The objective of our paper is to depict which creative strategies buyers can develop to by-pass oligopolies more efficiently and to identify ways of monitoring the results. Methodologically speaking we have analyzed the way of operating...
moreThe objective of our paper is to depict which creative strategies buyers can develop to by-pass oligopolies more efficiently and to identify ways of monitoring the results. Methodologically speaking we have analyzed the way of operating of monopolies and the potential strategies developed by buyers to improve on their position by a sectorial analysis of the plastic pellet (resin) industry. We consider this industry to be a representative case for the above mentioned environmental situation.
The most important observation we made on how oligopolies operate is that from the outside they appear to operate as one single group offering nearly identical prices in one region. In reality however the different companies and their entities are separated from one another by an “intercompany Chinese wall”, called “profit and loss statement responsibility” Each company is indeed individually accountable for their sales, margins and profits. In general, the coordination is achieved by some type of marketing, but coordination on the level of pricing policy appears to be limited. So, if a price for Europe for instance is about x €, it might well be that the Asian price for the same product is much less, because oligopolists just like any other marketeers have to adapt their pricing to local circumstances. As such, one of the major worries oligopolistic suppliers face is to avoid parallel imports by traders. Additionally, local subsidiaries or joint-ventures will be prohibited to sell to other geographical areas. Oligopolists follow a simple add-up price calculation approach to achieve this goal. In order to avoid products and prices from their Asian subsidiaries and colleagues to enter the European market via parallel import, a comparison is made between the price of the most expensive European offer with the cheapest product from outside Europe. As long as the price delta does not exceed the sum of a number of costs linked to importing from outside Europe to Europe (conversion of local currency or $ into €, transportation costs (some times even back an forth), import duties eventually applicable and the standard margin of traders organizing these parallel imports), the parallel import problem is avoided.
The thing is that apart from an indication about the general pricing policy defined by the marketing department or the general management, most sales people are not informed about the sales prices of their colleagues and competitors in other geographical area’s. Moreover traders do not necessarily negotiate good logistical contracts as they focus more on buying prices than on other costs. These facts represent the Achilles heels of the way oligopolistic markets operate. Buyers can take advantage of these vulnerabilities to by-pass the negative consequences linked to the bottleneck nature of oligopolistic offerings by systematically and legally eliminating or reducing the above mentioned intermediate costs. Thus they can create a sustainable business advantage. This can for instance be done by negotiating better transport and logistical costs, by offsetting the effects of exchange rates by “fixing” them more intelligently and by arranging their logistical flow in such a way that import duties are legally avoided. The latter can impossibly be done by traders alone as they are legally not entitled to do so without the involvement of a production unit. We have called this a “logistical bridge”, which “bridges” the above mentioned “Chinese wall”.
Before engaging in establishing these logistical bridges, it is however important for buying companies to do some desk research to get a good indication of the long term sustainability of such deals. In most cases the benefits of buying in another geographical area will not be positive during twelve months in a year, due to market changes and exchange rate fluctuations. Moreover, constant monitoring of the positive effect by comparing resulting prices with market prices is needed to maintain the advantage.
Our conclusions are that it is possible to circumvent the problems of “bottleneck” offering by shrewd negotiations and creative thinking. Of course, the experiences we depicted are applicable to certain types of oligopolistic products and markets. They are probably best suited for standardised or semi-standardised products. This is in line with the “portfolio model activities” proposed by Gelderman and Van Weele (2003). Looking for alternatives will in less standardised markets mean that buyers will have to concentrate on standardising materials specifications first. Moreover, buyers have to create enough internal support for the changes in material flows and logistical costs (for instance because of changes in stock volume) any “logistical bridge” might cause for their production system and the concerns about quality and timeliness of delivery that might arise.