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In a recent article Dr. Hans W. Gottinger provides a conceptual strategic framework for insights re?garding power and competition in a collaborative supply chain setup. It builds on strategic thinking specifically in the context of collaboration.
The study of innovation based competition has often considered aspects related to patent races and incremental product-process innovation to achieve distinctive advantage.
However, recently innovation-based competition has become an aspect of buyer-supplier relationships. There are many instances in manufacturing where one finds situations of lock-ins created by innovative suppliers. For example, in the computer industry Intel and Microsoft as suppliers of microprocessor and operating systems, respectively, to desktop manufacturers like IBM, Hewlett-Packard and Dell illustrate such innovation-based lock-ins. Indeed, there exists an evolving power structure (dubbed ‘channel power’) in a supply chain driven by innovation competence of its members.
A business context is envisaged in which, at any given point in time of the relationship, both the buyer and the supplier could be pursuing innovation simultaneously. We recognize that the primary motivation for such investments in innovation by members of the supply chain is to increase their differential or relative channel power in the supply chain. Also in a situation where the buyer is locked in by a supplier, the buyer may actively pursue the creation of a substitute technology by investing in innovation. The primary motivation for the buyer in this case would be to eliminate the technology lock-in and become independent. The relationships of various suppliers to the buyer reveal multi-level competitive characteristics on top of overall cooperative arrangements, featured as ‘coopetition’. Interactive and constantly evolving relationships embed coopetition in an ever changing network structure where the strength of cooperation is revealed by the thickness of the links from the sources (S) to the end destinations (L) while the intermediate links strive for competition among suppliers---drawn in a schematic graph and in a flow-type graph.
In such circumstances, firms enter the crossroads of a very delicate strategic supply chain relationship. Specifically, a strategy ought to be in place to defend the ability to appropriate and accumulate value by ensuring that the suppliers of the resources that the firm chooses not to own are not able to put themselves in a position to leverage value to the firm. The PC industry provides an excellent example of power diffusion up the supply chain. In 1981, IBM designed product, process and supply chain such that it sources the microprocessors from Intel and the operating system from Microsoft. The outcome was an outstanding successful product design but a disastrous supply chain design for IBM.
Today, the power of Intel in the supply chain for PCs is undisputed but continues to be challenged by Advanced Micro Devices (AMD).The new innovations that occur in this industry are to a great extent defined by this upstream supplier of microprocessors. The lesson learnt is to beware of the ‘Intel Inside’ syndrome.
Extending this argument to the upstream microprocessor industry also provides some interesting observations. During the 1960s, the practice of second sourcing whereby innovative firms license production of one or more manufacturers that can act as a second source of any new product had already developed. It was alleged that some sole suppliers of semiconductors ‘exploited’ their customer firms once they had locked in their product designs to that of the supplier’s product. This feature of the industry profoundly affected the evolution of market structure, for it opened up a new and attractive strategy for second sourced suppliers. A firm would enter as a second sourcer and learn to produce high volumes efficiently while offering a leading edge product identical to that of the innovating firm. Once this hurdle was surmounted, it could use its growing cash flow to support a larger R&D effort with a view to developing its own next generation products. For example, AMD operated as a second sourcer in its early years, achieved considerable success, and later on more than half a dozen companies were second sourcing AMD’s product .
Investigation of this type of buyer-supplier competition would lead to a better understanding of the dynamics of collaboration among supply chain partners. An interesting aspect of the problem is the fact that the supplier must take into account the inherent incentives for the buyer to develop a ‘backstop’ technology which can be substituted for the supplied component. The supplier with the knowledge of this intent of the buyer acts such that the profits are maximized before the invention of substitute technology by the buyer. The time when such innovation materializes is uncertain, but can be affected by R&D efforts.
A third step is to present the competitive role of innovation among collaborating firms. The model provides reasoning for inter-firm incentives in forming collaborative arrangements for product development. The dynamics of relationship among supply chain partners is viewed in terms of their respective innovation competence. It is emphasized that varying power arrangements in a supply chain leads to different implications for investments in innovation by buyer and supplier. The incentive for buyer and supplier to strategically maneuver their overall innovation levels by appropriate investments is highlighted.
A transaction cost approach provides a conceptual grounding for understanding the fundamental basis on which relationship between buyer and supplier takes place. With multiple firms constituting a supply chain, investments by supply chain partners have implications that transcend the traditional cost minimization or revenue/profit maximization objectives. In present dynamic environments, firms are investing in risky innovations and associated strategies to gain first-mover advantage. But also in high technology industries more firms strategically decide to enter a collaborative relationship. In a joint product development context, many firms outsource the manufacturing process of components which would be used in the final product .At times; this outsourcing goes beyond just the manufacturing of a fully specified component to allowing and expecting the supplier to build resource competence through active innovation.
An example can be found in the supply chain of automobiles in the European car industry. Au?tomobile production begins with design, which consists of three main elements. The first element is the concept itself, thereafter; the design of the vehicle can be usefully divided into the macro-design (the development of the basic chassis, sub-assembly and component specification) and the micro-design (the development, to agreed specifica?tions, of the vehicle's constituent components). The first two elements of design tend to be undertaken by the car assembler. In particular, the assembler takes charge of concept origination. In the face of intense competition, however, the costs associated with developing new vehicle prototypes have increasingly forced car assemblers to source the design of sub-assemblies and components (the micro-design) from external suppliers. The degree to which such outsourcing is undertaken by assemblers varies between different firms.
The assemblers who outsource the micro-design to external suppliers have a motivation to let these suppliers grow larger so that the supply bases can be brought up to global standards. These larger suppliers would then be required to take full responsibility for the design of sub-assemblies and for the coordination of the second? and third-tier component manufacturers that contribute to the product.
The strong market position of these sub-assemblers is further enhanced by product specialization. No single supplier produces all types of sub-assembly. For example, Bosch, which is one of the world's largest automotive equipment manufacturers, targets its efforts on starter systems, spark plugs, braking systems, lighting and windscreen wipers.
The net result of market consolidation is that the supply of particular sub-assembly systems has become concentrated amongst just a handful of manufacturers.
In such circumstances, firms enter the crossroads of a very delicate strategic supply chain relationship. Specifically, a strategy ought to be in place to defend the ability to appropriate and accumulate value by ensuring that the suppliers of the resources that the firm chooses not to own are not able to put themselves in a position to leverage value from the firm. The PC industry provides an excellent example of power diffusion up the supply chain. In 1981 IBM designed product, process and supply chain such that it sources the microprocessors from Intel and the operating system and application software from Microsoft. The outcome was a phenomenally successful product design but a disastrous supply chain design for IBM. Today, the power of Intel in the supply chain for PCs is undisputed. The new innovations that occur in this industry are to a great extent defined by this upstream supplier of microprocessors. The lesson learnt is to be aware of the ‘Intel Inside’ Syndrome.
Dr. Hans W. Gottinger, Executive Research Director, STRATEC Munich Germany, www.stratec-con.net