Environment, business strategy and buyer supplier relationship: exploration of linkages

Abstract

Research on the nature of buyer-supplier relationship is still in a nascent in context of developing countries like India. With economic liberalization and mounting pressure on firms to be competitive , buyer-supplier relationship and its linkage to strategy is gaining increasing importance. This study attempts to explore the linkages between environment, business strategy, and buyer-supplier relationship from the perspective of manufacture(buyer firms ) in the Indian tractor industry. Conceptually two types of buyer-supplier relationship, viz, arms length bargaining(adversarial) and close cooperative (partnership) are well developed in the western context. While acknowledgement the change in the relationship of firms from one type to another most studies have, however concentrated on recording and explaining the context and process of change in the relationship and its impact on performance outcome of firms. The links with strategy have not been discussed. Researches studying the buyer-supplier relationship have tendered to give a low priority to the role of environment and the strategy adopted by a buyer firm in determining the nature of its relationship with supplier. Similarly the literature on strategy identifies purchase strategy as a functional level strategy that has to be in congruence with suppliers business level strategy of firms. This study, therefore, seeks to answer the following questions. a) does the relation between a firm and its suppliers changes with time? If in what ways? b) is the firms relationship with suppliers linked to business strategy and changes in it? If yes in what ways? c) is the firms relationship with suppliers linked to environment and changes in it? If yes in what ways? To answer the above questions longitudinal case study method is chosen. The tractor industry is chosen as the site of this research since it depends on suppliers for a large percentage of components has witnessed government control and is now entering free competition. The four firms studied control among themselves seventy percent of tractor sales. The firms are fairly representative of the phenomenon being studied. The policy environment impacting this industry segment changed from that of direct government control to partial decontrol in the late eighties to liberalization post 1991. Some of the important findings of the study are highlighted. The nature of buyer – supplier relationship in the Indian tractor industry has changed over time but not uniformly across firms in different periods of time. Majority of firms have moved towards formula cooperative supplier relationship. Four types of buyer-supplier relationship viz informal arms length (FC) informal cooperative (IC ) formal arms length (FA) and formal cooperative (FC) are identifiable as opposed to only arms length or cooperative buyer-supplier relationship as identifiable in literature earlier. Choice of location of tractor manufacturing facility, choice of product market and source of technology emerge as important strategy variable influencing the nature of buyer supplier relationship. Informal arms length buyer-supplier relationship is linked to the strategy of foreign technology to manufacture critical items in house and off-loading non critical items to multiple supplier available in the location. In an environment of licensing restrictions on tractor / component manufacture and import encourage development of indigenous capability informal arms length buyer supplier relationship is linked to the strategy of using foreign technology for in-house manufacture of most critical items and outsourcing non-critical items for which several suppliers are available. Liberalization increased options for suppliers and competitive threat for sample firms inducing these firms to have formal co-operation relationship with suppliers of critical items. From the findings of the study directions for tentative hypotheses and managerial implications are identified The longitudinal case study method comprised of a pilot study of two firms belonging to the sample. The preliminary source of data is semi-structured interview of managers. The information was supplemented with data obtained from secondary source. A re-examination of the previous two organizations along with two others done through in depth interviews constituted the final set of information along with detailed study of company documents.