Case Analysis: In the early 1990s
In the early 1990s, ChemCo - the focal firm which operates in the speciality chemical industry was operating very well due the soaring demand. This demand was due to the end users who required superior products. And since the demand was high, the chemical suppliers had set premium prices through product differentiation. ChemCo divides its market into three discrete segments. The first, being the 'global majors'. They were major volume purchasers who were operating with an international scale of operations. The second, being the 40 national customers who were known as the 'nationals' operating in the domestic market and thirdly, hundreds of small time local chemical blenders. ChemCo had the highest market share and was a technical leader. This was due to their high investments in R&D. The suppliers were very less. This shows that the barriers of entry were high in the sector. The probable reason was high investment for the research and development in the area.
The global majors- ChemCo's major customers had not consolidated their buying activity because; each of the customers had their own subsidiary acting on its own initiative. This scenario was particularly liked by the managers at ChemCo. ChemCo had taken no efforts whatsoever in probing in to its customer's business and building a strong relationship. When specifications were met, the transactions took place. And they seemed to be very satisfied with this kind of scenario. The customers soon realised the opportunistic behaviour of ChemCo. But they fostered close relationships with the national subsidiaries of the global majors and thus had resulted in a different customer perspective, because they were largely satisfied.
Case Analysis: by the late 1998
Late 1998, the market scenario was different with demand dropping due to various economic reasons. Now, this situation led all the manufacturers to focus on reduction of costs. This had to trace back upstream, i.e. their suppliers. Consolidation was inevitable for them. This increased the bargaining power of the manufacturers and had exposed the pricing strategy of ChemCo. The focal firm's strength further weakened. ChemCo, which had businesses with 300 local business units, was now reduced to seven businesses ("Seven Sisters") due to the co-ordination in buying.
Comparing the situations in the early 1990s to later in the decade, the bargaining power of manufacturers had increased because of centralised purchasing which led to high purchase volumes. Price based competition became the norm amongst the suppliers. This complex situation has decreased the product life cycle and has led to a commodity-style market. The product standardisation has the made the competition intense amongst the suppliers. ChemCo does not realise the importance of 'nationals' which has not been tapped to its potential. But they can't due to the scare that they might repeat the mistake as with the global majors.
This case is good illustration of the importance of relationships among the industrial network members. There was lack of effective interactions, the way the customer relations were managed. Internal conflicts between the managers were evident after the market changes because more emphasis was given to the global majors while the nationals were neglected. But the lower price levels would definitely make lesser funds available. ChemCo's conflicting goals has made them override the relations with the locals and the nationals. The focal firm is still pursuing a strategy based on market share by paying more interest to the global majors. With the focal firm's short termist goals, which neither benefited both the parties, the manufacturers adopted a powerful stance which has put ChemCo in an uncomfortable position. The demand of price discounting as a result of the centralised purchasing has led to commoditisation of products which gives no scope for product differentiation. This also resulted in limited number of customer contacts.
Impact of KAM on the Network
The poor relationship management by ChemCo has to be noted as the reason for KAM being implemented as the new corporate strategy in the firm. The centralised buying strategy by the global majors made ChemCo to take a relational approach which seemed like a traditional approach that any industry would take in a situation like this. But it was just overreacting by implementing KAM in the company. The modern scenario is typically that the large accounts exploit their buying power for lower prices and offer suppliers less profit leaving them to make their wealth from the medium and small sized accounts with less market share (Shapiro et al. 1998). Holistically speaking, the entire value of the chain is being reduced which is not a good sign for the shareholders.
This centralised buying approach by the manufacturers was bound to be implemented because; the suppliers for a long time have "screwed" the manufacturers on the price in the name of product differentiation. As a consequence of centralisation, customer satisfaction, penetration, and loyalty has become the important goals in sales departments and in order to achieve these goals, many suppliers develop concepts through which they can show their closeness to their customers (Homburg 1995 cited in Ivens&Pardo 2007).
Key Account Management by definition is almost a cross-functional activity intended to deliver value to the consumer which suggests that the key account managers have the status to gain support and commitment from managers and with other priorities (Piercy&Lane 2006). But in this particular case, it has an impact on every stakeholder in the network (i.e. internal&external) directly/indirectly related to ChemCo. Many companies rely solely upon sales volume to identify their key accounts (Ivens&Pardo 2007).
KAM and Internal Stakeholders
The key account managers will definitely face a task of internal coordination across the functional units, product units and regions (Workman et al. 2003). That is what happened with ChemCo as well, intra-organisational conflict arose among the functional, product and the key account managers. The coordination amongst them failed. The coordination between all the departments is the most fundamental objective before implementing and following a new corporate strategy.
When firms fail to achieve an esprit de corps, there may be a lack of commitment to common goals for key accounts and people will follow their personal agenda, thus making it more difficult to serve the needs of key accounts.
(Workman et al. 2003:10)
This is very much evident from the case. The views of the functional department managers show that they don't have the same vision as the key account managers. In addition to this, Workman et al. (2003) articulates that, there may possibly be a loss of information about the key accounts when there is higher level of esprit de corps. This is possibly because the information enters the organisation through many different people who are more likely to share it (Workman et al. 2003).
One more major disadvantage of this strategy as Kalwani&Narayandas (1995) adds, tying up important personnel could force these suppliers to give up opportunities to service other customers. They also note the effects of long-term relationship benefits through inventory holding&control costs, selling prices and profitability.
Speaking about control costs and inventory holding costs, the lower demand uncertainties in long term relationships will improve the efficiency of the purchasing practices of the supplier firm and thus lead to better inventory and control costs (Trevelen 1987 cited in Kalwani&Narayandas 1995).Inventory handling&control costs are high due to demand uncertainties in transactional approach. ChemCo would have definitely faced this as they were complaining about logistics issues. The problem in this case is that, opportunistic behaviour is seen at both ends of the transaction. But if the both sides in the relationship were to support each other and safeguard each other's long term interest, it would be quite possible to achieve and maintain an optimum level of performance (Burt 1989). Even though the KAMs were easily achieving their goals, the impact on the long term profitability of the company wasn't taken into consideration and kept on pursuing to achieve targets just by focusing on the 'seven sisters'.
The narrow-mindedness of ChemCo to have inter-organisational relations through a 'bow-tie' model of KAM was one of the reasons for the tension created in the organisation and was no good for the buyer organisations as well. It is evident from the case that there was only one point of contact for clinching the deals. The only connection in this model is between the buyer and the salesperson which is very fragile and can easily be broken by a competitor who can offer a better price to take away the business (Christopher&Juttner 2000). The focus is to just complete a transaction. Many managers in ChemCo also discouraged that just one contact point for the suppliers was not enough to clinch the deals. In a sector such as speciality chemicals, where R& D, operations and logistics are very important for technical queries were supposed to be directed, didn't happen. The sales force did the entire job of selling. The prices quoted by the functional manager were lowered by the Key account managers. This is again a very short term view on the part of the KAMs. The bow-tie model of KAM basically doesn't work when there are so many departments in the industry like this wherein there is scope for loads of information exchange. With both the ends being very opportunistic, there is total lack of confidence and commitment. When a supplier/buyer believes that the partner is engaging in opportunistic behaviour, such perceptions will lead to decreased trust (Morgan&Hunt 1994).Also Ellis (2010) adds, interaction between individuals is very important for a successful implementation of KAM. There were no multiple contact points between ChemCo and the buyers. In this case, the social element of relationship as Ellis (2010) says does not enhance.
Decision taken by the management should definitely not let company be taken to court. This would seriously annoy the shareholders of the company. "A business strategy such as KAM which results in enhanced exposure to action under those laws and regulations in important markets carries the seeds of its own failure from the outset" (Piercy&Lane 2006:159). Competition regulators in the industry will definitely keep their eyes open to large customer-supplier relationships. Considering the case, if ChemCo is offering its key customers(global majors) - prices which are lower than the average cost, while supplying other medium and small customers(the nationals and the locals) at average variable costs or higher, there is a clear indication of unfair behaviour which may attract legal action being taken against ChemCo. Fontenot and Hyman (2004) also note that favoured treatment of some key customers, at the expense of the mid and small customers is legally challengeable in many circumstances. Shareholder will definitely be unimpressed if vulnerability to possible legal actions like this is not taken care of before implementing any strategy.
KAM and External Stakeholders:
Also ChemCo being the market share leader, lowering their prices will definitely create ripples across the supply chain horizontally (competitors). Before the consolidation of the global majors, ChemCo had negotiated prices only via product differentiation. But the scenario had changed after consolidation to nothing but price negotiation. The KAMs instead of concentrating on the second and the third tier customers wherein product differentiation was still the key were neglected. The price reduction for the global majors would definitely filter down to the nationals and the locals as well. Thus, the pricing strategy undertaken by the KAMs had made the competitors pointing fingers at ChemCo for having started the price war.
From the case it's very evident that the short-term view of ChemCo has put itself in a critical position. In a commoditised market like in the case-study, it is a very complicated issue to implement a strategy like long term relationship marketing. The best strategy that it can probably look at implementing is, look at building long term relationships with its partners in the national and local regions. Like Morgan&Hunt (1994) proposes, relationship commitment should be central to relationship marketing. This is only possible with the second tier and the tier customers who were still open to product differentiation. But the attitude of ChemCo in the case study seems to be very opportunistic even with that of the nationals (milking the customers). This attitude cannot go a long way. The consequence of this attitude on the global majors has already been seen. In light of relationship commitment and trust, Morgan&Hunt (1994) posit that, (i) relationship benefits, (ii) shared values and (iii) communication and opportunistic behaviour are the precursors and thus directly influence trust and through trust, indirectly influence commitment. A company like ChemCo which operates in the global markets, should necessitate continuous value addition to its offerings in terms of products, technologies and operations. RM theory also suggests that the selection of the partner may be a crucial element in the competitive strategy (Morgan&Hunt 1994).
Ballantyne et al. (2003) see that, "the idea of value exchange as the foundation stone of relationship marketing for their future". Managers at ChemCo have to take an approach that would add value to their relationships. Christopher et al. (2002) perspective of values suggest that, (i) Value is created as an offering and delivered through regular transactions with a supplier managed relationship, (ii) Value is created through mutually interactive processes and shared through negotiated agreement within the life of the relationship, and (iii) Value is created and shared in interactions that emerge from within network of relationships. This is exactly what ChemCo is supposed to be doing in the kind of scenario that it is put itself and its competitors into. It should add value to the services that it is currently providing. Economic outcomes can be obtained through a social process like effective interactions. Also, the three layers of substance (Activity links, Resource ties and Actor bonds) as suggested by Hakkanson and Snehota (1995) should be taken as three different effect parameters that are the determinants of values in a relationship. They add up to a relationship. A chemical speciality company like ChemCo will definitely have complex relationships and thus there will be more effects in these three layers of substance.
The six market network of relationships (Christopher et al. 2002) has to be taken into consideration while making any framework work of strategy. That is because the action in one domain (e.g. the customer market) will impact the supplier market and the internal markets, with wider impacts that require critical issues planning (Ballantyne et al.2003). The management at ChemCo have to think about working within these relationships to create and deliver value. Thus the six market model as illustrated by Christopher et al. (2002) is shown in figure 1.
To serve these kinds of relationships, the bow-tie model of KAM in ChemCo would definitely not create better working relations between the suppliers and buyers. A more cross-functional approach like that present in a diamond model of KAM is required. In a diamond model, there are multiple contact points between the buyer and the seller organisations. This would be a more enduring relationship wherein both the parties are working towards mutually agreed goals (Christopher&Juttner 2000). The model like the one shown below in Figure 1 can be followed.
Close interfacing of Ramp&;D, operations, finance functions, logistics and manufacturing on either side is the key to a successful exchange. And if the companies relate strongly and are persistent enough to create value in the market place so that they can achieve individually, Integrated KAM approach is the key(McDonald 2000).
Strategic partnerships are being sought by many specialty chemical firms to provide better customer service, optimize technological advantages, and enter new markets (Guisinger&Ghorashi 2004). ChemCo should form strategic alliances and partnerships or joint ventures with other firms as well as direct competitors. This trend has dramatically increased in all the sectors of the chemical industry (Guisinger&Ghorashi 2004). Partnerships like these would give access to broader markets. There would be close interfacing of partner firm's functional departments and thus facilitate horizontal integration. This would reduce the lead time in bringing out new products into the market.
Supply chain strategy-Value Delivery systems
Since the customers have consolidated, there can be upswing or downswing in demand. ChemCo will have to capture information on the trends in the end customer market (the OEMs). Using a small network of suppliers, they can respond in very short durations. Producing in small batches will reduce the risk inherent in long supply chains (Christopher&Peck 2003). The authors illustrate the example of Zara's supply chain on agility.
Quick Response Logistics
P&G receives sales data directly from North-America's largest retail chain, Wal-Mart and thus makes use of this information to plan production and schedule deliveries on a replenishment basis (Christopher 1998).In the recent years, Quick Response logistics (QR) has emerged under the umbrella of the Just in Time (JIT) philosophy. In order to reap time based competition, quick responsive systems are required. The development of IT and in particularly EDI has made QR feasible which combines information systems and JIT logistic systems to provide right product at the right time in the right place (Christopher 1998). ChemCo have to develop better working relations with the end users (OEMs)and also should encourage all other players in the market to have healthy cooperation in order to share information which will be of use to the manage their production and reduce lead times. Thus, it will reduce administrative, operational, inventory and control costs to add more value to product and still compete on price as the competition is based on. Also, this process leads to spotlight the areas that require improvement, and thus these systems can lead to continuous improvement in quality and ultimately the quality of the product.
Increasingly, e-marketplaces have become one of the best places to trade speciality chemicals.B2B electronic market places are utilised as the digital intermediaries that focus on specific business functions (Dai&Kauffman 2000). The virtual marketplaces are used for buying and selling activities (e.g. ChemConnect.com, CheMatch.com).These marketplaces are some of the best way to sell and buy commodity products. "The marketplace creates value by bringing buyers and sellers together to create transactional immediacy and supply liquidity, and by supporting the exchange of demand and supply information" (Dai&Kauffman 2000).
An emerging trend called "Virtual firm"
This area is specific to speciality chemical producers. Some of the suppliers are moving into a virtual organisation mode in order to bring products to market quickly with higher frequency of product improvements. These firms are unique in the fact that they introduce and develop new chemical entities without owning an actual facility by outsourcing many of its functions (Guisinger&Ghorashi 2004). Each of the partner firm involved in this concentrates on their area of core competence."In fact, all mechanisms of virtual organizations, partnership, joint venture, strategic alliance, new corporation, supplier-subcontractor, cooperative agreement, royalty or license and outsourcing contract are being used by custom chemicals producers" (Guisinger&Ghorashi 2004:629). The introduction of improved new products will give ChemCo lots of advantages over its competitors. It is quite obvious that this strategy would not work a commoditized market like the one present in the case. But it always has its options open with the second and the third tier customer who will definitely want customised products.
"One challenge will stem from the existing and continuing trends such as accelerated commoditization, or declining rates of classical innovations, which will put additional pressure on the specialty share in portfolios and further enforce the competition"(Baker 2010). Thus the players have to continuously rework their strategies to stay profitable in this industry.
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