In this second in a series of blogs from Chris Lonsdale on the concept of power in buyer-supplier relationships, he cautions practitioners not to confuse the concept of power with the lazy assumption that it determines how relationships should be managed in practice.
In a recent post, I suggested it might be time to re-visit the subject of power in buyer-supplier exchanges. Over the past 16 years, I must have taught, trained, worked with and advised somewhere between 1,500 and 2,000 procurement professionals and others professionals with an interest in procurement. During this time, the topic of power (the subject of many publications, not just by me, but also my colleagues over the years at Birmingham) has always been one of the topics to generate the most interest and yet, arguably, power does not have a profile in the profession to match this interest.
The initial post in this series outlined a number of issues to be explored. The first reminded us that power is a concept not a practice and should not be associated with any particular type of management action. In particular, many people associate the word power with the aggressive exploitation of dominance. They should not. In this (rather technical, but hopefully not too dry) post, I explore the concept of power.
Power was defined in the initial post as the ability of one party to make another party act in a way that they would not otherwise have done. There are two things here. One, power is understood here as residing in the relation between two parties. That is, you don’t say ‘IBM is powerful’. Rather IBM is said to be, for example, dominant in its relation with X, but not in its relation with Y.
Two, what provides the ability? The rather circular answer is power resources. Buyers and suppliers in exchanges, whether it is a new exchange or the continuation of an existing one, possess power resources and it is the relative possession of power resources that determines the power relation.
These power resources are many, but most can be placed in three categories – scarcity, utility and information. Scarcity refers to the options available to the two parties. Sometimes this can mean the availability of other buyers and suppliers to the buyer and supplier in question. In existing relationships, however, scarcity concerns both the availability of other buyers and suppliers and the ease of switch. Time is also relevant here. Scarcity of time affects the power relation.
Utility refers to the importance of the exchange to the two parties. Is it critical to the buyer’s business (e.g. a core sub-assembly)? Is it critical to the supplier’s business, either in terms of immediate revenue or future potential revenue (e.g. the buyer provides access to a new market or technology)?
Information refers to the existence or otherwise of information asymmetries between the two parties. Economists have invented a range of concepts to describe different types of information asymmetries, including: adverse selection (the supplier is trying to pass off rubbish as quality); moral hazard (the supplier is putting in less effort or lower quality inputs than it is letting on); strategic misrepresentation (the buyer or supplier is bluffing about their walk-away point); hold-up (the buyer or supplier is trying to lock-in the other party while talking about sweetness and light).
Depending on the balance between the two parties in respect of these three categories of power resources, the relation between them can be one of four types. Buyer dominance and supplier dominance are two of them and represent power positions. The other two (which are strictly speaking not power positions, for reasons too boring to go into) are independence (neither party considers the other important) and interdependence (both parties consider each other very important).
So this is a little synopsis of the concept of power. Of course, buying organisations can be left with only ‘potential power’ if their power resources are affected by poor internal practice. To give a few examples, scarcity can be affected by over-specification and the over-consolidation of spend, utility can be affected by the excessive fragmentation of spend and information can be affected by poor negotiation and contract management practice. This raises the question of whether enough procurement practitioners (not to mention internal clients) have a thorough enough understanding of the concept of power to be able to incorporate it into their practice.
In the next post in this series, I discuss the different ways in which buyers and suppliers can utilise (or not as the case may be) positions of power in business markets and look at the relationship between buyer-supplier power and buyer-supplier co-operation.
By Chris Lonsdale
Guest blogger Chris Londale is a Reader in Procurement and Supply Management at Birmingham Business School’s Centre for Business Strategy and Procurement. See CBSP_brochure for details of the Centre’s research and renowned MBA programme.