The Concept of Power in Buyer-Supplier Relationships

The Concept of Power in Buyer-Supplier Relationships

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An organisation’s relationship with other organisations is among the most fundamental strategic decisions in management. An organisation’s relationships can be with various stakeholders, customers, owners, suppliers or competitors. Among these categories of relationships, the relationship with suppliers is very important and this task lies in the hands of an organisations supply chain management. Supply management has the objectives of cost optimization in which a competitive advantage is played through cutting down costs, asset utilization in which an organisation seeks to match their research & development strategies, and innovations with those of their supplies, and value creation in which a balance of dependence and interdependence with suppliers is created. All the above mentioned objectives, which have a significant impact on any firm’s business, are related to supplier relationships. Relationships between companies can be collaborative, converse or arms length. The nature of a buyer-seller relationship depends to a very large extend, on the power balance and power relation between the two organisations.This essay starts with an analysis of the concept of power. In this essay also, the power regimes approach in supply relationship management will be discussed. The role power plays in supplier selection as well as in negotiations between suppliers and buyers is discussed in order to demonstrate how power affects buyer-supplier relationships. The essay concludes by outlining the effects of the power strategy in buyer-supplier relationships on management practices.

Power has for a long time been a contested concept with disagreements mainly based on what its scope should be and how it should be understood.The study of power is multi faceted and complex, but its consequences are observable in all aspects of our lives. In the discipline of sociology, the five bases of power have been identified as; reward power which is the ability of the powerful partner  to offer incentives to affect the actions of the other party, coercive power is when an actor uses threats, sanctions or punishments to influence others, legitimate power also known as position power is usually derived from social norms and held by an appointed or selected authority, expert power is gained from knowledge or special skills and referent power which is derived from an organizations affiliations or organisations it associates with (Zhao et al., 2008, p. 368-388) . However, in this concept of power, the different actors in a relationship may wield power but chose not to exercise it fully (Houser and Domokos-Cheng Ham, 2004, p. 11). When it comes to power within organisations, Fleming and Spicer (2007, p. 19) state that power has four distinct faces with each of these having distinct answers with regards to power and how power operates and is maintained within companies. On their part, French et al. (2011, p. 669) define power as “the ability to get someone else to do something you want done or the ability to make things happen or get things done in the way you want.”

Depending on their services, products and markets, various firms adopt different approaches in the kind of relationships they wish to establish with their suppliers and to effectively manage the relationships. One such approach, the Kraljic model, dissects a company’s purchasing portfolio into high supply risk and low supply risk, as well as how supply is likely to impact the company’s financial results. This analysis creates the categories of products as; strategic items, leverage items, and bottleneck items. Another approach is the ABC analysis method which categorises suppliers based on various factors such as volume, their performance, their strategic importance, price and quality (Shapiro, 2001, p. 243). The power regime model by Andrew Cox et al (2004, pp. 357-371) analyses the relationship between buyers and sellers in power regimes.

The power regimes methodology suggests that the type and nature of a relationship is fundamentally defined by the power balance and relations between the two actors. According to this model, a firm can decide on the most suitable relationship management approach on the basis of the power they hold, which is determined by resources. Buyer supplier relationships are therefore a function of resource dependency (Meehan and Wright, 2011, p. 32-41). By establishing the level of resource dependency we can therefore be able to learn the power buyers have over their suppliers. Based on Cox’s power matrix, power relationships range from buyer dominance to interdependence to independence to supplier dominance.

In every relationship, there are circumstances, known as power resources, which provide power and leverage for either of the actors. When it comes to a business deal between a buyer and a supplier, each of the actors has power resources which can be used to achieve a favourable outcome.  according to Cox (2007, p. 50) power resources for buyers include; “monopsony and oligopsony, low sunk and switching costs, regular market contestation, buying consortia and appropriate governance structure to eradicate ex ante and ex post opportunism in situations of incomplete contracting and bilateral dependency.” on the other hand power resources for suppliers occur in circumstances such as; having a superior financial ability, physical and non physical assets, information and intellectual property as well as low switching costs (Cox, 2007, p. 50). In a vertical business exchange where the buyer can be categorised as having either a dominant or interdependence power position the most appropriate relationship approach is one whose focus is supplier development. On the other hand, if the supplier is in a dominant or interdependence power position, the organisation should adopt a supply chain management strttegy. According to this model, a shift in power balance results in a change in the relationship portfolio which could have the benefits of improved performance outcomes (Axelsson, Rozemeijer and Wynstra 2005, p. 31).

Relationships between buyers and supplier are influenced by various factors including; trust, commitment, if the two organizations have mutual goals, power and interdependence, and cooperation. A power imbalance is said to occur if one actor in the relationship gets the other to do something they would not normally do. A power imbalance is one of the major factors that lead to a breakdown in the relationship between two organizations. Hill and Hill (2009, p. 279) provide a framework for evaluating the level of interdependence in a relationship based on the percentage of purchases or sales. Power can also have the effects of either facilitation or constraint on the relationship between buyers and suppliers. Facilitation can be seen in a situation where the buyer has more power than the supplier. The buyer’s dominance would contribute to discretion in the operations as well as in business outcomes of the relationship. On the other hand, if the buyer is in a position of dependency, their ambitions would be constrained. For instance, the buyer may be willing to initiate a partnership but the supplier fails to reciprocate and even if they reciprocate, the suppliers intention maybe to award themselves a disproportionate share of the profits in the partnership. Power therefore determines if a buyer supplier relationship will be an arms- length relationship or a partnership. In a relationship where either partner employs the power concept, collaboration is unlikely because firms that operate power based relationships have fewer reasons to enter into partnerships (Schroder et al, 1996 in; Dapiran & Hogarth-scott, 2003, p. 259). Power also influences how surplus value from their relationship will be shared with there being only three possibilities; the buyer receives the lion’s share, the supplier receives the bigger proportion, or both actors share the profits equally.