The Benefits of Vertical Coordination

Much research 'ms advocated ^riMier vcJiicfll cnnrdinatioti between buying parUiers and sellers so that they transcend men- transactions to engage in activities that create more value foi both partiri. Ituildihgiiust between parties is often seen as one prerequisite 10 bftthhy long-term relntionships."'"Maikeiing Insight: Hslahlishing Corporate 1'rnst an<i Credibility" Identifies some key dimensions pit hose concepts. Consider the inntual hcnCftts from i he following attBri^ement.

MOTOMAM IMC. AMD STILLWATER TECHNOLOGfES

MolOman Inc.. a leading supplier of industry robotic systems, and Stillwater Technologies, a contra:! tooling and machinery company and a key supplier lo Motoman, are tightly inlegrated. Not only do they occupy office and manufacturing space 111 Ihe same lacihty. bul their telephone and computer systems are I in kecT. and Ihey share a common lobby, conference room, and employee cafeteria. Philip V. Morrison chairman a no

CEOol McMillan, says it is like "a joint venture wttfioul I he paperwork." Short delivery distances are just one benefit of the unusual partnership. Alse key is the fact that employees of bolfi companies have ready access la one another and can share ideas on improving quality and reducing costs. This close relationship hast opened the door to new opportunities. Both companies had been doiOQ work for Honda Motor Company, and Honda suggested thai the/ work together on systems projects The integration makes the two bigger than they are individually.19

One historical study of four very tliffe rent business-lo-business relationships found that several factors, by affecting pari net interdependence and far environmental uncertainty, influenced the development of a relationship between business partners,^ The relationship b eh Veen advertising agencies and clients illustrates these (indiums:

J. In the relationship forrttntion stage, one partiler experienced substantial market growth. Man u fa et n rers ca pi to t i /. i ng o n m ass- ] jroduct ton techniq ues develo p cd i ta lion al brands, which increased the importance and anionm i.if mass-media advertising.

2. information asymmetry between partner^ was such thai a partnership icowWgenerate more proßts (hau if (he partner attempted to inna/ic (he other firm's area. Advertising agencies had specialized knowledge that their clients would have had oiffT-culty obtaining

At least one (rarhier had high barriers to entry that would prevent the other partner from entering the business. Advertising agencies could not easily become national manufacturers, and for years, manufacturers were nOI eligible In receive media commissions.

4. Depemlence asymmetry existed such tha l one pa rtnern vis nit»v a Ole to con trol or iuß ri■ euce the otherfy ccnitluct. Advertising agencies had control oi er media access.

5, One partner benefited from economies of scale related to the relationship, ,\d a^eneic^ gained by providing the same markei information lo multiple cliL-nts,

Cannon and L'erreault found that buyer supplier relationships differed according to lour factoid availability of alternatives; importance or supply; complexity of supply: and supply market dynamism, based on these four factors, they classified buyer-supplier relationships into eight different categories:'*1

1. Itasic buying rind selling - relatively simple, routine exchanges with moderately high levels of cooperation and information exchange 'i. Bare bones-similar to baste buying and selling hut more adaptation by the seller and less cooperation and information exchange

3, Contractual transaction - generally low levels of trust, cooperation, and interaction: exchange is defined by formal contract.

Customer Siipply — traditional custom supply situation where competition raibet than cooperation is the dominant form of governance. 5., Cooperative systems although coupled closely tn operational ways, neither party demonstrates structural commitment through legal means or adaptation approaches, ii. Collaborative - much trust and oomtnUmcnt leading to true partnership,

7, .Mutually adaptive - much relationship-specific adaptation for buyer and seller, hut without necessarily strong trust Or cooperalion,

8. Customer is king - all hough bonded by a close, cooperative relationship, the seller adapts to mcc< the customer's needs without expecting much adaptation ur change on the part of the cuslomer In exchange,

Some firms find that their needs can be satisfied with fairly basic supplier performance, They tin not want or require a closc relationship with a supplier. Alter natively, some suppliers may not find it worth their white lo invest in customers with limited growth putcmiul. One study found that the closest relationships between customers and suppliers arose when the supply was important 10 the Customer and when there were procurement obstacles such ys complex purchase re^uireiiiems and few alternative suppliers.'12 Ajiothec study suggested thai greater vertical coordination between buyer and seller through Information exchange a u d pla n n i ng is u sua I ly necessary only wit en h i gh en v i ro 11 menta I u tteeria i nt y ex is t s a nd spe -cific ini'eslmerits are modest.4-1

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