What creates sustainable business success? If a group of marketing professionals were asked this question they would focus on the successful identification of a target market; the development of appropriate products and services, with an effective brand; and the adoption of appropriate competitive and pricing strategies, with the aim of maximising a firm's revenue and profits from marketing and sales.
Ask the same question to procurement professionals and the response will probably be very different. They are more likely to focus on segmentation of supply and category management; enhancing value for money from continuous improvement in the quality and timely delivery of products and services, at the lowest possible total costs of ownership feasible; sourcing supply inputs in ways that are superior to direct competitors; and, whenever possible, denying supply inputs to competitors through preferential trading relationships with unique suppliers.
Unfortunately, our research and consulting experience shows that many organisations do not effectively link together the causes of sustainable business success that arise from superior selling and buying skills. As we show in this article, companies like The Body Shop, Dell and Pioneer Foodservices, which link marketing and sales and procurement and supply chain strategies effectively, are able to achieve sustainable competitive advantage. Those that do not, like British Airways, Gazeley Properties and Nike, can seriously damage their brands, undermine profitability, reduce the value for money they receive from suppliers and introduce risk and vulnerability into their supply chains. This means that finding ways to link marketing and sales and procurement and supply chain strategies effectively must be a pre-requisite for all companies, however large or small.
There are good reasons why companies spend considerable time and resources developing brands. A successful brand can:
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differentiate a product or service from those of competitors;
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enhance a product's competitiveness;
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influence the price-elasticity of demand;
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ease the introduction of new products and services;
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create customer recognition and loyalty;
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enhance leverage over upstream and downstream supply chain partners;
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create long-term shareholder value.
Sustainable business success requires, therefore, that companies get their branding, marketing, sales and pricing strategies right so that they can differentiate themselves effectively from their competitors.
GETTING IT RIGHT
The three cases of success presented here all demonstrate the significant benefits that occur when a company effectively links its branding, marketing and sales strategy with its procurement and supply chain strategy.
Case 1: The Body Shop
In 2006, The Body Shop was one of Britain's most successful global retailers with over 2,000 stores in more than 50 countries. The brand and marketing approach adopted by The Body Shop is associated with opposition to animal testing, support for the environment, use of fair trade, respect for third-world labour and the protection of human rights.
These brand differentiation policies were supported by the public and undoubtedly contributed towards the company's rapid growth in the 1980s. Since the late 1970s, The Body Shop has established a framework to ensure that all of its internal operations adhere to these ethical and green ideals. It offers customers discounts for topping up their own bottles instead of buying new ones. And it has replaced company cars with company bicycles and supported numerous social and environmental campaigns.
Its sourcing approach recognises that without the dedicated support of its supply chain partners, its brand ideals could never be achieved. The Body Shop understood that ensuring that its suppliers also ascribed to the same ethical, fair trade and green principles was essential to establish the brand effectively in consumers' minds and to create differentiation against its competitors. It has also sought to establish strong long-term relationships with key suppliers focused on environmental and ethical compliance throughout the supply chain.
Through its community trade programme it has promoted supply chain campaigns such as "Trading with communities in need" and "Trade not aid" that buy only natural ingredients from indigenous people in the third world. It has also enforced a "five-year rule" requiring suppliers to certify that they have not conducted any animal testing within the last five years for any of the cosmetic ingredients they supply.
The Body Shop's proactive management of suppliers directly supports its brand differentiation strategy and has undoubtedly sustained its rapid growth in sales, with a 50 per cent annual increase from the 1970s until the early 1990s. Although some have argued that "staying pure and still making a profit is too good to be true", no one would deny that The Body Shop has been a sustained success story.
Case 2: Dell
In just over 20 years Michael Dell has established a $59 billion company focused primarily on selling personal computers. Its brand and marketing strategy has been differentiated by emphasising the importance of time, both in terms of customer responsiveness and product assembly. The company has created a competitive advantage by focusing on direct sales and build-to-order.
By using sophisticated internal information systems, Dell successfully aligned sales and production to deliver products to end customers more quickly than its competitors, but also to keep finished stock at a minimum level, thereby avoiding rapid depreciation. As sales grew quickly in the early 1990s, a lack of control over quality and security of component supplies challenged Dell's business model and forced the company to adopt a more proactive sourcing strategy.
Its sourcing approach simplified buying by redesigning its computers to use commoditised components, reducing its number of suppliers by 75 per cent, so that the majority of components are now sourced from just over 12 suppliers. Through consolidation, Dell was able to significantly increase its bargaining power with suppliers, including contract sub-assemblers and component and sub-component manufacturers.
Dell also focused on proactively developing long-term collaborative relationships with its suppliers to achieve just-in-time supply chain management to support its build-to-order assembly strategy. Stock and production information is shared with suppliers via an extended information system, and by monitoring inventory and sales forecasts it is capable of quick replenishment, while keeping the level of component inventory to a minimum.
Dell's skill in customer responsiveness, build-to-order assembly and just-in-time supply chain management has enabled it to create a business model superior to that of many of its competitors, because it turns "cash into cash" more quickly than they do. Only recently has competitive imitation reduced this advantage.
However, Dell's recent problems with lithium-ion batteries in some of its laptops, which forced an expensive recall, demonstrates that even a previously successful brand and sourcing strategy can be damaged if supply chain risks and vulnerabilities are not properly managed over time.
Case 3: Pioneer Foodservices
Pioneer is a medium-sized beef processor and catering butcher, based in the Lakeland area of the north of England. Prior to 2000 Pioneer was just one of a large number of catering butchers in the Lakeland area producing undifferentiated raw and semi-prepared beef products for both catering and retail sales. In 2002 Pioneer formed an alliance with a livestock auctioneer and an abattoir to differentiate its products with the aim of increasing its share of the catering service market and to make higher returns.
The "Lakeland Beef" brand was launched and by 2006 it had achieved both of these aims. Pioneer is now in a position to take the brand national and make much higher returns from sales with a differentiated product offering.
Prior to the increased success of the Lakeland brand, the responsibility for sourcing the right quality raw and processed beef fell directly to its supply chain partners, with little proactive involvement from Pioneer. As sales grew, Pioneer became concerned about its ability to secure a sustainable source of high-quality beef from Lakeland farmers. As a result, it decided to develop a much more proactive supply chain management approach to ensure security of supply, to defend its brand and also to deny supply to its potential competitors.
In 2004 Pioneer ended the relationship with its supply chain partners, insourced the competence to source directly from farmers and opted to take ownership of the cattle as a raw material. This involved moving to an arm's-length relationship with an abattoir and the simultaneous development of highly collaborative long-term relationships directly with Lakeland beef farmers in order to secure the right quality supply of livestock.
The change in sourcing strategy to restructure the upstream supply chain and take ownership of the whole carcass was initiated to gain better control of the quality, traceability and sustainability of beef supply. This direct approach has not only helped Pioneer to improve its performance in procurement and ensured supply of the quality beef required, it has also provided the basis by which it can ensure that, as sales grow nationally, it will be in a position to ensure the right quality of supply through long-term contracts with farmers that deny supply to its potential competitors.
GETTING IT WRONG
The three cases presented here show how competitive advantage can be undermined, with serious consequences for reputation, market share and profitability, when marketing and brand strategies are not effectively aligned with procurement and supply chain management strategies.
Case 4: British Airways
Despite the difficulties experienced in the airline industry, with many carriers insolvent or near bankruptcy, following three years of declining turnover British Airways' revenue had shown some growth for the first time in 2005. But in that year the company lost over £45 million in revenue and seriously alienated many of its long-term customers.
The brand and marketing strategy of BA was historically based on using its relatively protected rights to landing and take-off slots at Heathrow and Gatwick airports in London and the international hub network that was a legacy of Britain's former colonies to build a global airline serving more countries than any other.
This ability to offer more routes globally was reinforced by a differentiation strategy that saw BA create four classes of air travel - economy, premium economy, business and first - with higher-quality services in business and first-class than competitors. BA then, via aggressive marketing, sought to premium price its business and first-class travel in order to raise profitability from a growing market share.
This strategy was very successful until 2001, when competition from lower-cost airlines increased at a time when the overall level of demand from business travellers declined dramatically after 9/11. This, combined with rising costs of fuel and other supply inputs and catch-up on quality from competitors, eroded revenues and profitability. BA's revenues began to pick up again in 2005 only to suffer a near disastrous decline by the end of the year as a result of a major supply chain problem.
Since 2001 BA, like all airlines, has been forced to find ways to reduce the non-fuel-related costs of operations. Historically, BA had insourced its catering services but over the years had outsourced as a non-core activity this high-cost element of its service offering to a supplier, Gate Gourmet, which supplied the airline with 80,000 meals a day.
As Gate Gourmet's largest UK customer, BA had frequently used its bargaining muscle to drive down costs. In August 2005, in an effort to further cut costs to meet BA's requirements, Gate Gourmet fired 670 staff at its Hounslow plant near Heathrow and employed non-union workers at lower wages. A wildcat strike then ensued, with over 600 Gate Gourmet workers refusing to produce in-flight meals for BA, which in response had to give its passengers airport meal vouchers instead.
For two days 1,000 BA workers at Heathrow, including baggage handlers, loaders and cargo staff who were members of the same union as the laid-off catering staff at Gate Gourmet, went on strike in sympathy, stopping all BA flights leaving the airport. This illegal wildcat action caused the cancellation of over 600 BA flights for more than 100,000 passengers and cost the airline as much as £45 million.
BA failed to understand that what it thought was a non-core activity that could be outsourced and leveraged could also be critical to its ability to deliver its overall service, and dramatically affect its brand, reputation and revenues if it was not managed appropriately.
Case 5: Gazeley Properties
Gazeley Properties is the property development arm of Asda, the UK's second biggest supermarket chain and part of Wal-Mart's international operations. It was set up to generate additional development opportunities from Asda's own new stores expansion policy.
The Gazeley differentiation strategy is the ability to assemble and deliver complex construction and development projects more quickly and with higher quality than its competitors. The company's operational focus has been half on the development of distribution centres and half on non-food retail facilities. Gazeley prides itself on being able to deliver projects on time, within budget and also consistently to make returns of around 15 per cent.
The key brand attributes that Gazeley seeks to sell to its clients (which are normally investment and pension fund companies) is the ability to generate a major increase in value from the initial purchase price of a site and its eventual value to the end customer when all development costs are deducted. The ability to manage development costs aggressively and to deliver projects on time is therefore a key element of the marketing and sales strategy.
The traditional sourcing approach adopted by Gazeley has been to insource the site acquisition and the integration role for the whole of the development, but it has outsourced the detailed construction activity to third-party suppliers. Historically, Gazeley developed long-term collaborative relationships with its preferred construction suppliers and designers in order to increase the value added for both its customers (by increasing quality and reducing total costs of ownership) and for itself (by increasing its own return on investment).This approach was highly successful and the company developed a strong reputation.
In order to meet increasing customer demands for more value for money, Gazeley decided to change its sourcing strategy from this highly collaborative approach to one based on more aggressive leverage of its two major construction suppliers. To this end Gazeley passed all ground risks in construction to its suppliers, which resulted eventually in one of its two long-term suppliers refusing to work with it because it wasn't making any money.
Gazeley replaced this supplier with another company but eventually discovered that it could not meet the high quality and performance standards that had been developed over many years with the former incumbent. Furthermore, Gazeley realised that its aggressive stance was also alienating its other construction partners and seriously undermining its ability to deliver projects on time and to normal quality standards. After just three months, Gazeley decided to reinstate its former supplier and accept that it should take responsibility for ground risk.
This case demonstrates that overly aggressive short-term leverage of suppliers can have a detrimental impact on long-term supply performance. More importantly, perhaps, it also demonstrates that a shortsighted procurement and supply chain strategy can seriously damage a company's reputation for on-time delivery, quality and long-term value added.
Case 6: Nike
The development of the Nike brand and its phenomenal growth in the past 20 years is one of the most successful cases of product differentiation in modern business. But in the late 1990s this growth came to an abrupt end.
In order to support its differentiation strategy, Nike invested heavily in marketing and new product development. As a result, it became the most famous sports brand and, in 1997, controlled over one-third of the global athlete footwear market: greater than the sum of its four major competitors - Reebok, Adidas, Fila and Converse - put together. Yet, in 1999, Nike reported an 8 per cent decline in revenue across the US, Asia Pacific and Latin American markets.
Several reasons were given for this poor performance, including the retirement of basketball star Michael Jordan and a shortened NBA regular season. Nike attempted to solve these problems by heavily investing in innovative designs, by aggressive marketing and by reducing operational costs. Despite this revenue did not grow, and by the end of 2000 Nike had to rethink its sourcing strategy.
Historically, Nike had taken advantage of global sourcing opportunities to reduce costs by outsourcing production and re-locating plants to Korea and Taiwan in the 1980s, and then to China, Indonesia and Vietnam in the 1990s. By 2006 Nike's products were manufactured by over half a million workers in 700 offshore plants in 51 countries, although the company has fewer than 23,000 staff on its own payroll. Nike's sourcing strategy was initially successful in obtaining high-quality products at continuously reduced cost and this supported growing profitability as market share increased.
This pressure to reduce costs was continuously passed on to suppliers, but Nike failed to understand that this might result in the exploitation of its suppliers' employees, and the long-term implications for its own brand and market share when this exploitation was uncovered. The first anti-Nike organisation, "Boycott Nike", was established in 1996 and since then stories of underpaid workers in Indonesia, child labour in Cambodia and Pakistan, poor working conditions in China and labour abuse in Vietnam have been reported globally.
Nike's worldwide image was tarnished and forced the company to ensure that its suppliers did not abuse and exploit their employees in future.
There is no doubt that the decline in sales in the late 1990s was the direct result of a misaligned sourcing strategy in relation to the company's avowed brand image. While Nike has certainly cleaned up its sourcing act since then, and has continued to retain a major share of the global market for its products, this case clearly demonstrates the risks that a misaligned sourcing strategy can create for reputation, revenue and profitability.
The implications for companies
The six cases discussed here show that while procurement and supply chain strategies are rarely the basis for a competitive advantage on their own, it is clear that differentiation and customer retention may be impaired if they are not aligned with marketing and brand strategies.
The key learning point for companies, therefore, is the need to understand how to link strategy and operational delivery across product and/or service brand development, as well as within internal and external supply chain execution. Our research and consulting experience suggests that successful companies adopt a five-step approach to alignment (see checklist, below).
Checklist
Five steps to successful alignment
1 . Mandated cross-functional involvement of the strategy, marketing and sales, R&D, operations procurement and logistics functions in business strategy, brand and product/service development and execution.
2 . Company-wide strategic source planning to link customer and brand differentiation strategies with internal operations and external supply chain execution strategies over time.
3 . Rigorous and robust segmentation of all internal and external sourcing requirements impacting on brand differentiation, with brand differentiation opportunity analysis across all categories of spend.
4 . Rigorous and robust segmentation of all internal and external sourcing requirements, with brand dilution risk and vulnerability analysis across all categories of spend.
5 . Development of an internal and external opportunity and supply chain vulnerability early warning system to capture brand differentiation opportunities and to forestall brand dilution risks.
These five steps are necessary because success requires not only that the strategy and marketing functions work with R&D, operations, procurement and logistics to create a brand identity, but also its delivery. In a world of increasing risk and uncertainty, monitoring opportunities and threats is clearly a continuous rather than a one-off process. Only those organisations that can institutionalise continuous cross-functional implementation of a linked brand and sourcing strategy are likely to be successful in the future.
Andrew Cox ( acox@newpointconsulting.com ) is CIPS professor of business strategy and procurement at Birmingham Business School in the UK, and chairman of Newpoint Consulting; Dan Chicksand is a research fellow at Birmingham Business School
