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MARKETING NETWORKS: A NEW WAVE OF STRENTHENING DISTRIBUTION STRATEGY TO GAIN SUPERIROR OUTCOMES
Draft Paper Submission for
International Conference on Economics and Management of Networks (EMNet2005)
September 15-17, 2005
Budapest, Hungary
By
Assoc. Prof. Dr. Somdee Hongphisanvivat
Faculty of Commerce & Accountancy, Thammasat University,
Bangkok 10200, Thailand
Tel. (662) 02-986-9620-31 ext. 151-153, 115, (662) 02-613-2220, 613-2229, 613-2239
Fax (662) 02-986-9617, 02-225-2109, Email :
MARKETING NETWORKS: A NEW WAVE OF STRENTHENING DISTRIBUTION STRATEGY TO GAIN SUPERIROR OUTCOMES
ABSTRACT
Marketing networks becomes imperative in the knowledge-based economy as they are a promising paradigm driving firms to offer a better channel development strategy and gain business position under highly volatile and limited resource environments. This study pioneer proposes an integrative framework using three critical concepts with the emphasis of key success factors in strategic networking to demonstrate how to appropriately formulate and manage distribution networks for gaining superior channel performance in terms of greater productivity and competitiveness.
- INTRODUCTION
The emergence of the knowledge-based economy and strong global competition calls for managing change in strategy, structure, and behavior (Wurzburg 1998). The literature has contended that business across all sectors will have to change their approach to marketing as it is a major part of business strategy and success (Morgan and Hunt 1994; Hunt and Derozier 2004). Such change tends to be carried out through relationships, networks, and interactions (Ford et al. 1998; Hunt 2000; Webster 2000). This new marketing approach has different perspectives from the more traditional one based on Four Ps (product, price, place, promotion) (Doyle 1995; Gummesson 1999). Successful networking offers a means to overcome a number of limitations e.g. resource scarcity, adaptability and improve competitiveness in terms of lower costs, better service quality, greater new product development and innovation, higher productivity, and more flexibility, which in turn leads to increased market share and bigger profits (Hiller 1999; Todeva and Knoke 2005).
Although marketing network can improve firm performance, the practical guidelines on how to design and implement networking successfully remain understudied (Achrol, Reve, and Stern 1983; Andersson 1992; O’Farrell and Wood 1999; Sherer 2003). In addition, there has been little research on critical success factors in distribution networks and most of them have focused either on large firm strategic alliances (Human and Provan 1997) or on informal and social networks (Dubini and Aldrich 1991). Despite the fact that distribution networks are increasingly important to the new global challenges as it becomes a critical strategic tool leading firms to continued growing and gaining competitive advantage, especially improving SME skills and competencies (Gilmore, Carson and Grant 2001). Evidence shows that channel networks/relationships enable partners not only to access the channels of another and facilitate increased efficiency in distributing goods and services (Elmuti and Kathawala 2001) but to exchange strategic resources and capabilities which may be scarce or lacking in either one or both of them (Gulati 1999). For example, in February 2002 Expedia signed a deal with British Airways (BA) to provide its hotel booking solution. Consequently, BA can offer more than 40,000 hotel properties throughout its web-sites in Europe (Anonymous 2000). Even though these strategic premises become more imperative for improving sound strategy and better performance, the organization’s ability to exploit partnership advantages still under-investigated (Gulati et al. 2000; Harvey and Novicevic 2002).
Specifically, most previous research explored distribution strategy along one dimension with the emphasis of channel choice decisions at an individual perspective and primarily based on the transaction cost analysis (e.g. Bucklin 1966; Rangan, Menezes and Maier 1992; Williamson 1975). Few studies examined how to manage channel especially in terms of collective or relationship aspect with the integration of competitive advantage premise and the strategic network theory (Anderson and Narus 1990; Buckin and Sengupta 1993). Despite the fact that effective channel relationships create greater breadth of distribution, enhance its efficiency and facilitate the convergence of strategic resources, capabilities and competencies; which, currently are the most addressing areas of building super value and superior performance for long-term competitive advantage and success (Hunt and Derozier 2004). However, inappropriate alliance /partnership process highly causes to failure of implementation and brings channel cannibalization (Rowley 2002). This can lead to weaken distribution strategy and decrease channel performance.
Reviewing the network literature related to distribution strategy, three major conclusions are drawn as follows: 1) Distribution strategy tends to be developed along one dimension based on individual basis rather than networking perspective even the latter becomes the promising paradigm to shift the channel competitive advantage in the emerged knowledge economy and global challenges. 2) Most of them lack to explore the impact of distribution networks toward channel performance which in turn leads to firm’s success. 3) The strategic role of distribution networks remains unclear and under addressed the explicitly practical application. As such, this paper is pioneer to first provide an overall strategic networking framework for greater understanding and better utilizing its imperative concept and process resulting in superior outcomes; second, identify key factors affecting distribution networks; and third, propose an integrative framework of how such networks are formulated and managed to strengthen distribution strategy for generating better channel performance and finally sustainable firm’s success.
- THEORETICAL BACKGROUND
Strategic networks refer to the cooperation between two or more companies with a clear strategic purpose to share knowledge, resources and capabilities so as to increase organizational competencies or enhance competitive positions of each partner in some areas (Dean and Smith 1997; Earp 1996; Morrison 1994; Spekman et al. 1998) but still maintain their autonomy in other areas (Webster 1992). Following this definition, distribution networks involve a group of companies willing to work together based on their common objectives and share either intangible or tangible assets to gain distribution advantage resulting in better channel performance.
According to Peter and Donnelly (2003), there are at least three relevant theories/concepts used to elaborate the imperative distribution networks and their contributions to help firms develop sound strategies for incremental growth, competitive advantage, and value creation. Among them, the latest concept appears to be the most concern of proactive and successful organizations as follows:
2.1 Transaction Cost Analysis (TCA)
This concept developed by Williamson (1979) and emphasized the economic aspect can be implied that firms should perform distribution networks when their activities produces the lowest total costs or channel efficiency prevails compared to individual or independent distribution system. However, this premise does not take into account considerations of marketing and management factors, in particular service quality and flexibility, consumer value and satisfaction, partnership trust, commitment and compatibility as well as profit sharing which are relevant to successful networking (Jarillo 1990). As such, other concepts based on competitiveness and value creation are developed to find better solutions of organizational growth and success.
2.2 Competitive Advantage
Porter (1985) has introduced a general competitive strategy for gaining competitiveness. His work can be implied that firms should first analyze their belong industry and traders, then select partnership appropriately and develop distribution networks for creating the feasibility of cost leadership or differentiate channel strategies within a market-wide or a niche (segment) base. Using a cost leadership strategy guiding firms to offer standardized distribution services and delivery to obtain channel efficiency. In contrast, employing a differentiation strategy requires adaptive and unique distributing services including unique delivery value to increase customer satisfaction for achieving channel effectiveness and/or superiority.
Within the context of the resource-based view of competitive advantage, the involved partners are likely to increase distinctive competencies when firms can collectively generate ‘network resources’ that are inimitable and non-substitutable (Gultat 1998). Further the acquisition of high valuable and intangible resources offset the ‘newness’ of the firm and the difficulties it might compete against a number of well-established organizations. Gultai et al. (2000) also notes that a close set of network ties can create a pseudo-oligopolistic position within the industry, thus increasing a chance of firm’s profitability and/or placing barriers to entry for competing firms. However, building only competitive advantage is not enough, firms need to sustain such advantage to continue success in the long-run (Day and Wensley 1988). Therefore, not only networking but integration of key competencies in a synergistic way to sustain unique value creation and long-run advantage are imperative.
2.3 Strategic Network Theory
This theory has emerged as a body of knowledge which offers new ways to understand key strategic management issues (Doz and Ring 2000) and performs a critical role of providing positive outcomes and sustaining a competitive advantage in the highly global competition (Gulati et al. 2000; Kandampully 2002; Todeva and Knoke 2005). The major reason is due to the difficulties in being able to alone create super value for customers, grasp relevant opportunities, and continue to gaining advantage (Barney 1991; Thompson 2001) as it is necessary to have enough skills, competencies and capabilities for successful network implementation (Gomes-Casseres 1994).
According to Coviello et al. (1997) classifying relationship marketing into three categories: 1) database marketing defined as a technology-based tool facilitating effective relationship, 2) interactive marketing focusing on dyadic (two party) relationship; and 3) network marketing refers to the entire relationships in a market/industry and emphasizes how to create, utilize, and maintain such relationships between firms (Easton 1995; Gummesson 1994).
Strategic networks are varied in contextual application among industries and may be taken in different forms; either strategic alliances, joint ventures, franchises, long-term buyer-supplier partnerships, or other ties (Knoke and Kuklinski 1991; Gulati et al. 2000; Todeva and Knoke 2005). For instance, major UK tour operators have integrated their operations by systematically networking with suppliers and buyers in the distribution chain. This leads involved partners reciprocally and mutually to obtain “synergistic creating value” added to their goods and services which might otherwise be very difficult to achieve independently (Andersson 1992; Cooper and Lewis 2001; Crotts et al. 2000). Anand and Khanna (2000) have also found that firms generate more value due to gain greater experience in the formation of alliances and are more likely to enter into new types of networks. The ability of firms to transfer organizational know-how and learning is particularly apparent (Gulati 1998) and can become firm’s core competency when that transferred knowledge, information, and technology are new and relevant to their competitiveness (Amit and Zott 2001; Kandampully 2002). When there are small numbers of actors or players in the markets such as business-to-business markets, portfolio analysis can act as a very useful tool for identifying key strategic relationships (Zolkiewski and Turnbull 2002).
Finally, in today’s highly competitive environment, successful organization needs to build long-term relationship with their customers by offering a unique and superior value to them. To ensure sustainable competitive advantage, many firms not only employ one of the three value strategies-best price, best product, or best service (Peter and Donnelly 2003) but have to integrate them in a synergistic way if applicable and/or seek for the lack of distinctive strategies/competencies from sound partnerships which reciprocally add value to their business and thus generate a “network advantage” over their competitors. For example, VF Corporation, manufacturer of Wrangler and Lee Jeans, has formed “quick response” partnerships with both discounters and department stores to ensure the efficiency of product flow. The key to sustain a competitive advantage is to continually focus and build on the assets and skills that will lead to long-term permanent gains (Peter and Donnelly 2003).
Pitfalls of Strategic Networks. A network advantage can, however, be difficult to sustain. Crotts et al. (2000) observe that partnering is often a competitive reaction to other firms gaining strategic advantage from their own alliances. Entering into a network can therefore be an ad hoc decision leading to incompatibilities and a lack of synergy between partners. Vyas et al. (1995) has contended that power imbalances in terms of size resources, image or market access can erode the network relationship. Such imbalance power may lead to the acquisition or even abandonment of lesser players in the network. The nature of trust within the network including partnerships commitment and compatibility is really important (Gulati 1998) and affects the ability of partners to gain greater knowledge of each other’s resources and capabilities (Gulati et al. 2000). Nevertheless, the actual advantages of acquiring information, strategic resources, core competencies and so on from a partner may also be the reason for leaving once these have been embedded into the firm’s strategic practices and the stronger partner has been exploited the opportunity to enhance their strategic position in the competitive environment (Stiles 2001). The likelihood to occur such action depends upon the firms’ relationship within the network and whether they are involved in alternative alliance structures. (Gulati et al. 2000).
Another relevant concern is entering into multiple alliances can also create the challenge of managing a portfolio of different partnerships and the conflicts of interest likely occurred between them (Goelho, F., Easingwood, and Goelho, A. 2003; Gulati et al. 2000). However, gaining different values can be challenging if the organization wishes to pursue a particular strategic direction. In addition, the over-reliance on partners and the subsequent inability of the firm to create a sustainable resource-base itself including independent behavior in the eventuality of divorced relationships (Crotts et al. 2000) can also be a disadvantage. Newman and Chaharbaghi (1999) contend that over-dependence can lead to the erosion of knowledge leadership and the loss of mobility due to the threat if allies becoming competitors. Furthermore, strategic networks can encounter strategic gridlock where the alliance structure becomes overcrowded, leading to a sense of competitive inertia (Gomes-Casseres 1994).
As such, distribution networking will be able to generate the promising advantages for better channel performance depending primarily on whether partnership is really needed, firm’s ability to exploit network opportunity exists, and how it is formed and managed or implemented appropriately through the key success factors of network selection and development process.
- PROPOSED FRAMEWORK OF MARKETING NETWORKS
According to the review literature and theoretical background, the framework of marketing networks focusing on practical application are proposed into two parts. The first one is overall framework or macro-orientation of strategic networks (Figure 1, p. 10) to exhibit the condition and process of establish networking and point out the critical success factors affecting network formulation and implementation which leading to superior outcomes. This framework provides better understanding and explicit strategic role of marketing networks toward firm’s success. It suggests that effective networking has to start first the careful consideration of whether firms really need partnership by using SWOT Analysis and thorough comparison of costs-benefits between networking and alone operation (Lei 1993; Williamson 1991). Then, insight consideration of whether firms have enough possibility to apply networking successfully is needed. If yes, they have to decide what types of networking are most relevant and essential to strengthen their business/marketing strategies, in particular those related to firms’ competencies. After that, firms have to select the most suitable form of networking based on its critical success factors, especially trust and commitment of partnerships and the compatibility which places an emphasis on whether the selected network or partnership can be worked well with respect to the organization culture and management style (Dacin, Hitt, and Levitas 1997; Das and Teng 1998; Haugland 1999; Lin and Germain 1998; Mohr and Spekman 1994; Morgan and Hunt 1994). All of these concerns will critically affect the sustainability of networking both in short-run and long-run. Therefore, the ability to maintain sound networks is important to ensure the sufficient competitive advantages, in particular network advantage of value creation over competitors to gain superior performance.
In order to gain insight implementation of how to formulate and manage strategic networks, the second framework or micro-orientation of distribution networks is proposed (Figure 2, p.11). This framework demonstrates the three strategic components: 1) Strategic formulation. How to appropriately formulate distribution networks based on the key influential factors. 2) Strategic management. How to manage distribution networks or channel relationship effectively and practically in such a way of generating synergistic value creation to strengthen distribution strategy. 3. Strategic contribution. How sound distribution networks or channel relationships improve channel performance in terms of incremental productivity and greater competitiveness which finally lead to sustainable firm’s success in terms of higher market share, greater profitability, continued value creation and increase consumer satisfaction. Evidence shows that profit-maximizing network solution seems to be a better alternative than least cost network design or market share penetration (Robinson 1998).
The combination of the two proposed frameworks contribute comprehensive network conceptualizations and applications which are rare in marketing channel theory and research even they are essential for dynamic and global phenomena (Andersson 1992). In addition, the framework provides the linkage between network formulation and implementation with the explicit role in channel network management while channel performance calls for periodic reviews to assess strategic alignment among partners and maintain real network advantages (Spekman et al. 1998).
Figure 1: Overall Framework of Strategic Networks