Markets are highly efficient mechanisms for the sale and purchase of commodities and general-use parts. Exemplified in cash-and-carry wholesaling, and online auctions, we’ve classified these exchanges as spot or transactional relationships. Self-interest motivates the exchange, and parties give little thought to future interaction.
At the other end of the business relationship continuum is the partnership, which many writers liken to a marriage. A partnership is a relationship characterized by mutual commitment, intense communication and collaboration, high trust, and common goals.
With partnership status come opportunities to develop new business, a chance to gain access to valuable information, and many other benefits.
Many marketing organizations aim to achieve partnership status with a range of cus- tomers. Likewise, many buying organizations look to form partnerships with a subset of suppliers. Obviously, a buyer–seller match in partnership motives yields a mutually main- tained relationship whereas mismatches skew the relationship management responsibil- ity to the party more interested in relating.
It should also be clear that business relationships can be distinguished on two other dimensions: the social dimension and the contractual/structural dimension. Social re-
lationshipis the term we use to describe a trading association supported principally by social bonds and habit. The “glue” holding together a social relationship includes interpersonal attraction and friendship between buyer and seller, similarity in back- ground, a track record of successful cooperation, efficient communication, and gen- eral satisfaction. A transactional exchange could evolve into a social relationship as the parties forge customized routines, provide extraordinary performance, develop im- plicit and explicit understandings about needs and roles, trade favors, discover they both (dis)like fly fishing, French wines, the pope, Bob Marley . . . , and start liking each other.
The social bonds and the positively reinforced interactions that support the social relationships are important to most business relationships. Sometimes parties need more assurance than friendship—or prior to the possibility of developing social ties—that the relationship can be sustained. This includes assurances that the other party will stay motivated to perform up to established standards. These assurances usually involve some type of contract or “hostage” that constitutes a pledge for performance. Thus, such relationships are called safeguarded relationshipsbecause contracts or structural and technical ties bond the parties to the ongoing exchange. Contracts may have large penalties for termination and detailed procedures for resolving conflicts and adjusting to new working environments. For example, Unamin sells silica sand to Dow Corn- ing, delivering 300 tons per day. The sand must meet very specific size and quality standards. If Unamin fails to deliver the right quality at the right time, the company must pay Dow Corning a substantial fee. Of course, Dow Corning has structurally tied its operations to Unamin and would also have to shut down the plant in the face of late deliveries and defects. The contractual provisions for the penalties, then, balance Dow Corning’s implicit pledge in sole-sourcing silica and are a way of safeguarding by sharing risk.
Corporate relationshipsare exchanges safeguarded by ownership or vertical integra- tion. A university assures itself of sustained access to printing services by having its own printing operation. A medical equipment manufacturer may acquire a wholesaler to pro- vide the selling and distribution services. In each example the trading relation becomes circumscribed by an employment relationship. Generally, employees work with a set of explicit rules and under an authority structure that is difficult—but not impossible—to duplicate in contracts between independent organizations.
The success of Cessna Aircraft depends on much more than its own humming pro- duction process. It critically rests on its selection of top-drawer suppliers, collaboration with key suppliers and their supplies in the development of high performance compo- nents, and sound design and administration of the dealer network that serves its ultimate customers.
Many business marketers would point to some 15 years of supply chain management as our most significant breakthrough in network thinking. Indeed, a 1998 survey by the consulting arm of Deloitte and Touche found 90 percent of respondent companies plan- ning supply chain improvements for the coming year.26No wonder! The market leader- ship of Dell and Cisco can well be traced to strategic supply management that yields quality, speed, performance, and service levels that net out to superior value for their customers.
Historically, bringing elements of the value network together and into managerial fo- cus has been no mean feat. It has happened only with the impetus of dynamic leader- ship and imagination, such as provided by G.W. Carver and today’s top supply chain executives.
Today, global network convergence is one of the most exciting Internet phenomena for business marketing. At VerticalNet.com, “hubs” or virtual communities for over 50 business-to-business industries are just a few keystrokes from any manager’s desktop. Each hub is a door to various discussion forums, trade groups, and the “storefronts” of buy- ers and sellers who pay VerticalNet $6 thousand per year to be there. Started in 1995, VerticalNet exists to provide Internet environments where business can be conducted faster and more efficiently. Within its communities, its mission is to “provide the fore- most online information resources, communication vehicles and e-commerce channels for industrial, professional, and technology-based businesses.”27
If we back away a bit from the intimidating complexity of networks, we should be able to focus on the essential linkages for resources and skills in the creation of value.
Consider George Washington Carver, a scientist most often celebrated for his devel- opment of scores of products made from peanuts. But Carver was not simply a pro- ductive laboratory dabbler. His efforts with “goobers” followed his vital research and demonstration projects involving crop rotation. His work at Tuskegee Institute was aimed at increasing cotton yields among Alabama’s struggling small farmers. Planting peanuts restored nitrogen to the soil, enabling rich cotton harvests in subsequent sea- sons. Carver and the farmers seemingly had a productive relationship. But the farm- ers’ success with peanuts glutted the market. Their bountiful harvests had no value.
Thus, not until consumer preferences for peanut butter cookies built demand for peanut butter processors, which bid up the price of peanuts, did cotton growers benefit sig- nificantly from crop rotation. George Washington Carver’s endeavor to develop mar- kets for peanuts reflects his insight into the connectivity of any enterprise to the larger network creating value.
You know from Chapter 1 that today’s business marketing is not just peanuts. Mul- tiple firms interacting with one another are using and discovering a host of mechanisms to coordinate their activities, of which price is but one. Consider Airborne Express, which has gained significant market share in the urgent-delivery business by knowing and han- dling its clients’ shipping needs. In effect, becoming a firm’s shipping department, Air- borne and its client (say, Xerox or an industrial catalog company) together serve the ship- per’s customer base. Other firms enlisted by Airborne—independent consultants, software companies, local couriers, commercial airlines, and more—become part of the value- creating network as well.
The concept of networks is not new. Indeed, in the long history of trade the preva- lence of family enterprises, cartels, guilds, and conglomerate trading companies is unde- The Internet
enables new types of B2B networks.
niable. The scarcity of truly autonomous enterprises with strictly defined boundaries be- lies their dominance in formal economic models of the marketplace.
Unfortunately, the complexity of business networks and the infancy of scholarship in the field limits us to largely descriptive insights. Even the progress in supply chain man- agement is confined largely to optimized linkages—two-firm interfaces—rather than sys- temwide flows. But Dave Wilson and Kristian Moller, top business scholars from the United States and Europe, respectively, contend, “Network thinking represents the most novel conceptualization about the nature of industrial markets and industries. . . . The emerging results suggest, however, that network concepts help to understand industrial markets in a more realistic fashion.”28
Summary Markets represent a powerful system for coordinating exchange. They allow work to be divided among specialists and allow value to be determined by customers. But there are technical limits to the effectiveness of markets. Incomplete information about product performance, buyer or seller integrity, and hidden costs not well reflected in price limit the utility of market exchange. For complex products and uncertain transaction envi- ronments, buyers and sellers must find additional means—complementary to the price system—for coordinating their behavior.
In some environments, buyers and sellers can forge high-performance relationships by a process akin to courtship. It includes gradual probing, reinforced risk taking (trust), language and norm customization, and overall deepening of dependence. The request for adjustment and accommodation are key signals of the value of the association and allow expansion into other exchange activities. We used the running example of the new prod- uct development efforts for automotive vibration dampers to illustrate the processes of relationship development.
But some contexts simply do not allow parties to taper into a relationship. These must be set up in advance to safeguard each party’s investment and ensure long-run perfor- mance. Supplier verification, exchange of personnel, and dependence balancing provide some assurances of continuity and performance. On another plane, the parties can strate- gically manage dependence through third-party relations. Relational contracts and verti- cal integration complete our illustration of the vast array of options.
Finally, we must not neglect to consider the nesting of each relationship in a larger business network. Each firm’s connections to other players in the web of exchange rela- tions will determine their competitive position to provide value.
Key Terms attraction
awareness stage commitment
corporate relationship dependence balancing dissolution
expansion stage exploration stage just-in-time (JIT)
relationship
justice norms outsource power reciprocation relational contract safeguarded
relationship social relationship spot exchange
strategic partnership supplier verification supply chain
management transactional
relationship trust
vertical integration
Discussion Questions
1. Evaluate the ability of spot markets to provide adequate resources for an organi- zation seeking to purchase
O-rings storage racks
data entry services payroll software custodial services office furniture
applications engineering small electric motors (components)
2. Would a company marketing these products be interested in developing long- run relationships with any customer? Why?
3. Write a series of events that might well typify a developing relationship between an office furniture dealer and a growing investment company.
4. Is it possible to develop a corresponding series of events reflecting a relationship between this investment company and its phone system vendor?
5. Imagine you are concluding a very productive meeting with your finance pro- fessor regarding the conduct of a feasibility analysis of a business venture you have dreamed about for a long time. You’ve never had such a supportive and caring professor before, yet there is a pained expression in Dr. Roberts’ face when you ask to borrow one of his books. What safeguards can you provide Dr.
Roberts that you’ll return his book in good condition?
6. Marketing authors Robert Morgan and Shelby Hunt argue that trust and com- mitment are the central variables for understanding relationship marketing.
Other scholars have suggested that power is the key variable. Explain which variable you believe is key.
7. A small group of parents in Kentucky formed a private, independent school. It opened recently in classrooms rented from an urban church with an oversized physical plant and a shrinking congregation. School officials forecast enrollment growing from about 40 in year one to about 120 over the next four years. Am- ple space for over 100 was available at the church, low-cost terms were agreed on, and an option to renew for up to four years at the same terms was signed.
The pastor answered to the church council and recently wrote the school board president that because the school opened with 80 students instead of 40, the consistory wanted to double the rent. How do you respond? Could this rela- tionship have been set up better?
8. Describe a situation in which an important business relationship developed be- cause of other loosely connected business relationships involving the parties.
9. Many franchisers require their franchisees to follow strict operating procedures or face termination and forfeiture of large sums of money. In some circles this state of affairs prompts discussions of the abusive power of franchisors over their franchisees. But the chapter suggests these termination provisions might be considered for their use as a safeguard. Explain.
10. Explain the student recruitment imperatives for a top business school using a network perspective on value added.
Internet Exercise
Franchising is a unique business marketing format. The franchisor selects franchisees from applicants who have the necessary financial resources and meet other qualifica- tions. Then, each party to this partnership brings unique skills and resources to the en- terprise. Usually, the franchisor lends a brand image, operational expertise, and siting assistance. The franchisee brings capital and initiative.
Delve into McDonald’s’ website to determine the financial resources a McDonald’s franchisee would need. Examine the means by which the franchisor makes money.
Evaluate this structure in the light of the chapter’s discussion of safeguarding rela- tionships.
Cases Case 2.1 Mac OS Licensing
Apple Computer began its bold Mac OS licensing program in 1994, hoping to increase its market penetration in publishing, design, and database applications against competi- tive pressure from PC powerhouses Microsoft and Intel. A key ingredient to this program was a joint effort by Apple, IBM, and Motorola to create the Common Hardware Refer- ence Platform (CHRP). This move freed Apple from the exclusive responsibility of hard- ware design and brought in broad industry participation. In the CHRP introduction, then Apple CEO Michael Spindler said, “We believe today’s announcement is good news for anyone who believes in innovation, competition, and responding to customer needs.”
Enter the Mac clones. Power Computing began shipping Mac systems in May 1995 and sales quickly soared. Clone maker Umax also racked up business. After touting its speed and then besting Apple systems in many computer magazine reviews, Power Com- puting reached annual volumes of nearly $400 million by summer 1997.
As Apple struggled and prodigal founder Steve Jobs began to assert more influence in the company from his seat on the board, there were signs that licensing would end. In a filing at the Securities Exchange Commission, Apple said, “The benefits to the com- pany from licensing the Mac OS to third parties may be more than offset by the disad- vantages of competing with them.” Indeed, sales data indicated that, rather than ex- panding the market, clone makers were carving up Apple’s customer base. Apple’s CFO said, “I would guess that somewhere around 99 percent of their sales went to the exist- ing customer base.”
On September 2, 1997, Apple announced that it would acquire Power Computing for $100 million in common stock and cease licensing new technology to other clone makers such as Umax and Motorola.
1. What did Apple hope to gain by licensing? Is this option open in the future?
2. What were licensees looking for? Where do they go without new Apple technology?
3. Could the license arrangements have been structured differently?
4. How did customers fare under licensing?
SOURCE: Stephen Beale, “Apple Eliminates the Top Clone Vendor,” MacWorld,November 1997, pp. 30–31; Galen Gruman, “Why Apple Pulled the Plug,” MacWorld,November 1997, pp. 31ff.; Kaitlin Ouistgaard, “Apple Kills Clone Market,” Wired,September 2, 1997, www.wired.com/news.
Case 2.2 Just-in-Time JIT
You’re the director of purchasing at a telecommunications company in Seattle and you’ve just gone to meet your sister-in-law for coffee at a little cafe off Rush Street. Earlier this week you arrived in Chicago to attend the National Association of Purchasing Managers Convention. As you waited in the cafe, you couldn’t help but hear the conversation in the opposite booth. A group of three increasingly rowdy purchasing agents from differ- ent companies were clearly from the same convention.
One they called Xavier was from Tex Implements. He was warmed up and getting loud. “I just want to know how I’m supposed to get the best price from Prespec Spring, when I cannot even ask for a bid from anyone else.”
WWWI N T E R N E T
“You think that’s bad?” retorted a stocky guy called Hank, a streetwise purchasing manager at a Big Three auto company. “I got this dude from Magma in my department telling us how many hoses of which type we’ve got to get each month.”
“We’ve got the same JIT II baloney. I call it ‘JIP Too,’” said the woman in the teal suit.
You hoped you had done a better job getting the purchasing people at your firm committed to the concept of vendor consolidation, sole sourcing, and partnering, but the conversation prompted you to jot a few notes. At tomorrow’s conference luncheon you were slated to accept an award for your company for purchasing excellence. You had been planning to make a few simple remarks off the cuff, but your napkin now had a short summary of the motivation and strategic payoff for this “new era in pro- curement.”
Additional Readings
Achrol, Ravi S, and Phillip Kotler. “Marketing in the Network Economy.” Journal of Marketing63 (Special Issue 1999), pp. 146–163.
Bowersox, Donald J., David J. Closs, and Theodore P. Stank. 21st Century Logistics:
Making Supply Chain Integration a Reality. Oak Brook, Ill.: Council of Logis- tics Management, 1999.
Claycomb, Vincentia (“Cindy”), and Gary L. Frankwick. “The Dynamics of Buyers’
Perceived Costs during the Relationship Development Process.” Journal of Business- to-Business Marketing4, no. 1 (1997), pp. 1–37.
Dwyer, F. Robert, Paul H. Schurr, and Sejo Oh. “Developing Buyer–Seller Relation- ships,”Journal of Marketing52 (April 1987), pp. 11–27.
Fein, Adam J., and Erin Anderson. “Patterns of Credible Commitments: Territory and Brand Selectivity in Industrial Distribution Channels.” Journal of Marketing61 (April 1997), pp. 19–34.
Fine, Charles H. Clock Speed: Winning Industry Control in the Age of Temporary Advantage.Reading, Mass.: Perseus Books, 1998.
Gundlach, Gregory T., Ravi S. Achrol, and John T. Mentzer. “The Structure of Com- mitment in Exchange.” Journal of Marketing59 ( January 1995), pp. 78–92.
Gundlach, Gregory T., and Patrick Murphy. “Ethical and Legal Foundations of Relational Marketing Exchanges.” Journal of Marketing57 (October 1993), pp. 35–
46.
John, George, Allen M. Weiss, and Shantanu Dutta. “Marketing in Technology- Intensive Markets: Toward a Conceptual Framework.” Journal of Marketing63 (Spe- cial Issue 1999), pp. 78–92.
Leenders, Michiel R., and David L. Blenkhorn. Reverse Marketing: The New Buyer–
Supplier Relationship.New York: The Free Press, 1988.
Leuthesser, Lance. “Supplier Relational Behavior: An Empirical Assessment.”Industrial Marketing Management26 (1997), pp. 245–254.
Mohr, Jakki J., Robert J. Fisher, and John R. Nevin. “Collaborative Communication in Interfirm Relationships: Moderating Effects of Integration and Control.” Jour- nal of Marketing60 ( July 1996), pp. 103–115.
Morgan, Robert, and Shelby Hunt. “The Commitment–Trust Theory of Relationship Marketing.” Journal of Marketing58 ( July 1994), pp. 20–38.
Naude, Pete, Chris Holland, and Matian Sudbury. “The Benefits of IT-Based Supply Chains—Strategic or Operational?” Journal of Business-to-Business Marketing7, no. 1 (2000), pp. 45–67.