Transitioning from Transaction-Based Markets to Alliance-Based Supply Chains: Implications for Firms

Like biotechnology, rapid advances in information technology are inviting enhanced supply chain coordination. For example, online B2B (business-to-business) marketplaces connect consumer-goods manufacturers, suppliers, and retailers in networks for the purpose of minimizing costs. GlobalNetXchange recently announced a merger with rival WorldWide Retail Exchange in an effort to facilitate all member firms of the merged exchange to better control supply chain inventory and reduce supply chain cost (Chicago Sun-Times, 2005).

The longer-term foundation of rivalry in the global food system is shifting. Encouraged by the rapid development of IP, the foundation of rivalry within the global food system is shifting away from tangible assets toward intangible assets (Boehlje, 1999). The consequences of this evolution are pervasive and fundamentally change the character of relationships among firms within the global food system. In particular, when the basis for rivalry is centered on intangible assets, value-creating vertical networks are spawned in response (Sporleder & Moss, 2002).

This article discusses the consequences of the changes that are evolving in food supply chains. The basic notion is that the basis for rivalry is shifting in the interdependent "farm gate to plate" food industries. The discussion focuses on vertical network coordination or alliance-based supply chains as one specialized response to this new basis for rivalry. How these responses result in transitioning away from transaction-based markets is discussed, particularly for commodity markets. Value capture has enhanced the need for supply chain participants to correctly identify the target market space.² The authors argue that food supply chains have unique characteristics based on the nature of vertical dependencies found within chains.

Vertical Network Alliances

A more sophisticated understanding of how exchange relationships develop revolves around intellectual property that induces firms to structure exchange relations vertically within the food chain in a manner that maximizes transaction value. In essence, vertical network alliances form (often based on IP) around an objective of maximizing value added within the vertical supply chain.

For example, Suiza Foods, through their Morningstar Foods division, formed a strategic alliance with Hershey to create supply chain value. Hershey is responsible for contributing enhanced flavor technologies while Morningstar is responsible for contributing enhanced packaging technologies (Wall Street Journal, 2000). Sparling and Cook (1998) analyze an international strategic alliance involving Casa Ley with Sun World International. This strategic alliance, based on IP leveraging, was aimed at enhanced shelf-life vine-ripe tomatoes and other fresh products.

The foundation adopted here for the transition to alliance-based supply chains is that firms in vertical networks can increase value creation by increasing dependence on a small number of suppliers (limiting suppliers to one or a few) and thereby deepening incentives of suppliers to share knowledge and engage in R&D. Firms in alliance-based supply chains may make performance-enhancing investments of benefit to their downstream customers and the overall supply chain (Sporleder & Peterson, 2003).

Supply Chains and Vertical Networks

Alliance-based supply chains imply the ability to differentiate products and to quickly respond to market changes compared to traditional transaction-based supply chains. Alliance-based supply chains can identify targeted markets and create value for products and services. This is a huge leap from the typical focus in transaction-based supply chains to creating value. Value creation is accomplished by forming alliances that leverage intellectual property to match unique product characteristics and information technology with under-served markets.

Supply Chains as a Basis for Rivalry

Retail grocery stores in the United States illustrate the evolution in the perception of rivals over time. The now outdated managerial perception was that retail grocery stores competed against similar stores in the same industry. The perception of rivalry has now evolved to include not only the traditional competitors but also quick service food establishments, such as McDonalds and Burger King. This expanded perception of rivals is multi-industry in scope. This evolution in rivalry has resulted in retail grocery store managers perceiving their market to include selling meals, not solely the traditional role of selling ingredients for meals. One obvious consequence of this evolution has become more delicatessens and ready-to-eat products offered in grocery stores.

As supply chains transition from transaction-based to alliance-based, it becomes even more difficult to assess one's rival. A rival's tangible assets are relatively easy to identify and assess. As rival firms' holdings become increasingly concentrated in intangible assets, the capabilities and capacities of rivals become more uncertain and even ascertaining the industries that may produce future rivals becomes more elusive. For example, traditional food processors such as Kellogg did not anticipate consumer preference shifts to on-the-go breakfast foods, and new rivals developed from firms in industries outside the mainstream ready-to-eat breakfast cereal manufacturers.

The transition from transaction-based supply chains to alliance-based supply chains changes many "drivers" or factors that managers must consider. The traditional basis of rivalry, compared to a new and evolving basis for rivalry, is outlined in Table 1. An important aspect of the new basis for rivalry is the existence of an alliance-based supply chain centered on soft assets (e.g., IP) rather than hard assets (e.g., plant and equipment). A major purpose of the alliance-based network becomes the commercialization of the technology, typically focused on target markets that are relatively low volume and/or represent specialized end-use.³ Trust becomes more pronounced within alliance-based supply chains (Sporleder, 1994). For example, trust is especially critical in the early stages of a cooperative interfirm alliance.

The generic items summarized in Table 1 offer some indication of the challenges to, and the evolution of, managerial perceptions presented within alliance-based supply chains. The first six items of the table are associated with internal management of the firm. The next four items are factors associated with the competitive environment in which the firm operates. The last two items of the table are factors associated with strategic planning and outcomes. Not all items may pertain to a specific situation.

Recent improvements in our ability to transmit information have forged new partnership and alliance opportunities among firms around the globe. Now an agribusiness firm may form an alliance of a block of growers in the United States, a pharmaceutical firm in Europe, and a manufacturer in India to produce a highly specialized product based on biotechnology intellectual property. The use of genetically engineered plants to harvest medicinal compounds, such as corn to produce monoclonal antibodies, is just emerging. In this example, it is no longer clear whether a firm's rivals are growers, a research company or a processor or even within the agribusiness sector. Complicating the issue is that the firm, via its alliances, is now international with multinational assets.

As the public strives to assess the performance of these new alliances, non-traditional measurement techniques are required. Assessing the performance of IP-driven relationships is more difficult, compared to physical asset-driven relationships, because of the tacit knowledge involved.⁴ Tacit knowledge (knowledge that people carry in their minds that is, therefore, difficult to access and difficult to codify) often is a factor in understanding the value proposition of relationships and the value of knowledge firms possess within the chain (Sporleder & Moss, 2002). Some new performance measurements will surely rely on improved definition, valuation, and understanding of intangibles (Lev, 2001).

Market Space Defined by Dependency and Differentiation

Another factor inherent to agricultural commodities and food products, in a comparative sense, is perishability. Perishability partially determines the inherent nature of economic dependency within supply chains. For less-perishable commodities, storage can be a primary means of vertical coordination in the supply chain. Buffer stocks are held by firms in upstream and downstream markets in an effort to mitigate risk and generally deal with unexpected events. Vertically dependent firms at successive stages in the supply chain are referred to as sequentially dependent because buffer stocks play a major role in risk mitigation and coordination. The portions of a supply chain that rely on buffer stocks for risk mitigation typically also rely on transaction-based open markets.

In commodity markets characterized by perishable commodities, reciprocal dependency is the relationship among vertically allied firms in the marketing channel. Buffer stocks are not feasible. One consequence of this is that the coordination problem is more severe and alternative exchange mechanisms emerge beyond simple spot market transactions, such as contracting, joint ventures, and various forms of strategic partnering. In short, these alternative exchange mechanisms are examples of interfirm alliances. These alternatives are attempts to enhance coordination and, in part, "substitute" for the economic role that buffer stocks play in the sequentially dependent channels. The relative relationship among some selected commodities and food products can be easily portrayed in the market space defined by the intersection of differentiation intensity and sequential-reciprocal dependency (Figure 1).

Along the vertical axis, the fungibility of items decreases from the bottom of the axis to the top. Thus, items such as soybean oil are more fungible than pharmaceutical corn. In general, the space above the horizontal requires relatively increased investment, often predominantly in intangibles. Moving from left to right of the vertical represents declining potential for buffer stocks and the increasing reliance on exchange arrangements that tend to replace cash markets, such as contracting and strategic alliances.

The "dependency/differentiation" space may be used to understand the major thrusts within value creating alliance-based supply chains (Table 2). The distinction of sequential and reciprocal dependency and the extent of product differentiation are factors useful for better understanding the type of exchange mechanism that is appropriate for a particular combination of dependency and differentiation. The relative importance of alternative exchange mechanisms is provided within the cells of Table 2. The dynamics of how firms participate in supply chains that drift from transaction-based to alliance-based may generally be characterized as movement away from either cell of the 'reciprocal' row of Table 2 to either of the cells of the 'sequential' row.

Conclusions

The basis for rivalry is shifting and these shifts present challenges for managerial perceptions. Factors associated with internal management of the firm, the competitive environment in which the firm operates, and strategic planning and outcomes all must be revised when firms join an alliance-based supply chain. Firms may adopt new definitions of their rivals and look beyond traditional sectors to identify collaborators and competitors, while new means of assessing firm performance may become necessary.

The degree of differentiation and the nature of dependency within supply chains enhances our understanding of the incentives for alliance formation. The transition to alliance-based supply chains creates challenges in how firms assess their relative position within industry and requires novel approaches to understanding both competitors and collaborators. Participation in alliance-based supply chains demands managerial flexibility and nimbleness, yet offers virtually unlimited opportunities to leverage assets. Firm assets concentrated in intangibles, in tandem with novel alliance formation, offers exciting potential for value creation within the global food system.

Notes

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