The Concept of Power in Buyer-Supplier Relationships

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In the relationship between buyers and suppliers both organisations posses resources in the form of money and products as well as external resource needs. External resource needs for suppliers are the desire to obtain money from sale of products and revenues while for buyers, the external resource needs are to obtain products which they cannot produce by themselves. The buyers turn their product needs into purchase specifications that can are important in the appraisal of purchase specifications from various suppliers (Ramsay, 1994, p. 128). The generation and evaluation of purchase specifications is an ongoing process and the information collected in these activities feeds back and is applied to further modify suppliers product and buyers purchase specifications. If a buyers purchase specifications are met by a supplier, a decision on the suitable supplier, who can satisfy the buyer’s external need for products, is made. The supplier also makes their customer selection need that fulfils their external need for sales and revenue. Satisfaction of these external needs is met through a bargaining process as buyers and suppliers negotiate the acceptable terms for either party for the exchange of resources and also how the resulting profits from the exercise should be shared out. The buyer and the supplier both bear the responsibility of ensuring that the external needs of their organisations are met and in a manner in which their organisation is able to retain the maximum possible long term benefits. The concept of power originates from that common need that a supplier and a buyer has and the resources each party can offer the other.

The impact of power in buyer supplier relationships can be observed in the supplier selection process. Identification of suppliers is the first step in supplier selection. Here, the firm focuses on choosing a supplier who has the capacity to meet their requirements and who they can establish a long term relationship. The criteria for supplier identification focuses mainly on competence and includes such activities such as reference checks, financial status checks, ability to meet specifications as well as surge capacity availability. Once potential suppliers have been identified, the next step is compilation of a supplier’s shortlist. This process involves formally requesting that the various suppliers provide information about the goods and services they produce. The request types include; Request For Information, Request For Proposal and Request For Quote which the buyer evaluates and finally makes a decision (Bidgoli, 2010, p. 57). In making decisions for the outlined steps, the buyer examines the supplier’s competence and confidence. The competence of a supplier can be judged through Request for Information and Request For Proposal while their confidence can be evaluated through Pre-Qualification Questionnaires (Sparrow, 2003, p. 83).

The final step in supplier selection involves contract terms where what the supplier is expected to do and what the buyer should pay for this is specified. In coming arriving at a decision, the buyer considers each of the suppliers’ qualifications and their contract terms like price. A suppliers qualifications are an external factor which the buyer cannot control because if a supplier has a history of good performance, that is not likely to change in the short run. On the other hand however, contract terms can be negotiated between the buyer and their suppliers and it is here power balance and power relations come into play (Jia, 2013, p. 1554).

Heneman and Greenberger, (2002, p. 267) state that there are five legitimate strategies for negotiations. The first is a competitive, also known as a win-lose strategy, where a party prioritizes achievement of outcome which are in their favour but not the relationship.A competitive strategy is applied if one actor in a relationship is determined to win at whatever costs and they therefore have little concern for future relationships with the other actor. This strategy is very often employed by organisations, which hold the position of power in a relationship between buyer and supplier, in negotiations as they are ensured of getting maximum benefits from the business deals. Their intentions are ensure that the organization gets the most out of the relationship and the maintaining the relationship is not important to them (Maude, 2014, p. 189). In a competitive strategy, the powerful organization uses both coercive and hostile tactics in order to ensure they win. They may also employ confrontational and emotional tactics as a way of swinging the negotiations to their advantage (Maude, 2014, p. 189).

A second strategy is a collaborative, also known as win-win strategy. In this approach to negotiations, both positive outcomes as well as the maintaining the relationship are equally important to the supplier and the buyer. The negotiators on either side of the relationship will try to maximise benefits while also ensuring that the relationship is preserved. The most probable outcome when this approach is employed to negotiations is that both the supplier and the buyer are able to find a compromise to their external resource needs and sharing of profits and revenues. In the strategy of compromising (split the difference) each actor takes the needs of the other into serious consideration because both outcomes and the relationship are crucial (Fells, 2009, p. 49). In a buyer-supplier relationship, a compromising approach to negotiations can be applied if the two organisations cannot collaborate. The final approach to negotiations is a strategy of avoiding, also known as lose-lose, where the relationship is more important than the outcomes (Sethi and Adhikari, 2010, p. 187). Here neither the buyer nor the supplier is at a power position and both parties are more concerned about maintaining good relations with each other rather than obtaining positive outcomes.

From the above discussion of the concept of power and the strategies of negotiation, it can be deduced that underdogs are disadvantaged in the negotiation process. This is because power influences to a very large extend the decisions made by the parties involved in a negotiation process. Kleinaltenkamp, Plinke and Geiger, (2013, p. 224) argue that power plays the most important role in determining the outcomes of a negotiation process. In a relationship where the buyer is more powerful as compared to the supplier, their objectives when entering into contract negotiations are to gain what the supplier gives up. in extreme circumstances, the buyers offer a take it or leave it deal where they basically dictatethe terms of the contract to the suppliers as they are at an inferior power position and dependent. This has been observed before in the UK where retail stores have been known to impose heavy fine