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How to create value in buyer-seller relationships?


Introduction

The creation of value has been seen as the focus and one of the main objectives in buyer-seller relationships (Ulaga, 2006). Adding value to the relationships increase customer satisfaction, link together the involved parties and promote customer retention. Understanding how the value could be identified, created and delivered to the relationships is therefore crucial in business market.

This paper first explains the relationship development process and introduces the four different phases. Then, factors in direct and indirect aspects of value creating function are discussed. Trust and commitment which would lead positive effects on the relationship are also examined in the paper.


Relationship development process

When buyers and sellers undergo development process, there is an emergence of collaborative exchange relationships. According to Dwyer and Schurr (1987), the process moving through four interrelated phases which including awareness, exploration, expansion, and commitment in relationship development. By these relationship phases, they could help explaining the relationship behaviors, processes, and orientations.

Particularly, relationship development is an ongoing process, which is hard to identify the phases from one to another. Yet, it shows a model that analyze how companies establish, develop and maintain relationships with their customers.


Firstly, in the awareness phase, buyers will try observing the market and then recognize the potential suppliers that they may corporate with. Secondly, in the exploration phase, buyers will begin to inspect the suppliers by a series of actions, such as conduct business meetings, negotiate proposal and contract terms, and place a small order to check the product quality and corporate sustainability.

Thirdly, in the expansion phase, buyers will compromise the long-term contracts and increase the purchases from suppliers. Rather than from alternate suppliers, some of the buying firms may wish to seek profits from the current exchange partners. Lastly, in the commitment phase, both buyers and sellers will express the willingness on maintaining their relationships, confidence of constancy and continuity of their corporations, and these hence establish stable relationships.


After identification of phases, it could provide a clear and useful picture to study how the relationships develop over time. While time plays a significant role in explaining and comprehending the exchange, “buyers and sellers actively consider the past to forecast likely outcomes of future exchanges” (McLoughlin & Horan, 2002, p.539). For instance, during the awareness phase, as there is a lack of information about the market and new exchange partners, buyer uncertainty will emerge in potential supplier selection.

In addition, absence of personal relationship between the firms involved in buyer-seller relationships will cause fewer corporate opportunities and little investment (Ford, 1980). In the exploration phase, the insufficient experiences of buyers with potential partners will result in higher buyer uncertainty. Therefore, reduce uncertainty is a significant goal in the exploration phase.

In the expansion phase, by probing and testing, and profits which partners supply to buyers, buyer uncertainty starts to decrease as relationship has evolved significantly. High level of activities between buyers and sellers will lead to stronger relationships during this phase (Hakansson, 1982). In the commitment phase, due to the past performance of suppliers, customers are more confident that they would offer consistent performance in the future. “A pattern of less intensity and withdrawal of key contacts from the relationship becomes apparent” (Cindy & Gary, 2010, p. 255).

This contributes the stability of the relationship and buyers thus perceive low uncertainty regardless the high actual risk on conducting business. Function of value creating would be discussed below to understand how the value is created.


Value creating function

Value creating function is based on that buyer–seller relations take the form of a series of functions or tasks to create value for the individuals involved (Anderson, Hakansson & Johanson, 1994). It allows buyers and sellers to link up their resources, develop bonding between people involved, accumulate knowledge and technologies, create new resources, and develop new products and activities.


Direct function

It includes resources and activities of suppliers and customers which may create value to the suppliers, while they are independent upon other relationships (Achim, Thomas & Hans, 2001). It could then be further divided into three different aspects: benefit, volume and safeguard (Sanchez, 2010).


For benefit function, it is the fact that the supplier is able to offer the product or service at the best price in its relationship with a given customer, while the customer does not have to refuse certain minimum technical quality standards (Walter, Ritter, & Gemunden, 2001). This function reflects the financial benefits of supplier to customer, helps the customer to gain a high profit margin which stimulate the exchanges with other different suppliers.



For safeguard function, once the supplier could guarantee that the customer would receive a certain level of supply even the economic return is not so favorable, the supplier could carry out the function in a relational exchange (Hakansson 1982). The safeguard function therefore could provide insurance against difficulties or crisis in other exchange relationships.


Indirection function

It captures the connected effects in other relationships or/and in the future – the network (Achim, Thomas & Hans, 2001). Anderson, Hakansson and Johanson (1994) state that “a business network can be defined as a set of two or more connected business relationships, in which each exchange relation is between business firms” (p.8). Indirect function is therefore important as it has positive impact on exchange in other relationships.


For innovation function, in the process of develop new products, customers tend to build relationships with suppliers who have comprehensive product experience and are the technological leaders (Walter, Ritter & Gemunden, 2001). Interactions between two or more firms are then the result of both product and process innovation. Customers may even be willing to sacrifice the financial benefits to achieve the function under some circumstances.


For market function, it is whether that customers could take the benefit of good commercial reputation of their suppliers and make use of it to help gaining access to the new markets (Walter, Ritter & Gemunden, 2001). The function could also be found when cooperating with suppliers who endorse strict conditions and criteria for choosing their customers.


Customers could obtain commercial information such as matters related to the market trends or the details of opponents’ products.


Trust and Commitment on value creation

Trust and commitment are also noted as key factors for a cooperate relationship to succeed in the long term and these factors cause positive impact on buyer-seller value creation (Wilson, 1995). Therefore, business partners should behave in the best interest and positively toward trust and commitment in relationships.


According to Moorman, Zaltman and Deshpande (1992), trust is defined as “a willingness to rely on an exchange partner in whom one has confidence” (p. 315). When trust is sufficiently well developed, new ways of conducting activities, exchange of resources, and a warmer and closer relationship between agents could be facilitated. For the other factor, commitment has become a fundamental part in business distribution and marketing research (Brown, Lusch & Nicholson, 1995).


Besides, Palmatier, Dant, and Grewal (2007) reveal that the main point is seller should promote trust and commitment with its buyer. If it is achieved, it could even lead to emotional links between the agents, attainment of shared or individual goals seek by the partners. While trust “could be considered a powerful tool to impel and

maintain commitment in a commercial relationship” (Sanchez, 2010, p. 78). It could be considered in some way as helping to maintain a corporate relationship with long-term orientation, and reduce risk of opportunistic behavior and transaction costs. By improving the existing level of cooperation, buyers and sellers could use their resources more efficiently.


The basic aim of this paper is to examine the value creation in buyer-seller relationships. It is vital to understand the relationship development process as it provides information about how partners establish and develop relationships with each other. The process includes four phllases: awareness phrase, exploration phrase, expansion phrase and commitment phrase.

In order to explain how different aspects influence the value creation, value creation function which could be divided into direct and indirect functions. For direct function, it consists of benefit, volume and safeguard factors, while for indirect function, it consists of innovation, market and scout factors. Lastly, researches reveal that both trust and commitment lead positive impact on partners’ relationships in creating the value.





Reference

Achim, W., Thomas, R. & Hans, G. G. (2001). Value Creation in Buyer–Seller Relationships: Theoretical Considerations and Empirical Results from a Supplier's Perspective. Industrial Marketing Management, 30 (4), 365–377.

Anderson, J. C., Hakansson, H. & Johanson, J. (1994). Dyadic business relationships within a business network context. Journal of Marketing, 58 (4), 1-15.

Brown, J. R., Lusch, R. F. & Nicholson, C. Y. (1995). Power and relationship commitmen. Journal of Retailing, 7 (4), 363–392.

Cindy, C. & Gary, L. F. (2010). Buyers' perspectives of buyer–seller relationship development. Industrial Marketing Management, 39 (2), 252–263.

Ford, D. & (1980). The development of buyer–seller relations in industrial markets. European Journal of Marketing, 14 (5), 339–353.

Gemunden, H. (2004). The impact of information technology development on trust, commitment and value creation in business markets. Journal of Business and Industrial Marketing, 19 (3), 197-207.

Hakansson, H. (1982). International Marketing and Purchasing of Industrial Goods: An Interaction Approach. New York: John Wiley and Sons.

Mcloughlin, D. & Horan, C. (2002). Markets-as-networks: notes on a unique understanding. Journal of Business Researc, 55 (7), 535–543.

Moorman, C., Zaltman, G. & Deshpande, R. (1992). Relationships between providers and users of market research. Journal of Marketing Research, 29 (3), 314–328.

Sanchez, J. A (2010). The Impact of Relational Variables on Value Creation in Buyer–Seller Business Relationships. Journal of Business-to-Business Marketing, 16 (1), 62-94.

Walter, A., Ritter, T. & Gemunden, H. G. (2001). Value creation in buyer–seller relationships. Industrial Marketing Management, 30 (4), 365–377.

Wilson, D. T. (1995). An integrated model of buyer–seller relationships. Journal of the Academy of Marketing Science, 23 (4), 335-345

Ulaga, W. (2006). Relationship value and relationship quality. European Journal of Marketing, 40, 311-327.

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