a possibility to be much more efficient in taking care of these customers and in terms of which customers to prioritize. The company has decided to continue growing but doing so utilizing less resources because there is the suspect that sometimes too much resources are dedicated to customers that would deserve less resources. The company decided to do an analysis to se how really profitable single customers are → new accounting system called activity/based costing system (ABC) to assess exactly which are the costs attributable to the orders of single customers. They distinguish between orders’ specific costs and general volume specific costs The average profitability of two customers highlights the fact that maybe one is generating a loss and the other is generating more profits than the average. They have introduced the new accounting method that lead to shocking results → some customers have terrible level of profitability causing losses to the company. What should we do in relation to these unprofitable customers? → there are no big differences in the net income of Alpha and Beta. 71 BETA’s behaviour • OMEGA’s KAM spends much of his time at Beta’s site • Beta demands a lot of help and technical adaptations • Beta demands also technical resources (“technical marketing”) next to marketing and sales resources • In addition: – Beta places many small orders for special products – Beta demands special treatment distribution – They do not pay in time • This increase demands on order management, invoicing and customer receivables management They are not attractive customers. ALPHA’s behaviour • Alpha, on the other hand: – Orders few different products in large volumes – Places orders in a predictable manner with long lead times (ex: Omega knows that every Monday there will be an order that cover three months) – Demands little support in sales and technical marketing • The sales manager knows that Alpha is the “better” customer of the two even if the accounting system they are using doesn’t show it (because they are applying a fixed fee equal to 35% for indirect costs) • A detailed study is made to analyse the firm’s sales, marketing, administrative and support costs • A study inspired by Activity-Based Costing (ABC) 3.4 Cost analysis study: ABC • It is possible to – Identify resource utilization by different customers → how much resources each customer use – Identify activities that resources are used for → which are the activities where those particular resources are utilized in relation to every single customer – Choose cost drivers for different activities that are possible to link to specific customers → define, for every particular activity you are considering, which are the drivers of the costs coming from those activities. The cost drivers are: – Volume-related cost drivers: number of products in a batch, number of orders, machine problems, sales management time, number of invoices, etc. 72 – Order/complexity-related cost drivers: planning/follow up time, order handling time, negotiations, adjustments, etc. – Customer care-related cost drivers: number of visits, number of telephone calls, number of complaints customers send to the company that then needs to take care of them, number of special adaptations, etc. Analysing customer profitability Total indirect costs = 222250 euros A new view of reality: ALPHA BETA Gross result 166,000 159,000 Order management cost -24,680 -86,380 Customer service cost -14,800 -29,600 Technical marketing cost -16,650 -49,950 SUM: Activity-based costs -56,130 -165,930 Net profit 109,870 -6,930 Profit margin 34% -0,02% Beta was generating much higher costs across the three groups of indirect costs and eventually the sum of total cost is 3 times the one of Alpha. Gross result – sum (ABC) = net profit → the net profit of alpha is very high while Beta is only generating costs. 75 o Business relationships are connected, and they form network structures to help attain the goals of each firm • TECHNICAL INTERFACES have to do with adaptations made at the technical level between the two companies (ex: product developed for one particular customer; machineries bought for one particular customer…) o Products are part of a customer's and a supplier's system, and their features are created and shaped in interactions between the two parties. A product can be adapted to the customer's needs or it can be standardized o Production facilities link production and the utilization of resources between the companies involved. 3.9 CUSTOMERS’ RELATIONSHIP TYPES From the table, we can see that four different customer relationships are identified: A. Transactional customer relationships are associated with low technical and organizational interfaces. These relationships are about commodity products with standardized interfaces. There is no adaptation of production facilities by the supplier for its customer and the contacts between the companies are sporadic and lack depth (classical arm's-length/ adversarial relationships). Financially, transactional customer relationships are of minor importance for the company because customers seek only price reduction and continuously compare suppliers in order to achieve the best price. B. Facilitative customer relationships are characterized by a low technical interface and a high organizational interface. The products exchanged differ only marginally from standardized ones and obtaining total cost reduction is a high priority for the customer. Financially, facilitative customer relationships are of great importance for the company. In order to achieve that, actor bonds emerge since are essential to communicate. Being the contacts between the companies frequent, the company will dedicate organizational units to handle such customers and will make some adaptations at the order- processing and logistic level (strong activity links in terms of logistic and payments). C. Integrative customer relationships are associated with high technical and organizational interfaces: they are the relationships with the highest level of integration in terms of actor bonds, resource ties and activity links). The products are dedicated to specific customers and are often developed in close cooperation with the customer. The technical interfaces within both companies are adapted to each other and this process is often of long duration and involves large and costly investments from both companies. Integrative customer relationships are important for a company's short and long-term profitability and the customers represent a substantial part of the company's short-term revenue, but they may be even more important for future revenue. The company employs dedicated organizational units to work with its prioritised customers. D. Connective customer relationships are characterized by a high technical interface and a low organizational interface. The products involved are adapted to the customer needs and the company invests a considerable amount of time and significant resources to the customer, including adapting its production facilities. However, the revenues in connective customer relationships are low. Thus, these relationships place special demands on the company because they create high direct costs but only bring low direct revenues. EX TE N T O F IN TE G R A TI O N ( b as ed o n A R A m o d el ) 76 The combination of each customer relationships, (transactional, facilitative, integrative and connective) with the four customer accounting techniques identified earlier (customer segment profitability analysis, customer profitability analysis, life time profitability analysis and customer valuation analysis) results in a frame work which describes when a particular customer accounting technique is suitable. 3.10 CUSTOMERS’ ACCOUNTING TECHNIQUES (Lind and Stromsten) 3.10.1 CUSTOMER SEGMENT PROFITABILITY ANALYSIS In customer segment profitability analysis, the object of measurement is a group or segment of customers which are homogenous within the segment but heterogeneous between segments, and the segmentation can be based on variables such as purchasing behaviour, geographic location, demographic variables etc... The logic underpinning this approach is that customer groups are more important than individual customers so overhead costs are traced to customer segments because transactional customer relationships are not sufficiently important to measure and monitor individually, and customers are best treated as aggregated groups. “Averages” across all of these customer groups in terms of revenues, costs... This accounting technique is used with transactional customer, meaning customers characterised by small purchase volumes and no adaptation (adversarial relationship). The time perspective is annual or even quarterly. 3.10.2 CUSTOMER PROFITABILITY ANALYSIS Facilitative customer relationships with low technical and high organizational interfaces are associated with customer profitability analysis. Those are customers characterised by large purchase volumes, but no major technical adaptations or investments → standardized products and production facilities are rarely adopted to a specific customer. Customer profitability analysis measures customers' contributions to a firm's profits. It identifies the difference between the revenues and costs of a customer over a period of time (e.g., annually or quarterly). These relationships are not characterized by long-term investments. However, facilitative customer relationships are commercially significant, and they contribute a large proportion of the company's sales revenue. The organizational interfaces with customers are characterized by high interaction and dedicated organizational units. It is important to make these relationships profitable annually because of the lack of long-term investments. The costs are allocated to each single customer according to the volume of products purchased. However, more sophisticated analyses include activity-based costing (ABC) which makes customer accounting more accurate by allocating overhead costs to specific customers based on activity information. 3.10.3 LIFETIME CUSTOMER PROFITABILITY ANALYSIS Integrative customer relationships with high technical and organizational interfaces are associated with lifetime profitability analysis. Lifetime customer profitability extends the time horizon of the analysis to include previous years and the future. The revenues and costs associated with a specific single customer are simply added together using a time horizon that extends beyond normal annual measurement. The allocation of investments, costs and profits is made to each specific customer. 77 This type of accounting technique is used for integrative customers, meaning those customers characterised by large purchase volumes and major technical adaptations or investments. These relationships are complex, with large upfront investments in production facilities and knowledge development projects. Integrative customer relationships are financially important for short term revenue, but even more important for long term development. These customers might cause a loss on the short term, since big investments and big adaptation processes are made, but bigger revenues in the long run. It is important to track the customer profitability on an individual basis because annual customer profitability analysis could report that a customer is unprofitable but using an extended time period could report the customer as profitable. NPV (net present value calculation or discounted cash flow analysis): discounted contribution margins of y0→yn Investments made now will be discounted at a higher rate later on. 3.10.4 CUSTOMER VALUATION ANALYSIS Connective customer relationships with high technical and low organizational interfaces are associated with customer valuation analysis. These relationships are the most demanding from a customer accounting view: close technical adaptation creates large investments in connective customer relationships. However, these large investments are not associated with large revenue streams from customers. This type of accounting technique is used with connective customers who the trickiest and the most difficult to handle. They are characterised by small or no purchase volumes in the present time, BUT they require major technical adaptations or investments. You only know the investments that have already been made but forecasting future sales could be difficult because of the non-continuity of the relationship. Thus the customer accounting technique should extend beyond the annual time period and it should incorporate the indirect benefits from connected relationships. Customer valuation analysis treats customers as assets that will yield revenue in the future. Therefore, the time period is the lifetime of the BR or even beyond (these could also be intermittent relationship). These customers are seen as assets with a • financial value (NPV of presumed cash flows) • connective value (lead users or bridges to other profitable customers) The four customer accounting techniques presented above differ over the object of measurement, which can be a single customer or a group, and use different time periods for the measurement, with these ranging from annual (or quarterly) to several years. However few studies have explained why or when a firm should use a particular way of measuring a customer, some studies have identified variables with which to explain the use of customer accounting in general. Two main variables: • competition within the industry in which a firm resides • firm's market orientation Let’s now analyse two case studies of two Swedish companies operating in B2B markets: • ERICCSON is a dominant actor within the telecom industry and sells complex technical systems for use by its customers over a long period of time 80 4. COMMUNICATION AND ICT IN BUSINESS RELATIONSHIPS (CHAPTER 4) 4.1 Communication in business relationships Communication in BRs is seen as interaction between suppliers and customers. For this reason, Kotler’s model does not work anymore: it is about unidirectional communication while BRs are all about dialogue. Can communication be “planned” in BRs? 1- Choice of target group → In a BR, selecting a target group is a more complicated issue 2- Choice of communication’s goal → in a BR, the communication’s goal cannot be decided only by one company because the counterpart will be interested in influencing them 3- Choice of the message 4- Choice of communication channels/media → Gadde’s model 5- Collect feedback 4.2 Communication in B2B: Gadde’s model Two key dimensions: communication roles and contents: 1. Communication roles means why you communicate: • coordination: this type of communication affects directly the activity links and efficiency. Activity dimension of the ARA model. • learning: for mutual knowledge and technical development → a lot to do with the resource layer of BRs • control: pursue your own strategy by convincing other actors and mobilising external resources coming from these other actors 2. Communication contents means what you communicate: • administrative: transaction details (when and where a product is to be delivered, how much has been ordered etc…) • commercial: aspects that must be decided by the two counterparts before the transaction (who, what price?) → Qualitative aspects in the negotiations and in particular the reputation of the other company become important • technical: details of the offering (what exactly, how to use it) → joint investments, adaptations made by the counterpart, particular knowledge necessary to solve a certain problem of a customer etc… 81 How does ICT impact on these roles and contents? For which roles/contents is ICT used in B2B? The two dimensions are: COMMUNICATION REPETITIVENESS = How repetitive a communication is COMMUNICATION COMPLEXITY = How complex the type of communication (richness of the communication) Non routinazable → personal contact are the typical channel. There can also be mechanic tool but the content to be negotiated must be very simple (ex: only the price). Trust between the parties is essential. Limited use of information technology Routinazable → repetitive communication simple in content (standard content). Largest use of IT with a goal of rationalize communication and improve activity links. EDI = electronic data interchange in the early ‘80s. 4.3 What is “electronic” communication? It is a computer-based (digital) solutions for: • information retrieval, processing and distribution • direct (online) communication with other actors Modern technologies are Web-based: •Extranets → connect two or more companies •Portals → single company •E-hubs: separate web sites that aim to enable exchanges between parties by exploiting market forces (competition btw competitive suppliers or competitive customers) (min-medium integration B2B) •E-business: interlinked ERPs = enterprise resource planning system (max integration B2B) → every company has an internal software to run and control their business HIGH LOW LO W H IG H 82 4.4 History of B2B e-solutions and business models -EDI (1970s): Low flexibility, high cost, only large companies. Limited diffusion, strictly one-to-one (since there was the need of a physical connecting cable, only two companies could be connected), little interactivity, not real time caused information delay (Odette) -Extranets (1990s): One-to-one. Reduce purchasing costs, shorten ordering cycles, reduce errors. Instant ordering and order-status information (GE and Chrysler). A customer that wants to know its order’s status can log in the extranet and they would see where in the production chain its product is. -Enterprise portals (1995): A single entry point for partners (suppliers or distributors) combining various Extranets (Dell) -E-hubs (1996): Find new partners! Third-party independent marketplaces Vs centred on focal buyer/seller. Industry (vortals = e-hub for electronic component, e-hubs for wooden components) or process specific (horizontals = maintenance & repair operations). Low entry costs attract SMEs → these platforms are created to enable the entry of as many partners as possible. -E-business (2000): Tightly integrate the ERP-systems of close partners (deep connections between these companies). Real-time data interchange + transparency for max coordination efficiency …... -Blockchains in the future? Emerged to protect confidential transactions (cryptocurrency, e.g., Bitcoin). Potential for use in supply chains across several partners. Categorising e-hubs → enable transaction between buyer and seller: 1. Value creation: how the hub provides value to members • by aggregation (assorting: one stop shopping) → customers go there because there are many different products that can be bought on the same place. Vs • by matching individual buyers’ needs - sellers’ offers → intermediation function 2. Purchase situation: • systematic (e.g. MROs = maintenance, repair and operations) → routine purchases. Ex: toilet paper, office paper, lubricants for production equipment Vs • spot (excess in input or peak in required items) → things you didn’t need to buy but when you enter the shop you suddenly realise you need them 3. Bias/endorsement: who “owns” the hub • neutral (third party functions as true market maker = they do not buy anything on their market platform) Vs • one sided (owned by one specific exchange party) E-hubs: business models and tools 85 4.5 “Open” e-hubs limits for business relationships: • Time of interaction S-C: an instant in auction VS BR are more long-lasting. It is very difficult that something base on instantaneous interaction can help you improve your own business relationship • Borders: fluid as in free market (like in the e-hubs). The more companies join, the better VS fixed as in a network (restricted number of actors since too many participants means increasing complexity and you would not be able to trust all of them) • Number and type of actors: competitors in e-hubs VS complementors in network • Products + needs: standard as in a market (in a typical e-market) VS adapted in BR • Actor identity: irrelevant in e-hubs solutions as in a market VS pivotal, essential in BR • Dependence between actors: bad in a market (the counterpart would exploit this dependence by increasing prices) VS OK in BR • Transaction importance: market if trivial (small volumes, no strategic items) VS BR if strategic • High transaction complexity and no alternatives require a BR! • Running tech. devel. projects on an “open” e-hub or in a BR? • Can we impose e-auction to suppliers? If our customers do? → conflicts and discussions very often • Can “open” e-hubs frame the total network complexity? → the network is too complicated to be handled by this simplistic solution 4.6 Impact of e-solutions in business networks IT goals: streamline + enhance interactions with other actors while saving money •Use right type of e-solution for right type of BR and goal: -direct cost (price) reduction → best to use an e-auction VS overall efficiency -technical learning, control/mobilize IT history in B2B: e-hubs did not open BRs to market forces -Today back to e-tools that maximize efficiency in close BRs •IT effects stronger on existing BRs! (efficiency + reinforcement) •IT effects limited on new BR establishment! (find new partners) Other important effects: •IT’s impact on BR costs? -minor price reduction (i.e., direct costs exposed to competition), -instead large indirect costs reduction (thanks to improved opportunity for coordination between partners) •IT effects on communication contents: 86 -administrative: strong effect. Order, time, how much and where to deliver. Almost all administrative information is handled by IT tools -technical: it depends (on the specific IT tool + type of knowledge) -commercial: limited effect •Do not forget the network effects of IT (on indirect BRs) computer system installed in one single company and it has no IT connections to other partners in the network. 87 The challenges in digitalising business relationships. The construction of an IT infrastructure for a textile-related business network 90 Each of these four dimensions influences the nature of the organizational buying process and must be considered in appraising market opportunities ii. Organizational structure consists of subsystems of communication, authority, status, rewards, and workflow, all of which have important task and non-task dimensions. The communication subsystem performs four essential functions: (1) information → understand how the communication system in customer organizations informs the members of the buying center about buying problems, evaluation criteria and alternative sources of supply. (2) command and instruction → appraise how commands and instructions flow through the hierarchy (3) influence and persuasion → defines the nature of interpersonal interactions within the buying center. (4) integration → critical in coordinating the functioning of the buying center The authority subsystem defines the power of organizational actors to judge, command, or otherwise act to influence the behaviour of others along both task and non-task dimensions. The authority structure interacts with the communication structure to determine the degree of decentralization in the decision process. The status system is reflected in the organizational chart and defines the hierarchical structure of the formal organization. It also expresses itself in an informal structure. Both the formal and informal organization define each individual's position in a hierarchy with respect to other individuals. The reward system defines the payoffs to the individual decision maker. Persons join organizations in anticipation of the rewards given by the organization and agree to work toward organizational objectives in return for those rewards. Every buying organization develop task-related procedures for managing the flow of paperwork, samples etc... iii. Buying center is a subset of the organizational actors and it consist of 5 roles: users, influencers, deciders, buyers, and gatekeepers. The behaviour of members of the buying center reflects the influence of others as well as the effect of the buying task, the organizational structure, and technology. This interaction leads to unique buying behaviour in each customer organization. 5.1.3 SOCIAL INFLUENCES There are three classes of variables involved in group functioning in the buying center: 1. The various roles in the buying center must be identified 2. The variables relating to interpersonal (dyadic) interaction between people in the buying center and between members of the buying center and "outsiders” must be identified 3. The dimensions of the functioning of the group as a whole must be considered The buying center includes five roles: • Users → those members of the organization who use the purchased products and services. 91 • Buyers → those with formal responsibility and authority for contracting with suppliers. • Influencers → those who influence the decision process directly or indirectly by providing information and criteria for evaluating alternative buying actions. • Deciders → those with authority to choose among alternative buying actions. • Gatekeepers → those who control the flow of information (and materials) into the buying center. Several individuals may occupy the same role but also one individual may occupy more than one role. To understand interpersonal interaction within the buying center, it is useful to consider three aspects of role performance: I. role expectations → prescriptions and prohibitions for the behaviour of the person occupying the role and for the behaviour of other persons toward a given role II. role behaviour → actual behaviour in the role III. role relationships → the multiple and reciprocal relationships among members of the group As illustrated in the model, the nature of group functioning is influenced by five classes of variables: the individual members' goals and personal characteristics, the nature of leadership within the group, the structure of the group, the tasks performed by the group, and external influences. The buyer is, in most cases, the final decision maker and the target of influence attempts by other members of the buying center. Tn performing their task, purchasing agents use a variety of tactics to enhance their power that vary with the specific problems, the conditions of the organization, and the purchasing agent's personality: • rule-oriented tactics • rule-evading tactics • personal political tactics • educational tactics • organizational- Interactional tactics 5.1.4 THE INFLUENCE OF INDIVIDUALS Eventually, all organizational buying behaviour is individual behaviour. The individual is motivated by a complex combination of personal and organizational objectives, constrained by policies and Information filtered through the formal organization, and influenced by other members of the buying center. The individual is at the center of the buying process, operating within the buying center that is, in turn, bounded by the formal organization. The organizational buyer's personality, perceived role set, motivation, cognition, and learning are the basic psychological processes that affect his response to the buying situation and marketing stimuli provided by potential vendors. The organizational buyer is motivated by a complex combination of individual and organizational objectives and is dependent upon others for the satisfaction of these needs in several ways. These other people define the role expectations for the individual, they determine the payoffs he is to receive for his performance, they influence the definition of the goals to be pursued in the buying decision, and they provide information with which the individual attempts to evaluate risks and come to a decision. 92 5.2 TASK AND NON-TASK MOTIVES The organizational buyer's motivation has both task and non-task dimensions. Task-related motives relate to the specific buying problem to be solved and involve the general criteria of buying "the right quality in the right quantity at the right price for delivery at the right time from the right source. Non-task-related motives may often be more important, although there is frequently a rather direct relationship between task and non-task motives. Ex: the buyer's desire for promotion (a non-task motive) can significantly influence his task performance Non-task motives can be placed into two categories: • Achievement motives → those related to personal advancement and recognition. • Risk-reduction motives → critical link between the individual and the organizational decision-making process. The individual's perception of risk in a decision situation is a function of uncertainty and there are 3 kinds of uncertainty: o Uncertainty about available alternatives o Uncertainty about the outcomes associated with various alternatives o Uncertainty about the way relevant other persons will react to various outcomes. 5.3 Why has purchasing become a key issue? 1. Growing specialization → focus on core business activities 2. Growing dependence on external resources/supplies → more and more companies are outsourcing a high % of activities (ex: Ducati outsource 90% of its activities and therefore it buys 90% of its value) The so-called “make or buy” decisions are fundamental: what to outsource? •ratio purchase/final value is near to 50% in industrial firms •more complex purchases: systems/complex offerings (ex: some car companies buy the entire engine) In any case, the overall tendency is an increased outsourcing but a reduced number of suppliers, with which they have closer relationships. 5.4 Customers’ purchasing strategies Promiscuity Adversarial & Arm's length (1920-80s) → suppliers were kept distant. This was the most used strategy at the time. With this strategy, you can obtain price reduction, but you are not able to address all the other costs under the surface of the iceberg. Advantages: Competition and self-defence allow -price reduction (putting suppliers against each other) -reduced dependence on specific supplier → you never become dependent on one particular supplier Partnering Supplier partnership (1980s) → With this strategy you cannot put suppliers against each other. Moreover, it may be difficult to obtain price reduction, but you will be able to address all the other costs beneath the iceberg surface. Advantages: Cooperation and coordination allow -total purchase cost reduction via BRs -joint technical development with supply partners 95 B3) Personnel knowledge and attitudes Slowly improving purchasers’ status/skills, less price fixation (otherwise you can use only an adversarial strategy) C) EXTERNAL CONDITIONS: SUPPLIERS' BEHAVIOUR •Supplier's technology → can they adapt their offerings or not? Some suppliers have extremely rigid technologies and can only produce standard solutions. •Supplier's marketing organization → can they understand & communicate internally a specific customer’s detailed needs? If not, we cannot create a good relationship •Supplier's attitudes → price fixation, pushers, traditionalists in buyer-seller relations, can they build and stay in a business relationship? If they just want to sell something, it will be difficult to create a good relationship (promiscuity strategy) 5.6 Features of “modern” supplier-customer BRs •Complexity: -multidimensional (technology, logistics, administration, social) -interdependence (mutual and at network level) •Long term duration: -history of interaction, not single episodes -relationships as investments: costs & benefits -a relationship requires specific investments -profitability can take long time •Adaptations: unilateral and bilateral -technical (product and process), administrative, commercial -common knowledge base and interorganizational routines -better exploitation of supplier potential for efficiency •Informality: -little use of formalized contracts because of complexity -uncertainty requires mutual trust -trust and commitment built over time by social contacts 96 •Power & dependence: -dependence is accepted and handled via relationships -seldom power is used to oblige counterparts -search for balance on various dimensions of power dependence (volumes, technology, contact, references) •Conflict & cooperation: -impossible to eliminate conflicts (profit distribution problem) -need to use conflicts in constructive ways for progress 5.7 Organizational structures for purchasing 1-Internal organization of purchasing: Where do we locate purchase function/responsibility? When dealing with this question we face a trade off between centralization or decentralization. However, there are some companies (ex: Ikea) that are both centralised and decentralized at the same time. In any case, the choice based on: -firm's own technology -type of product purchased -suppliers’ network structure -strategic goal of purchasing -overall organizational structure of the firm 2- External organization of purchasing: How to organize interfaces with single suppliers as well as the supplier network? A few key issues: -allow purchasers coordinate adaptations to internal functions -importance of right attitude towards suppliers -open new communication channels if necessary -accept conflicts, imbalance and partial dissatisfaction -overall structure of suppliers (technical/logistic interdependence.) → how many suppliers are there? -keep flexibility in each relationship and overall structure Nowadays, external factors more important than internal ones 5.8 THE SUPPLY STRATEGY The supply strategy is essentially a mirror image of the customer relationship strategy. Three dimensions are essential: 1- scope of purchasing 2- posture in supplier relationships 97 3- structure of supply base SCOPE OF PURCHASING: extent of purchasing (make/buy, value added) → define the level of vertical integration -outsourcing is affected by technology and strategy -impact on organization, logistics, other relationships (customers), scale (= optimal scale of production) and scope (what the resources you have can do) economies -limits to outsourcing (risk of losing identity/key resources) → too much outsourcing means that you might end up not knowing how your product works. -indirect access to external resources must be secured POSTURE IN SUPPLIER RELATIONSHIPS → How to handle the single relationship? Close relationship with broad & intensive contact or loose relationship with narrow and limited contacts. The decision is based on the following factors: -reciprocity (is supplier ready to reciprocate trust, knowledge etc.?) → do we get the same approach from the suppliers? -available time and resources to "shape relationship" → close relationships require time and resources -what kind of product and technology? -supplier importance in terms of volumes, financial and technology -firm's goals: total efficiency, for which you need a close relationship or "spot" efficiency. -effect of and on overall supply scope and structure -high scope/close relationships only with a few key suppliers -existing supplier relationships can block a new one STRUCTURE OF THE SUPPLY BASE: a) Number of supplier relationships (in total and per article) Single VS multiple sourcing → the choice depends on: -company goals and general purchase philosophy -existing alternative suppliers -type of product & technology b) How are these BRs related into a supplier network? -Fostering connections between different suppliers -System procurements: multi-tier supply networks