Blending Competition with Collaboration

Traditional Retailing: Secluded Hierarchies

Traditional channel systems consist of actors who perform complementary activities representing different phases of the marketing of an offering. This lead to the typical channel system with a manufacturer managing the production of an offering, the wholesaler handling the distribution of smaller lot sizes to the retailers, and the retailer handling the final sales to the consumer. This is a simple description of the vertical marketing system that we have come to know in traditional consumer products retailing.

Horizontal Co-opetition: Typically these markets consist of few suppliers and a large number of intermediaries and retailers. In such a seller’s market it is the supplier who plays the role of channel leader. The supplier has ample choice in the selection of partners and there is little overlap with the channel constellations of competitors (rival producers).

Competitive channels often strive for as little interaction as possible and partners are actively discouraged from taking the business of rival producers. Thus horizontal co-opetition between suppliers is limited to a co-existence philosophy where the rivals know each other, know the positions they have and do not frequently challenge each other’s position.

Vertical Co-opetition: Moving to vertical coopetition, within the administered channels there are clear hierarchical norms with the supplier playing the role of the channel captain. They align partner goals, arbitrate in the event of conflicts and are generally responsible for the governance of the channel that they have set up. Being a seller’s market, consumer expectations are also low and hence there are limited market externalities that constrain partners to work closely together.

Thus, similar to horizontal coopetition between suppliers, vertical coopetition between the supplier and their partners is primarily driven by co-ordination objectives rather than any overarching need to collaborate and build structural linkages.

The role of co-opetition substantially increases as the channel converges towards large format organised retailing. The next section will trace the reasons for co-opetition becoming the dominant logic of interaction in such channels.

Convergent Retailing:

Dynamic Networks

Unlike traditional channels where coverage is the primary objective, converging markets place a premium on competitive differentiation. Consumer expectations are high and it is no longer a seller’s market. Retailers are not small independent family run outlets but large corporates that are run in a professional manner. Fig.1 summarises the key changes in the environment and the subsequent drivers towards co-opetition.

Vertical Co-opetition: The scale of operations of retailers gives them substantial leverage in negotiations with producer-suppliers and hence the category captain arrangements are diffused and unclear. Additionally the increasing consumer expectation levels force these retailers to be less tolerant to quality debasement externalities. Vertical co-opetition between channel partners is now seamless with the boundaries of individual entities becoming diffused in an increasingly networked technological environment.

Horizontal Co-opetition: Suppliers are forced into horizontal co-opetition with these large retailers. They compete with the private labels introduced by these retailers while simultaneously collaborating in category management initiatives to improve the efficiencies of all participating brands. Efficient consumer response and joint inventory management systems need to be deployed to ensure supply chain efficiencies. Point of sales data captured by the retailer and shared with suppliers provide yet another instance of how these structural bonds lead to shared interdependencies promoting co-opetition as a viable and necessary arrangement.

Retailers themselves are forced into co-opetating with each other. They come together to form common purchasing and sourcing groups to take advantage of efficiencies in consolidated buying. Formation of alliances also helps them in negotiating with suppliers. On the consumer front joint loyalty programmes help in the introduction of cross promotions and thereby help deliver better value for their consumers.

Thus, as depicted in Fig.2, the distribution channel is no longer the well defined, secluded hierarchy administered by producer-suppliers but is a loose coupling of diverse actors who compete and co-operate depending on the problem situation at hand, the function they are in or the consumers they need to retain. Thus, the channel system is a dynamic and evolving network with a constant churn in the role and status of the partners and collaborators.

Framework for Co-opetition in Indian Retail

The Indian retail industry is at a transition phase - a period that will be characterised by punctuated change. Suppliers need to address mechanisms to deal with the growing power of the organised trade. As for the organised trade itself, a mindset to collaborate with competition has important implications to pro-actively increase their competitive advantages rather than reactively co-operate only when faced with the prospect of global competition. Even in the short term, joint initiatives such as procurement groups or loyalty programme alliances provide cost efficiencies or consumer value increments that are too significant to be ignored. In this section a five stage framework is provided to realise co-opetition initiatives within the retailing industry.

Step 1: Supply Chain Nets

These linkages consist of structural, technology mediated partnerships between large format retailers and their suppliers. The key activities are:

Efficient store assortment intending to provide a complete and convenient assortment of products wanted by consumers
Efficient replenishment through maintaining high in-stock levels of required assortment

Step 2: Vertical Value

Delivery Nets

Key activities are:

Efficient promotion, which refers to the harmonisation of the promotion activities between manufacturer and retailer by communicating benefits and value
Efficient new product introduction which refers to the development and introduction of new products beast placed to satisfy current and prospective consumer wants

Step 3: Horizontal Joint

Value Nets

The first step to horizontal co-opetition would be identifying complementors. Complementors are players who are in a position to provide a combined offering that is of greater value than the offering provided by the individual parties trying to collaborate. Thus, Foodworld would be a complementor to Shoppers Stop and Landmark would be a complementor to both. Loyalty programme alliances would lead to greater value to consumers on account of a number of factors such as conveniences from agglomeration, cross-promotion programmes, greater cross-category information on consumer behavior etc.

Step 4: Supply Side Alliances

This is the first stage of collaboration with direct competitors. The key activities are as follows:

Establishing joint working groups for sharing information on quality and reliability of vendors
Joint purchasing to utilize combined scale advantages while sourcing
Developing common standards for packaging, order quantities, labeling and other logistical operations
Better use of transportation capacities and mutual replenishment during stock-outs

Step 5: Demand Side Alliances

The final stage of horizontal alliances is on the demand side where retailers share data on their consumers. The most critical step, it is highly prone to conflict as collaboration would now be in the core areas of operation which are normally key differentiators/ success factors for individual retailers. Key activities would include the following:

Exchange of consumer forecast data
Loyalty card alliances similar to the airlines industry eg: Star or Sky alliances
Benchmarking and standardizing technology platforms and efficiencies
Sharing of POS data to enhance CRM and data mining techniques and value.

Anand Ramanathan is a Manager with KPMG Advisory Services Private Limited. The views expressed in this article are his own and do not represent the firm in any manner. This article is based on his thesis work at the Indian Institute of Management, Bangalore.

Environment

Traditional Retailing Convergent Retailing

Low volume of transaction/player High volume of transaction/player

Small number of suppliers (seller’s market) Large number of suppliers ( buyer’s market)

Low customer service expectations High customer service expectation

Marginal - wage earning retailers Large corporate retailers

Deficient transport and communications infrastructure Sophisticated transport and communication infrastructure

Restricted availability of financial resources Easy availability of financial resources

Drivers

Major objective - Market Coverage Major objective - Competitive Advantage

Low product differentiation Product differentiation

Large number of small intermediaries available and used Sophisticated competition