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SCRC Article Library: Strategic Purchasing: Introducing New Research on Relational Rents - Part 1

Strategic Purchasing: Introducing New Research on Relational Rents - Part 1

Published on: Oct, 11, 2005

by: Rob Handfield

SCRC

PART 1: Introducing New Research on Relational Rents
PART 2: Strategic Purchasing and Supply Management Practices
PART 3: The Nature of Strategic Purchasing
PART 4: Supplier Relationship Performance Outcomes
PART 5: Lessons for Purchasing Managers

The past two decades have seen a marked shift in the role of purchasing, evolving from a tactical service function to a strategic, integrative process. Purchasing is becoming widely recognised as an important contributor to strategic success, helping firms meet the challenges of an increasingly competitive and dynamic environment. Strategic purchasing allows the function to play a greater role in corporate planning, reduces a firm’s exposure to opportunistic behaviours, and is more likely to lead to successful collaborative relationships. Research also suggests that strategic purchasing is a capability that requires years to develop through focused leadership and change management.

In the next series of articles we explore the effects of strategic purchasing on external parties, specifically inter-organizational relationships with critical suppliers. Much of the strategic purchasing literature addresses the role of spend analysis, supplier selection, leveraging, negotiation, and contract management – yet there is a critical element of strategic supply management that occurs after these elements: relationship management. We examine the impact of strategic purchasing on a firm’s ability to: (1) conduct socialization activities with suppliers; (2) facilitate process integration with key suppliers; and (3) increase the flexibility of their supply base. These variables significantly impact the returns derived from a firm’s supplier relationships. In the words of one executive interviewed during the course of this research: “The greatest opportunity for saving money occurs after the ink on the contract has dried.” Many studies in organizational strategy view relationships as the foundation for true value creation. Establishing linkages between earlier process components of strategic purchasing and the later requirements for relationship building can help improve our understanding of how firms can build and leverage a collaborative advantage, and extract ‘relational rents’.

Collaborative advantage and relational rents
Competitive advantage arises when a firm owns or controls a resource that exhibits four characteristics. The resource must be:

  • Valuable
  • Rare
  • Imperfectly imitable
  • Non-substitutable

The rapid growth of collaborative relationships across industries has encouraged a focus beyond the earning capacity of resources controlled by a single firm, to recognition of the revenue generating potential of resources that lie beyond a firm’s boundaries. Collaborative advantage arises when a firm is able to extract business benefits from the resources of its’ strategic partners. Collaborative advantage is thus different to competitive advantage, (although the former may give rise to the later). Collaborative advantage requires a long-term orientation and may produce revenue that can only be realised through working jointly. Such revenue is termed ‘relational rents’. The ability of the firm to derive relational rents is at least, in part, dependent on how effective the supply function is in building and leveraging collaborative partnerships with suppliers. For example, Toyota’s approach to creating and managing a high-performance knowledge-sharing production network generates considerable advantage for both the company and its suppliers. Strategic purchasing and supplier relationships are therefore critical competitive resources.

We explore these relationships in greater detail in the next series of articles.

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