Benefits of vertical coordination


Much research has advocated greater vertical coordination between buying partners and sellers so that they transcend mere transactions to engage in activities that create more value for both parties. Building trust between parties is often seen as one prerequisite to healthy long-term relationships. “Marketing Insight: Establishing Corporate Trust and Credibility� identifies some key dimensions of those concepts.

Consider the mutual benefits from the following arrangement:

One historical study of four very different business to business relationships found that several factors, by affecting partner interdependence and/or environmental uncertainty, influence the development of a relationship between business partners. The relationship between advertising agencies and clients illustrates these findings.

1. In the relationship formation stage, one partner experienced substantial market growth. Manufacturers capitalizing on mass production techniques developed national brands, which increased the importance and amount of mass media advertising.

2. Information asymmetry between partners was such that a partnership would generate more profits than if partner attempted to invade the other firm’s area. Advertising agencies had specialized knowledge that their client would have had difficulty obtaining.

3. At least one partner 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 not eligible to receive media commissions.

4. Dependency asymmetry existed such that one partner was more able to control or influence the other’s conduct. Advertising agencies had control over media access

5. One partner benefited from economies of scale related to the relationship. Ad agencies gained by providing the same market information to multiple clients.

Cannon and Perreault found that buyer-supplier relationships differed according to four factors: availability of alternatives; importance of supply; complexity of supply; and supply market dynamism. Based on these four factors, they classified buyer-supplier relationships into eight different categories.

1. Basic buying and selling—relatively simple, routine exchanges with moderately high levels of cooperation and information exchange.

2. Bare bones—similar to basic buying and selling but 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.

4. Customer supply—traditional custom supply situation where competition rather than cooperation is the dominant form of governance.

5. Cooperative systems—although coupled closely in operational ways, neither party demonstrates structural commitment through legal means or adaptation approaches.

6. Collaborative—much trust and commitment leading to true partnership.

7. Mutually adaptive—much relationship specific adaptation for buyer and seller, but without necessarily strong trust or cooperation.

8. Customer is king—although bonded by a close, cooperative relationship; the seller adapts to meet the customer’s needs without expecting much adaptation or change on the part of the customer in exchange.

Some firms find that their needs can be satisfied with fairly basic supplier performance. They do not want or require a close relationship with a supplier. Alternatively, some suppliers may not find it worth their while to invest in customers with limited growth potential. One study found that the closest relationships between customers and suppliers arose when the supply was important to the customer and when there were procurement obstacles such as complex purchase requirements and few alternative suppliers. Another study suggested that greater vertical coordination between buyer and seller through information exchange and planning is usually necessary only when high environmental uncertainty exists and specific investments are modest.