A Marketing Perspective on Buyer Power

1. A Marketing Perspectiveon Buyer Power Presented at: American Antitrust Institute Invitational Symposium on Buyer Power Presented by: John R. Nevin Grainger Wisconsin Distinguished Professor School of Business University of Wisconsin-Madison June 20, 2007

2. Vertical Exchange Systems (Channels) Need Purposeful Management • A channel manager has to make the channel work (channel implementation). • Realistic, cost effective implementation is accomplished with purposive coordination, motivation, and direction. • A channel needs some set of controls to make it function efficiently and effectively.

3. Basic Control Mechanisms • Price • Integration (ownership) • Contract • Power • Trust • Communication

4. Using Control Mechanisms • Control mechanisms are strategic variables for managing ongoing channel relationships. • Choices exist between mechanisms with fundamentally different properties. • Control mechanisms serve as “key building blocks” for organizing exchanges between channel members.

5. Power Is Important in Channels • In marketing channels, getting power, using it correctly, and keeping power are subjects of paramount importance. • Channels are systems consisting of members who depend on each other, and power is the main way to manage dependence. • How players gain and use their power today drives whether they can keep their power tomorrow.

6. Meaning of Power • The ability of one individual or group to control or influence the behavior of another • The ability of a channel member to control the decision variables in the marketing strategy of another channel member at a different level in the channel

7. Sources of Power • Power = f (sources of power) • French and Raven’s classification of power sources/bases • Reward power • Coercive power • Legitimate power • Identification power • Expert power • Operationalized as “coercive” versus “noncoercive” sources • Perceptual basis of power

8. Dependence • Power = f (dependence) • Components of dependence • Importance of relationship • Replaceability • Channel member dependence and sources of power are inseparable

9. Balance of Power • Power is a property of a relationship, not an organization. • Power of A versus countervailing power of B. • A’s dependence on B creates countervailing power for B to use against A. • Net dependence needs to be assessed in addition to each side’s dependence.

10. Interdependence • Mutual Dependence Dependence of A on B Low High Dependence of B on A Balanced Unbalanced Low High Unbalanced Balanced

11. Symmetric (Balanced) vs. Asymmetric (Imbalanced) Relationships • High mutual dependence is conducive to creating and maintaining strategic channel alliances. • Low mutual dependence channels tend to operate closely along the lines of classic economic relationships (transactions). • Asymmetric relationships tend to be more conflictual, less trusting, and less committed than interdependent relationships.

12. Observations on Power • Power is fundamentally invisible. • Power is an emotionally charged term. • Power is a mirror image of dependence. • Power is the potential for influence (latent) • Power is customarily used (exercised) if possessed. • Coercive sources of power increase conflict and reduce satisfaction.

13. Exercising Power: Influence Strategies • Power is the potential to influence. • Converting “latent power” to “exercised power” requires a communication mediator known as an “influence attempt.” • A channel member’s perception of the content of communication used by another channel member in an influence attempt is customarily called an “influence strategy.” • Boundary personnel use strategies to influence their channel counterparts (influence strategies).

14. Model of Social Influence Influence Strategy Elements Inducement Content (promise, threat, reason, direct request, appeal to loyalty/friendship) Compliance Request Content (legitimacy, imposition, importance, clarity) + Dependence

15. Influence Strategy and Compliance • Both components impact compliance. • The nature of the request surprisingly has a stronger impact on compliance than does the motivational portion of influence strategies. • Four motivational categories (promise, reason, direct request, and appeal to loyalty/friendship) are statistically more effective than threats in achieving compliance. • Reason is statistically more effective than three motivational categories but not loyalty/friendship. • Dependence is positively related to compliance.

16. Three Powerful Roles Played by the Retailer in Relationship to Suppliers • Customer (purchasing and reselling goods) • Competitor (developing own brand substitutes • Supplier (provision of shelf and advertising space)

17. Retailer Initiatives to Reduce Costs/Lower Investment • Negotiate lower prices • Seek lower prices through “leveraged purchasing” • Pursue other nonprice issues • Vendor managed inventory arrangements (VMI) • Vendor owned inventory management (VOIM) • Category management

18. Target’s New Buying Practices Frustrate Marketers • Wal-Mart is softening as it gets the design and marketing bug and usurps the long-standing power of its famously ruthless buying division to take a more collaborative approach with suppliers. • Target is hardening as it expands its private-label brands to improve margins. • Suppliers of both large and small brands said Target has demanded unprecedented price concessions during the past year in addition to the strong-arm tactic of an online reverse auction buying system considered by some suppliers as a margin-busting, no-win option for them. • Wal-Mart runs under the attitude “Let’s take cost out of the system,” while Target’s attitude is “Make the supplier bear the brunt of inefficiencies.” Source: AdAge.com, “Online Reverse Auctions Put Brands at Disadvantage,” March 30, 2006.

19. Drug Wholesalers: Middlemen’s Market Power Drug makers Cardinal Health Inc. (CAH) McKesson Corp. (MCK) AmerisourceBergen Corp. (ABC) Combined market share: 90-95% 5,500 other wholesalers Pharmacies, hospitals, medical offices, other wholesalers Patients

20. Economic Meaning of Buyer Power • The ability of a buyer to significantly influence the terms of purchase not related to efficiency considerations, but rather to the relative bargaining positions of buyer and supplier. • Bargaining or negotiating power is a non-output reducing form of buying power.

21. The Emergence of Large and Potentially Powerful Buyers: Some Unanswered Questions • Do large and potentially powerful marketing intermediaries (wholesalers and retailers) pose a serious threat to competition and consumers? • What is the appropriate threshold for “buying power”? • What limits, if any, should be placed on buying power? • Does competition and consumers suffer when the increased buying power of large buyers allows them to obtain lower input prices without decreasing overall input purchases? • Does a strategic partnership between a supplier and a powerful buyer serve as a constraint on a buyer’s power?