Six common causes of VMS (Vertical Marketing System) failure can be identified: (1) fuzzy goals, (2) inadequate trust, (3) lip service commitment, (4) human incompatibility, (5) inadequate operating framework, and (6) inadequate measurements.
Fuzzy Goals: The interaction between VMS members is complex and, in terms of traditional business practice, unorthodox. Because of this complexity, organizations involved in a VMS run the risk of not fully understanding all the ramification and implication of the arrangement. A typical complaint among executive is that other channel, members do not fully understand their requirements.
In some cases, firms are not clear as to what they fully expect to gain from the arrangement. One sentiment is: VMS arrangements are fashionable, so we should get involved. Executives who have closely studied the pros and cons of such arrangements are quick to point out that if the real objective is limited to cutting cost, then the most expenditious arrangement may be a traditional and proven channel. If the objective of a VMS is to improve the competitiveness of the overall value added process then the clarification of objectives and the development of realistic expectations become essential.
The understanding of interrelationships and the development of a clear vision regarding mutual expectations in a VMS is further complicated by the difficulty in testing such arrangements. Because of the complexity and the high visibility of an inter-organizational arrangement tests are highly vulnerable to the “halo” or so called “Hawthorne” effect. Given close scrutiny by the senior management of participating organizations, the results of a test may generate false or unrealistic expectation. While simulation of new cultural arrangements is possible, actual operations must often be launched on a conviction of faith and trust. It is important to remember that the excitement of closing the deal can potentially result in the creation of hasty and unrealistic expectations and the introduction of seeds of dysfunctional conflict when the alliance fails to match vague expectations.
Inadequate Trust: As noted earlier, mutual trust must in evidence for a VMS to prosper. The development of a trust level necessary to make a VMS excel requires an ‘open door’ attitude. This is not easy for executives schooled in adversarial traditions.
In traditional adversarial based negotiation a host of competitive checks and balances exists to assure buyers that they are getting the best possible deal. In a VMS, trust must substitute or many of the perceived benefits of competitive bidding. If traditional bidding practices are implemented, a VMS cab get aborted by the reluctance of prospective partners to share innovative ideas up front and to disclose confidential information. The dilemma is how to build trust in situation in which no track records exist.
As a VMS, trust level and operational success becomes inseparable. Failure to build initial trust will ultimately result in difficult times. Building trust is not simple. Full disclosure and in-depth understanding appear to be the only ways to overcome this potentially fatal barrier.
Main Incompatibility: In developing a VMS remember that people, not technologies make the unique business solutions work. In some situations, the managers involved in a VMS simply are not capable of overcoming the realities of their different business cultures. For example, Genencor, a joint venture between Corning Glass and Genentech, Inc., was seen as a near perfect pairing of two research based companies that could dominate the industrial enzymes market by pooling their resources. The arrangements initially failed to meet expectations because of human incompatibility and split loyalty. Successful firms in an industry may have wide differences in basic values. Given the fact that people have a natural resistance to change, it appears reasonable to expect culture and style clashes when employees from two or more firms co-mingle. In many stations employees of VMS firms work side by side, often the same physical facilities.
When the arrangements are driven top down, the problem may be as basic as middle managers simply not understanding the big picture. However, in some situations, the establishment of a VMS may be viewed as a way of putting one’s career in jeopardy. Middle level managers play a key role in successful performances. These executives often see their areas of competences becoming the prime consideration for outsourcing. If their perception is that the primary objective of a VMS is to cut cost, they may have difficulty in understanding why the old and proven techniques are not better If these managers become the ‘keepers of the VMS’ a satisfactory conclusion of the problem would not be likely.