INDUSTRY LTD PAPER

MF 400 Strategic Marketing Management

INDUSTRY LTD

CASE STUDY B

MF 400- STRATEGIC MARKETING MANAGEMENT

Presented on 26.11.2013

O. Andersen and A. Buvik

School of Management

University of Agder Kristiansand (Norway)

Hallie Exall (Student Exam #4411)- [email protected]

Amal Lechheb (Student Exam #4426)- [email protected]

Lukas Polame (Student Exam #4413)- [email protected]

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INDEX

1. ABSTRACT…………………………………………………………………...….PAGE 3

2. PREFACE………………………………………………………..……………….PAGE 3

2.1. INTRODUCTION………………………………………………………….PAGE 3

2.2. INDUSTRY LTD SUPPLY CHAIN AND SALES FIGURES…………...… PAGE 3

3. THEORETICAL FRAMEWORK……………………………………………...PAGE 5

3.1. SUPPLIER STRATEGIES AND PURCHASING RELATIONSHIPS…...…PAGE 5

3.1.1. Kraljic’s Purchasing Portfolio Matrix & Van Weele’s Supply

Strategies……………………………………………………….…PAGE 5

3.1.2. Resource Dependency Theory……………………………………PAGE 10

3.2. DISTRIBUTION CHANNEL ORGANIZATION………………………….PAGE 12

3.2.1. Porter’s 5 Competitive Forces………………...............................PAGE 14

4. APPLICATION OF THEORIES……………………..………………………..PAGE 14

4.1. SUPPLIER STRATEGIES AND PURCHASING RELATIONSHIPS: TOP 6

VENDOR STRATEGIES……………………….…………………………PAGE 15

4.1.1. Systems Contracts: Vendor 1……………………………………..PAGE 16

4.1.2. Spot Market: Vendor 2………………………..………………….PAGE 17

4.1.3. Partnership: Vendors 3 & 5…………………..………………….PAGE 17

4.1.4. Securing Supply: Vendors 4, 6, & Sub Suppliers…………………PAGE 18

4.2. DISTRIBUTION CHANNEL ORGANIZATION…………...……………..PAGE 19

4.2.1. Spot Market: Wholesaler Distribution Channel Organization…..PAGE 19

4.2.2. Partnership: Manufacturing Firm Distribution Channel

Organization……………………………………………………..PAGE 21

5. ANALYSIS & CONCLUSION………………………………………………...PAGE 21

6. REFERENCES………………………………………………………………….PAGE 23

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1. ABSTRACT

The topic of this paper is to analyze and recommend the supply chain and distribution channel

organization strategies for Industry Ltd. The goal was to analyze, discuss, and propose which

kind of supplier strategy and purchasing relationships that the firm Industry Ltd should

implement in its current situation, and how the firm should organize their distribution channels.

In the first section, we shortly outlined the theories used in second section, which is where the

theories were implemented. These theories, such as Kraljic´s Purchasing Portfolio Matrix, Van

Weele´s Supply Strategies, Resource Dependence Theory, and Porter´s Competitive Forces, in

order to meet the goal of this paper.

2. PREFACE

2.1 INTRODUCTION

The purpose of this paper is to analyze the supply chain, supplier strategy, and purchasing

relationships of the firm Industry Ltd, while also recommending an implementation strategy for

how the firm should organize its distribution channels. Four theoretical frameworks will be

examined and applied to the case: Kraljic’s Purchasing Portfolio Matrix, Van Weele’s Supply

Strategies, and The Resource Dependency Theory will be used to form the supplier strategies,

while Porter’s Theory will be used to create the distribution strategy. These recommendations

will be made for how Industry Ltd should structure its operations with both their suppliers and

distributors.

2.2 INDUSTRY LTD SUPPLY CHAIN AND SALES FIGURES

Industry Ltd. is a company in Norway that sells product components and electronic

factory equipment to three wholesalers and ten individual manufacturing firms (Buvik, 2007).

They sell highly customized components and order-based equipment to ten manufacturing firms,

while they sell more standardized electronic equipment to three wholesalers (Buvik). These

wholesalers then distribute their products to five-hundred Norwegian retailers (Buvik).

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The company also has over one hundred suppliers that supply Industry Ltd. with their

products and components (Buvik, 2007). They have six top vendors that account for 695 million

NKR of annual purchased materials from the suppliers (Buvik). The remaining suppliers and sub

suppliers account for 335 million NKR or purchased materials (Buvik). The firm’s total annual

sales in 2007 was 1500 million NKR, which means that their expenditure on materials bought

from these suppliers and sub suppliers was roughly 69% of total sales (Buvik).

Each vendor supplies Industry Ltd with different types of products (Buvik, 2007). Some

of these are standardized and non-strategic products, customized strategic products, raw

materials and leverage products, while others sell spare parts and bottleneck products (Buvik).

Each of the many suppliers have differences in their annual purchasing volume, customization,

size of the firms, competition, their market position and bargaining power (Buvik). The sub

suppliers supply both the suppliers of the firm, the firms itself, as well as the three wholesalers

that the firm sells to (Buvik). Although the type of products that are sold from the sub suppliers

are unknown, they represent a great amount of power in the supply chain (Buvik). All of these

different variables have an impact on how Industry Ltd should structure their supply and

distribution channels.

Figure 1: Current Supply Chain Structure of Industry Ltd

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3. THEORETICAL FRAMEWORK

The following theoretical framework that is used to implement strategies for Industry Ltd

will be described below. The theories are placed under the corresponding topics, which they are

to be implemented in in the Application of Theories (Part 4).

3.1 SUPPLIER STRATEGIES AND PURCHASING RELATIONSHIPS

3.1.1 Kraljic’s Purchasing Portfolio Matrix & Van Weele’s Supply Strategies

One of the most famous and most useful scientific works regarding supplier strategies

and purchasing relationships, was created by Kraljic (1983), who has developed a purchasing

portfolio matrix which is based on two main attributes and divides products into four categories.

One of these categories consists of strategic products, and suggests three strategies based on the

power imbalance between the company as the purchaser, and the supplier of concrete strategic

products. However, Kraljic does not give attention to the remaining three categories. Van Weele

´s (2002) work completed this missing gap in information, which will be briefly discussed.

Kraljic (1983) suggests four phases that help develop strategies. In the first phase,

‘classification’, the company is supposed to classify all of its purchased items in terms of ‘the

importance of purchasing’ and ‘the complexity of supply market’ into four categories: leverage

items, strategic items, noncritical items and bottleneck items (Kraljic, 1983). The classification,

‘importance of purchasing’, respectively ‘the financial impact’, “can be defined in terms of the

volume purchased, percentage of total purchase cost, or impact on product quality or business

growth” (Kraljic, 1983, p. 112). The ‘complexity of the supply market’, respectively ‘the supply

risk’, “is assessed in terms of availability, number of suppliers, competitive demand, make-or-

buy opportunities, and storage risks and substitution possibilities” (Kraljic, 1983, p. 112).

As mentioned, according to Kraljic (1983) by combining the value of the firm’s financial

impact and supply risk, four cells with four different types of products emerge (see Figure 2).

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Figure 2: Product Type Categories and Strategies (Modified from Kraljic, 1983, p.111

and Anderson, 2013b)

When both the supply risk and financial impact are high, the product type is considered

strategic. Typical attributes of strategic products are a high level of customization and high

volume. Examples of such product are scarce metals, engines or gearboxes for automobile

producers, or high value components. With a combination of high financial impact and a low

level of supply risk, we obtain leverage products. These are usually standardized and ordered in

high volume (Van Weele, 2002). Examples include electric motors, heating oil, or electronic data

processing hardware.

When both supply risk and financial impact are low, the product type is considered to be

noncritical. Noncritical products are standardized consumables ordered very often in high value

(Van Weele, 2002). Such examples are steel rods, coal, or office supplies. The last type of

product, placed in the fourth quadrant, consists of bottleneck products. For this product

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classification, financial impact is low but supply risk is high. These types of products are also

called niche products and are ordered in low volume and are often very technologically specific

(Van Weele, 2013). Examples of these products are various specific electronic parts, catalyst

materials, or outside services.

In the second step, market analysis, the firm compares its strengths against its suppliers,

with the bargaining power of its suppliers. When evaluating company strengths, the following

criteria should be taken into account:

1. “Purchasing volume vs. capacity of main units2. Demand growth vs. capacity growth3. Capacity utilization of main units4. Market share vis-á-vis main competition5. Profitability of main end products6. Cost and price structure7. Cost of nondelivery8. Own production capability or integration depth9. Entry cost for new sources vs. cost for own production

10. Logistic” (Kraljic, 1983, p. 114)

When weighting the supplier´s bargaining power, criteria that should be used are as follows:

1. “Market size vs. supplier capacity2. Market growth vs. capacity growth3. Capacity utilization or bottleneck risk4. Competitive structure5. ROI and/or ROC6. Cost and price structure7. Break-even stability8. Uniqueness of product and technological stability9. Entry barrier (capital and know-how requirements)

10. Logistics situation” (Kraljic, 1983, pg.114)

The third phase is dedicated to strategic positioning. “The company positions the

materials identified in Phase 1 as strategic in the purchasing portfolio matrix” (Kraljic, 1983, p.

113), and subsequently, three basic strategies emerge: to exploit, diversify and to balance.

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Figure 3 - Kraljic´s Purchasing Portfolio Matrix (Kraljic, 1983, p. 114)

The exploit strategy is used for products when the company has a dominant role, and the

suppliers’ strength is low or medium. In this case, it is recommended to exploit company´s

power to obtain better conditions and/or prices, for example by spreading volume over several

suppliers or reducing level of inventory. This should be done with caution in terms to not

“jeopardize long-term supplier relationships or provoke counteractions by insisting on rock-

bottom prices.” (Kraljic, 1983, p. 114)

When the company´s strength is low and supplier strength is strong, the diversification

strategy should be used. The company then accepts its defensive role and “consolidates its

supply position by concentrating fragmented purchased volumes in a single supplier, accepts

high prices, and covers the full volume requirements through supply contracts” (Kraljic, 1983, p.

114). In order to decrease the long-term risk associated with dependence of a firm on a single

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source, that firm should search for material substitutes or new suppliers, and may also benefit

from backwards integration.

The balance strategy is ideal when the power between the company and supplier is more

equally balanced. In this case, the company should not exploit its power (because this could

damage the buyer-supplier relationship) nor use the diversify strategy (because this is over

conservative and not efficient). The most beneficial strategy to implement is to “pursue a well-

balanced intermediate strategy” (Kraljic, 1983, p. 114). In last phase, action plans should be

established, where all possible supply scenarios will be captured. As already mentioned above,

there were three strategies for the three remaining product that were formed by van Weele

(2002).

According to van Weele (2002), competitive bidding is most suitable for leverage

products. Because leverage products create a large percentage of the total purchasing costs,

capturing small savings will make large differences. Therefore, it is recommended to refrain

from entering into long-term contracts, and instead to use the advantages of the company´s high

power and low supply risk. This includes using the multiple sourcing strategy, spot market

purchasing strategy, competitive bidding, and tendering, which can all be used in order to

stimulate price competition among the suppliers.

For noncritical items, van Weele (2002) recommends category management and e-

procurement solutions, called systems contracting. This is due to the fact that 80% of the

purchasing department’s working time is used for purchasing noncritical products, due to their

great diversity (van Weele, 2002). Because of this, the firm should aim on reducing

administrative and logistic complexity by creating simple, but efficient ordering and

administrative routines, reducing the number of suppliers, and creating automatic orders. Modern

electronic technologies might also be useful, such as electronic ordering and payment systems.

Securing supply is the most useful strategy for bottleneck products. Considering the

nature of leverage products, continuity of supply should be secured, even at additional costs if

necessary. Simultaneously, developing alternative products and searching for alternative

suppliers should reduce dependency on suppliers. Also, contingency plans should be created,

which should be followed in the event that some continuity-disrupting event would occur (van

Weele, 2002).

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Although van Weele´s strategies were stated for the three product types mainly because

Kraljic omitted them, van Weele has also developed his own strategy that should be used for

strategic products as well, which is called partnership. The careful selection of a partner while

developing a close and long-term relationship is very important and beneficial.

3.1.2 Resource Dependency Theory

Firms are not internally self-sufficient, and thus need outside resources (Pfeffer, 1982).

The reason this is important is because it creates an interdependency, which can affect the

survival of the firm (Pfeffer). There are two main elements in the Resource Dependency Theory:

external constraints and managing external dependencies, which have an effect on the strategy of

the organization (Pfeffer). There are also two types of interdependence. Outcome

interdependence means “the outcomes, or results, achieved by one social actor are dependent on

the actions of another actor” (Pfeffer, 1982, p. 193). The dependence can be either competitive or

symbiotic. Behavioral interdependence means that “the activities themselves are dependent on

the actions of another social actor” (Pfeffer, 1982, p. 193).

Pfeffer and Salancik listed ten conditions that predicts the extent that a firm complies

with external demands:

1. “Focal organization is aware of demands2. Focal organization obtains some resources from social actor3. Resource is a critical or important part of the focal organization’s operations4. Social actor controls allocation, access, or use of resource; alternative sources for

resource are not available to focal organization5. Focal organization does not control allocation, access, or use of other resources is

critical to the social actor’s operations and survival6. Actions or outputs of focal organization are visible and can be assessed by social

actor to judge whether the actions comply with its demands7. Focal organization’s satisfaction of the social actor’s requests are not in conflict

with the satisfaction of demands from other components of the environment which it is interdependent

8. Focal organization does not control determination, formulation, or expression of social actor’s demands

9. Focal organization is capable of developing actions or outcomes that will satisfy external demands

10. Focal organization deserves to survive” Pfeffer and Salancik, 1978 in (Pfeffer,

1982, p. 45)

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The dependence of an organization on another can be assessed based on the “importance

of the resource, the extent to which the interest group has discretion over resource allocation and

use, and the extent to which there are few alternatives” (Pfeffer, 1982, p. 195). When

organizations are in a power-dependency relationship, one actor is usually at a disadvantage,

while one is at an advantage (Anderson, 2013c). The strategy for the power-advantage actor

would either be to “extract a higher share of the exchange surplus”, or to administer corporate

board interlocks (Anderson, 2013c, p. 4). The power-disadvantage actor could administer either

unilateral or bilateral restructuring. The theory suggests that by exchanging resources, both

actors will be better off than if they did not engage in the exchange (Anderson, 2013c). The

power imbalance and mutual dependence also has an effect on constraint absorption (Anderson,

2013c). These different combinations of dependencies have an effect on the supplier strategy that

a firm should implement:

Figure 4: Casciaro, Tiziana and Mikolaj J. Piskorski., 2005 in (Anderson, 2013c, p. 27)

The two hypothesized outcomes of this dependency are that “there is a negative relationship

between power imbalance and the likelihood of a merger”, and that “there is a positive

relationship between mutual dependence and a merger” (Anderson, 2013c, p.13).

3.2 DISTRIBUTION CHANNEL ORGANIZATION

The concept of the distribution channel, also known as marketing channel or distribution

of channels, is most commonly referred to as the: “two main research streams, namely, the

microeconomic and the behavioral paradigms” Stern and Reve, 1980 in (Heide, 1994, p.71). The

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microeconomic paradigm discloses “the manner in which individual marketing functions are

allocated across types of institutions” Stigler, 1951 in (Heide, 1994, p.72).

The microeconomic model encounters some limitations, and due to this, a second

behavioral paradigm emanated from it. According to Stern, the behavioral research paradigm

focuses on “the design of mechanisms for controlling the role performance of individual channel

members” Stern, 1969 in (Heide, 1994, p.72), The marketing channel is also described as a

“general trade-off between costs and control” Anderson and Weitz, 1983; Cespedes, 1988;

Lambert, 1966, in (Heide, 1994, p.72).

There are three main types of distribution channels, which the following figure describes:

Figure 5: (Collins, 2008, Chapter 9)

The first type of distribution channel is the dyad relationship between a manufacturer and

consumers. In this case, the producer is selling directly to the consumer. The second type of

distribution channel is the triplet relationship between the manufacturer, the retailer and the

consumer. In this situation, the producer is selling his products/services to the final customer

through the retailer.

Finally, the last type of distribution channel is the quadruplet relationship between the

manufacturer, the wholesaler, the retailer and the customer. Here, the producer is selling through

the wholesaler. Furthermore, the distribution channel is a notion that is found in the five forces of

Porter (Porter, 1985) that will be detailed in the next section.

3.2.1 Porter’s Five Competitive Forces

As mentioned above, Porter has developed a theory based on five forces of a firm

(Anderson, 2013a). This theory will be used in order to implement a distribution channel

organization. These five competitive factors have an important influence on the firm’s

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profitability and its attractiveness (Anderson, 2013a). Additionally, they also have an impact on

the costs and prices of the firm’s production (Anderson, 2013a).

The following figure describes those five factors:

Figure 6: The Five Competitive Forces of Porter (Porter, 2008, p. 27)

The entry of new competitors is the first force detailed by Porter. This force is

characterized by two mechanisms, and the barriers to entry are either high or non-existent. In the

first case, when the barriers are high, the firms are protected because it is hard for the new

competitors to penetrate the market (Anderson, 2013a). Consequently, the firms will have a high

profitability (Anderson, 2013a).

However, when the barriers are non-existent, there are more competitors and the chances

to have a high profit margin are low (Anderson, 2013a). The participants are not large enough to

dominate the market and set high prices. In this situation, it is impossible to have a monopoly

position. Furthermore, there are two types of barriers: structural and strategic barriers to entry

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(Anderson, 2013a). The first barrier refers to economies of scale, while the second barrier

introduces expected reprisals from the other firms (Anderson, 2013a).

The threat of substitute products is an important factor when it comes to other companies

that produce similar products and services, which limits the prices the firm can set within the

industry (Anderson, 2013a). The intensity of rivalry within the same industry sector is also one

of the essential competitive forces that Porter discusses (Anderson, 2013a). When the

competition intensity is high, there is a high probability of having perfect competition, which

means that none of the participating firms are large enough to set the prices and have a

monopolistic position in the market (Anderson, 2013a). This type of competition is also known

as an oligopolistic competition (Anderson, 2013a). On the other hand, when the competition

intensity is low, there is a higher chance of being in a monopoly position and having a high

profitability (Anderson, 2013a).

Furthermore, the bargaining power of the suppliers and buyers are the last two important

factors that need to be examined. The supplier’s bargaining power increases when firms are

dependent on them, which can be due to large amounts of volume purchased from them

(Anderson, 2013a). Finally, the buyers also have a high amount of power over the suppliers

when it comes to specific investments (Anderson, 2013a). This power imbalance occurs when

the supplier has made an important investment in the relationship with one buyer (Anderson,

2013a). Eventually, the theory of the five competitive factors developed by Porter helps

characterize all of the opportunities and threats that the firm might encounter.

4. APPLICATION OF THEORIES

Here, we will be discussing how the theories described above held determine the different

strategies that Industry Ltd should implement with both their suppliers and distributers. Kraljic,

Van Weele, Pfeffer, and Porter are the main theorists who helped established the theoretical

framework which has been implemented into this case.

4.1 SUPPLIER STRATEGIES AND PURCHASING RELATIONSHIPS: TOP 6 VENDOR

STRATEGIES

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According to Kraljic´s (1983) phases we will start with product classification. This

involves the evaluation of financial impact and supply risk level. The Resource Dependency

perspective will also be used to determine strategies for each of the six vendors.

The total purchased amount of goods and services for the production of Industry Ltd in

2007 was 70% of annual value of the sales, which is 1500 million NKR (Buvik, 2007). This

means that the purchasing amount of all products purchased for production was 1050 million

NKR. Because we have annual sales from the suppliers to the firm Industry Ltd, we can easily

calculate the percentage of total purchase cost as a fraction of purchasing amount of all products

and annual sales from the suppliers to Industry Ltd. Table 1 shows these percentages and

evaluation of financial impact.

Figure 7: Financial Impact Evaluation

Evaluation of supplier risk is considerably more complex, because availability, number of

suppliers, competitive demand, product characteristics, make-or-buy opportunities and other

variables need to be taken into account. By doing this, the following supply risk level can be

assigned to individual suppliers (see Figure 8).

Figure 8: Supply Risk Level Evaluation

Now, once the financial impact and supply risk level have been determined, the six

individual vendors can be classified according to the type of product that they sell to Industry Ltd

(see Figure 3):

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Figure 9: Top 6 Vendor´s Product Classification

4.1.1 Systems Contracts: Vendor 1

Viewing the relationship from a Resource Dependency perspective, Vendor 1 has a low

dependency on Industry Ltd due to their low annual sales to the firm, and Industry Ltd also has a

low dependency on Vendor 1 due to the low amount of market share that the vendor delivers to

the firm (Buvik, 2007). This means that the vendor and Industry Ltd are in a power balance

situation. The Resource Dependency Theory states that firms in low dependency situations

would be very unlikely to create a merger, and would be more likely to have an informal

relationship, governed by the use of contracts (Pfeffer, 1982). Van Weele’s (2002) perspective

also supports this strategy by recommending category management and e-procurement solutions

for Vendor 1. Industry Ltd should introduce measures in order to save the purchasing

department’s working time from purchasing from this supplier. This could be achieved by

reducing administrative and logistic complexity by creating simple, but efficient ordering and

administrative routines, reducing the number of suppliers, and creating automatic orders. Modern

electronic technologies might be useful, such as electronic ordering and payment systems. The

above reasons are why systems contracts should be the strategy that is implemented.

4.1.2 Spot Market: Vendor 2

From a Resource Dependency perspective, Vendor 2 has a low dependency on Industry

Ltd due to their low amount of annual sales from their sales to the firm, and Industry Ltd also has

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a low dependency on Vendor 2 due to the low amount of market share that the vendor is

responsible for (Buvik, 2007). As stated before, The Resource Dependency Theory states that

firms in low dependency situations would be very unlikely to create a merger, and would be

more likely to have an informal relationship, governed by the spot market (Pfeffer, 1982). They

are also in a power-balanced situation (Pfeffer, 1982). Van Weele’s (2002) perspective supports

this strategy by recommending the spot market strategy as most suitable for Vendor 2. The

management of Industry Ltd should try to use their high bargaining power and low supply risk

by the multiple sourcing strategy, spot purchasing, competitive bidding and tendering, in order to

stimulate price competition and gain cost savings. This small price change can create large cost

savings in total purchasing costs due to the high volume of the purchase.

4.1.3 Partnership: Vendors 3 & 5

Analyzing the power situation from The Resource Dependency perspective, Vendor 3 has

a low dependency on Industry Ltd because their sales to the firm only account for roughly 2% of

their annual sales (Buvik, 2007). However, Industry Ltd is highly dependent on the vendor due to

their high market share, and lack of competitors in the market (Buvik, 2007). This would create a

power imbalance, and semi-high mutual dependence (Pfeffer, 1982). The power advantage actor

here seems to be the vendor, while the power disadvantage actor is Industry Ltd (Pfeffer). In

order to reduce dependency, they should implement bilateral restructuring operations because

there are not many other suppliers that can offer the same resources to Industry Ltd (Pfeffer).

They could establish a friendship with the vendor in order to maintain and ensure continuous

supply (Pfeffer).

The Resource Dependency perspective can be used to view the power and dependency

imbalance of resources between the vendor and Industry Ltd (Pfeffer, 1982). Vendor 5 has a high

dependency on the firm due to the 68% of income that is generated through selling to the firm,

and Industry Ltd has a medium dependency on Vendor 5 (Buvik, 2007). With this configuration,

mutual dependence is high, and there is a small power imbalance (Pfeffer).

Unfortunately, there is not enough information to recommend appropriate strategies for

Vendor 3 and Vendor 5 according to Kraljic (1983). Only estimates of the bargaining power

between Industry Ltd and the vendors can be made by comparing a fraction of the total annual

sales of each supplier and the annual sales from the supplier to Industry Ltd, as well as the

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market share for the products delivered to Industry Ltd. With this information, the diversify

strategy should be used for Vendor 3 and exploit strategy for Vendor 5. Due to lack of

information, van Weele´s (2002) strategies will be better to use.

From van Weele’s (2002) perspective, Vendor 3 and Vendor 5 should use the partnership

strategy. Due to the strategic importance of products supplied by these vendors, Industry Ltd

should try to establish close, long-term relationships with these vendors “by developing different

joint actions, which can include quality improvement programs, process improvements, product

development and cost reduction.” (Anderson, 2013b)

4.1.4 Securing Supply: Vendors 4, 6, & Sub Suppliers

From a Resource Dependency Perspective, Vendor 4 and Industry Ltd are both highly

dependent on each other due to the high market share and lack of alternative suppliers (Pfeffer,

1982). This creates a mutual dependence between the two actors, and equal power in the

relationships (Pfeffer). A merger is more likely to form between them, and long-term contracts

may form in order to ensure a stable flow and source of critical resources (Pfeffer).

The Resource Dependency Theory suggests that the vendor has low dependency on

Industry Ltd, however the firm has a high dependency on Vendor 6 (Buvik, 2007). This creates a

high power imbalance between the two firms, with Industry Ltd at a power-disadvantage

situation (Pfeffer, 1982). Industry Ltd should search for ways to strengthen their relationship

with the vendor through bilateral restructuring cooptation, as there are only two alternate vendors

who can supply them with the resource that they need (Pfeffer, 1982).

Van Weel’s (2002) theory also supports that for Vendor 4 and Vendor 6, securing supply

will be the best solution because products delivered by these suppliers are essential for Industry

Ltd’s products, and the continuity of supply should be secured at additional costs if necessary.

Simultaneously, Industry Ltd should try and develop some product substitutes while searching

for new possible suppliers in order to reduce their dependency on Vendor 4 and Vendor 6.

Contingency plans should be developed with steps, which should be followed in the case that a

continuity-disrupting event should occur.

The strategy that Industry Ltd can use in decreasing their dependence on the sub-

suppliers can be determined using The Resource Dependency Theory (Pfeffer, 1982). These sub-

suppliers distribute their resources to many types of firms in the value chain (Buvik, 2007).

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These include Industry Ltd’s suppliers, the wholesalers that they distribute to, as well as the firm

itself (Buvik, 2007). Industry Ltd only purchases a small amount from the sub-suppliers, and the

sub-suppliers distribute to many other firms, which creates a low dependency situation between

the two actors (Buvik). They are in a power-balanced relationship, and both have a low mutual

dependence. This will decrease the need for long-term relationships, and will increase the need

for contractual arrangements a continuous flow of resources (Pfeffer, 1982). They should also

secure the continuity of supply.

4.2 DISTRIBUTION CHANNEL ORGANIZATION

Industry Ltd’s distribution channel is organized in two parts: one for the three

wholesalers, and the other for the ten individual manufacturing firms. They sell different types of

products for the two types of distribution channels, which is why Industry Ltd should choose two

distribution channel organizations to follow. They are discussed further below.

4.2.1 Spot Market: Wholesaler Distribution Channel Organization

Industry LTD sells standardized, electronic products to three different wholesalers,

namely Whol1, Whol2 and Whol3, and those three wholesalers distribute to five hundred

retailers all around Norway (Buvik). By selling those electronic products, Industry Ltd made

approximately 750 million NKR in 2007 (Buvik, 2007).

The types of products that Industry Ltd sells to its wholesalers are leverage products

(Buvik, 2007). According to Kraljic’s purchasing portfolio matrix (Kraljic, 1983), these types of

commodities refer to standardized products that represent a high amount of the annual firm’s

total sales. The wholesalers have more power over Industry Ltd, especially when it comes to

power in negotiations. This power can decrease, however, if Industry Ltd starts to negotiate with

other suppliers and create a price cartel (Anderson, 2013b). The advantage of selling this kind of

product is that it provides the firm several advantageous factors.

In order to exploit power, the wholesalers can implement a competitive bidding strategy

to use against Industry Ltd, or can monitor the market in order to get the most competitive price

(Van Weele, 2002) However from the supplier point of view, Industry Ltd should implement a

“spot market strategy due to ease of substitution” (Anderson, 2013b, p. 21).

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This would be advantageous for them because they will be able to compete on the current

price of the spot market. They can make annual or long-term contracts with the wholesalers

where they agree on the price of the future spot market for future exchanges (Anderson, 2013b).

This contract will secure distribution, and therefore secure income for the firm (Anderson,

2013b).

When it comes to weaknesses, Industry Ltd has to alter their prices depending on the

price elasticity related to the law of supply and demand. The principle of price elasticity is that

when the demand increases, the prices decrease, and vice versa. From the wholesaler point of

view, when the supplier switching costs of Industry Ltd are low, they can be interpreted as an

advantage. When costs are low, this means that the supplier does not only have a higher

likelihood of loosing a buyer, but is also more inclined to charge lower costs to the buyer whom

is debating on switching suppliers (Anderson, 2013b). The supplier would be more likely to

introduce a competitive bidding strategy against Industry Ltd and the other suppliers, which is

why Industry Ltd should implement a spot market strategy in order to stay competitive amongst

their competitors and secure their distribution of products to the wholesalers.

One of Porter’s competitive forces can be applied to the competitive bidding strategy.

This force refers to how new competitors face structural barriers when they enter the market.

One of these structural barriers are economies of scale (Porter, 1985). In this case, the larger the

company is, the lower the cost of its products it will be. The more products the firm produces,

the cheaper the unit price of this type of product will be. Economies of scale provide a

competitive advantage to businesses that choose to opt for this strategy (Anderson, 2013a). Also,

they will have a larger market position and a higher bargaining power over their buyers. Industry

Ltd is one of the largest firms in its industry, with it’s annual value of sales reaching 1500

million NKR in 2007, which is ten times more than most of the other suppliers of the industry.

Eventually, Industry Ltd should choose the spot market strategy, because it will provide

several advantages such as competitive pricing, and possibly security of future supply to the

wholesalers (Anderson, 2013b). This supplier strategy has been chosen to the detriment of three

other fundamental supplier strategies that are partnership, security of supply, and the system

contracts (Anderson, 2013b).

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4.2.2 Partnership: Manufacturing Firm Distribution Channel Organization

Industry Ltd sells highly custom and order-based strategic products to the ten individual

manufacturing firms, which is why they should implement a partnership with the manufacturing

firms. By selling the electronic factory equipment, Industry Ltd made roughly 750 million NKR

in 2007 (Buvik, 2007).

The types of products that are sold to Industry Ltd’s individual manufacturing firms are

strategic products (Buvik, 2007). According to Kraljic’s purchasing portfolio matrix, this type of

products pertains to highly customized goods and requires physical and human capital such as

technology and specific equipment, but also knowledge and experience about the asset

specialization (Anderson, 2013b).

In order to balance power, the manufacturing firm can settle partnering agreements with

Industry Ltd, or can insure a tight collaboration and secure its supplies by agreeing on a balanced

contract on the period of delivery and the goods that need to be delivered (Kraljic, 1983).

Consequently, Industry Ltd should implement a partnership strategy in order to “create a mutual

commitment in its long-term relationship” with its manufacturing firms (Van Weele, 2002, p.

201). The partnership strategy would be advantageous, because it will increase efficiency, and

will establish trust and commitment between the two members of the distribution channel.

Although the partnership strategy has many advantages, it also encounters a main

weakness. Few suppliers are available due to the specialization and the customization of the

products and there are high switching costs, which have been described beforehand. Overall, the

partnership strategy would be the best strategy to implement with the manufacturing firms to

establish a long-term and advantageous relationship.

5. ANALYSIS & CONCLUSION

In conclusion, Industry Ltd should implement supplier and distribution strategies with

regards to Kraljic’s Portfolio Matrix, Van Weele’s Supply Strategies, The Resource Based

Theory, and Porter’s Theory. Each vendor and supplier relationship should be thoroughly

analyzed before making decisions on which strategy to implement, and factors such as

availability of substitutes, financial significance, supplier risk, and other variables, should be

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examined. The relationships with the manufacturing firms and wholesalers that Industry Ltd

distributes to need to also be examined carefully, and motives for long-term relationships, buyer

dependence, and financial impact need to be studied before implementing a strategy. The

recommendations made took into account all of the above variables that may have an impact on

Industry Ltd and the actors that they conduct business with. Partnerships, spot market strategies,

securing supply, and systems contracting are very different types of strategies that, if

implemented properly, can bring financial success and long-term sustainability to Industry Ltd.

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6. REFERENCES

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productivity. Sloan Management Review, 27 (Spring), 3-19.

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supplier-firm-buyer. University of Agder, Kristiansand, Norway.

Anderson, O. (2013b). 2.1: Theoretical perspectives on inter-organizational relationships.

Business markets: Organizational buying. University of Agder, Kristiansand, Norway.

Anderson, O. (2013c). 2.2: Theoretical perspectives on inter-organizational relationships.

Resource dependence theory. University of Agder, Kristiansand, Norway.

Buvik, A. (2007). MF 400 Strategic marketing management: Case type B. 2010.

Casciaro, T. and Mikolaj J. P. (2005). Power imbalance, mutual dependence, and constraint

absorption: A closer look at resource dependence theory. Administrative Science

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industry. Industrial Marketing Management, 17, 215-27

Collins, K. M., & Shemko, J. (2008). Chapter 9: Exploring business. Pearson/Prentice Hall.

Kraljic, P. (1983). Purchasing must become supply management. Harvard Business Review,

(September/October), 109-117.

Lambert, E. W. Jr. (1966), Financial considerations in choosing a marketing channel. MSU

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Pfeffer, J. (1982). Organizations and organization theory. Boston, Pitman Publishing, 192-203.

Porter, M. E. (1985), Competitive Advantage. New York: Free Press.

Porter, M. (2008). The five competitive forces that shape strategy. Harvard Business Review, 27.

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http://ieg-sites.s3.amazonaws.com/sites/4e8476903723a8512b000181/contents/

content_instance/4f15bab63723a81f24000182/files/HBR_on_Strategy.pdf

Stern, L W. (1969). Distribution channels: Behavioral dimensions. Boston: Houghton Mifflin

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Stern, L. W., & Reve, T. (1980). Distribution shannels as political aconomies: A framework for

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Stigler, George J. (1951). The division of labor is limited by the extent of the market. Journal of

Political Economy, 59 (June), 185-93.

Van Weele, A.J. (2002). Purchasing and supply chain management. Analysis, planning and

practice. Cornwall: Thompson Learning.

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