There is a coffee shop close to where I live, and the owner is a friendly man. He begins every day anxiously waiting till the milk is fully boiled. If the milk ends up with a bad taste, the coffee will be terrible and he will lose first-time customers as they will never come back. On occasions when the milk curdles, he has to wash and clean every vessel that comes in contact with that milk.
As he prefers fresh buffalo milk every day, he is dependent on his two vendors. He does not mind paying a premium for reliable quality and timeliness – but there aren’t any more reliable vendors.
Though he tries to develop a relationship with his existing milk vendors, it is tough going. The social divide is rather stark. The relationship is what it is, a polite but impersonal one where both the buyer and seller view each other in a transactional manner. They are not invested in each other’s success.
“Can’t do without each other” syndrome
Buyers across industries face this problem. Apple was dependent on Foxconn for assembling iPhones. By 2010, news about harsh treatment of Foxconn employees came to light. 18 workers had attempted suicide and 14 died. Tim Cook had to fly to Foxconn facilities and meet with suicide prevention experts and Foxconn’s senior management in an attempt to stop the rising noise around its brand.
Apple could not terminate Foxconn’s services. They were far too dependent on Foxconn. Like the coffee shop owner. He too is dependent on the milk vendor. So, how can buyers handle this situation?
Informal, soft power networks
Firms in Korea, Japan and China have organized themselves into a network of buyers and sellers. In those countries, the coffee shop owner and the milk vendor will be part of a network. This allows the coffee shop owner access to more vendors, while the vendors benefit through access to more buyers. This network is called Keiretsu in Japan, Chaebol in Korea and Guanxi in China. These groups have well-established norms of commercial behaviour and it serves its purpose by building trust among members.
If the milk vendor, who is part of such a network, supplies bad quality milk on a regular basis, he would be first counselled and if that continues, thrown out of the group. It would mean the loss of business from all the coffee shop owners and other milk consumers – not just a single client. The same goes for the buyer – if he reneges on paying, or delays payments or shifts requirements, he will be thrown out of the group and will not have access to suppliers inside the group.
While this solution may not work in the case of Apple as it is too big, smaller companies could benefit from such an arrangement. Even Apple can think of forming a group of vendors under its aegis, with some basic norms of commercial and people-related behaviour that could have avoided the Foxconn fiasco.
So, here’s a question for you:
Do you think the concept of a buyer-seller network will work for the IT services market? Or would that result in a higher bar for entry, which in turn can inhibit disruption and innovation?
Note: This article is excerpted from book ‘Games Customers Play’ By Ramesh Dorairaj
Ramesh Dorairaj is consultant, coach and an author. He has 27+ Years of Experience consulting for Fortune 500 companies worldwide. He has groomed 50+ leaders. Has participated in 2.5 Billion $ worth of successful deals. He is a Certified Executive Coach at Marshall Goldsmith Stakeholder Centered Coaching, Certified Sales Coach and a Certified Proposal Coach.