Business - to-business marketing in Latin America 9781845441807, 9781845440169

Citation preview

Journal of Business & Industrial Marketing Volume 19, Number 6, 2004

ISSN 0885-8624

Business-to-business marketing in Latin America Guest Editors: Thomas G. Brashear and James S. Boles

Contents 354 Access this journal online 355 Abstracts & keywords 357 Guest editorial 359 Rationale and strategies of Latin American companies entering, maintaining or leaving US markets Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders 372 The use of online marketplaces for competitive advantage: a Latin American perspective Andrew J. Rohm, Vishal Kashyap, Thomas G. Brashear and George R. Milne 386 Benchmarking business-to-business marketing practices in emerging and developed economies: Argentina compared to the USA and New Zealand Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

397 Trust and negotiation tactics: perceptions about business-to-business negotiations in Mexico Mohammad Elahee and Charles M. Brooks 405 Coordinating B2B cross-border supply chains: the case of the organic coffee industry Danny Pimentel Claro and Priscila Borin de Oliveira Claro 415 Supplier-manufacturer relationships in the Brazilian auto industry: an exploration of distinctive elements Celso ClaÂudio de Hildebrand e Grisi and AÂurea Helena Puga Ribeiro 421 Executive summary and implications for managers and executives 427 Internet currency Edited by Dennis A. Pitta

Access this journal electronically The current and past volumes of this journal are available at:

www.emeraldinsight.com/0885-8624.htm You can also search over 100 additional Emerald journals in Emerald Fulltext:

www.emeraldinsight.com/ft See page following contents for full details of what your access includes.

was mirrored in Latin America too. With the growing importance of B2B e-commerce worldwide, Latin American firms cannot ignore the competitive advantages that accrue by employing the Internet into their strategies. This paper presents a variety of decision models that small and medium enterprises can employ to integrate the Internet into their business decisions and thereby remain competitive.

Abstracts & keywords

Benchmarking business-to-business marketing practices in emerging and developed economies: Argentina compared to the USA and New Zealand Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Rationale and strategies of Latin American companies entering, maintaining or leaving US markets

Keywords Emerging markets, Marketing, Business-to-business marketing, Argentina, United States of America, New Zealand

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders Keywords Management strategy, Marketing strategy, Market entry, Business-to-business marketing, Mexico, United States of America Foreign direct investment by Latin American companies in the USA is growing and significant. Yet, the characteristics of and trends in these investments, and the strategies used by these companies to either enter or exit the USA as well as to maintain their presence are little understood. This paper explores and illustrates the entry, maintenance, and exit strategies exemplary companies from Latin America use when they become involved in US markets. A sample of Mexican companies that concentrate in manufacturing industrial goods and prefer partnerships as the entry mode to US markets is used. In addition, this paper describes the patterns of direct investment, asset ownership, gross product, and intra-firm B-to-B trade of Latin American companies in the USA.

The use of online marketplaces for competitive advantage: a Latin American perspective Andrew J. Rohm, Vishal Kashyap, Thomas G. Brashear and George R. Milne Keywords Business-to-business marketing, Internet, Electronic commerce The promise of B2B e-commerce had led to an explosion in the number of e-marketplaces as firms adopted a “launch and learn” strategy. However a cash crisis and continuing losses led to tremendous consolidation in these marketplaces. This scenario

This paper examines the marketing practices of Argentine business-to-business firms and compares them with the marketing practices of US and New Zealand firms. While the results show marked similarities in the practices for a certain proportion of Argentine firms, there are also some differences. Overall, Argentine firms tend to have lower use of information technology in marketing and a greater emphasis on face-to-face interaction. There is also a group of Argentine firms that operates in the traditional business environment where less emphasis is placed on marketing activity. Implications of these results for managers and academics are discussed.

Trust and negotiation tactics: perceptions about business-to-business negotiations in Mexico Mohammad Elahee and Charles M. Brooks Keywords Negotiating, Competitive strategy, Trust, Ethics, Mexico Trust plays a significant role in business peoples’ choices of negotiating tactics. This study compares the use of generally accepted negotiating tactics with dubious ones. Findings from a sample of Mexican business people indicate that the type of negotiation (intra-cultural vs cross-cultural) is predictive of the level of trust that a negotiator will place in an opponent and of the likelihood of using various negotiation tactics.

Coordinating B2B cross-border supply chains: the case of the organic coffee industry Danny Pimentel Claro and Priscila Borin de Oliveira Claro Keywords Coffee, Supply chain management, Trust, Organic foods, Brazil, The Netherlands

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · Abstracts & keywords q Emerald Group Publishing Limited · ISSN 0885-8624

The recent interest in and increasing demand for healthy, social and environmentally sustainable

355

Abstracts & keywords

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 355-356

products, particularly in developed countries, have fostered the presence of organic coffee supermarket shelves of such countries. Proposes two models of B2B relationships for the Brazilian supply of organic coffee to international markets, more specifically, The Netherlands. For this proposition, compares two possible organizations of the supply chain wherein B2B relationships are based not only on contracts but more importantly on the informal safeguards of mutual trust, long-term orientation and joint actions. For the two proposed chains, a cross-border integrator is included to support the coordination of the business relationship. Emphasis is placed on coordination to increase overall efficiency of the supply chain through reduction of internal and transaction costs.

Supplier-manufacturer relationships In the Brazilian auto industry: an exploration of distinctive elements Celso Cla´udio de Hildebrand e Grisi and ´ urea Helena Puga Ribeiro A Keywords Automotive industry, Relationship marketing, Supplier relations, Brazil This study aims to identify the presence of commitment, cooperation and interdependence, in the relations established between suppliers and automobile manufacturers as described in the extant relationship marketing theory, Case studies of the three biggest Brazilian automobile manufacturers were carried out, depicting the existing relations, the routines in these relations and the standards governing such relations.

356

Guest editorial

About the Guest Editors Thomas G. Brashear is Associate Professor of Marketing in the Isenberg School of Management at the University of Massachusetts Amherst ([email protected]). He received his PhD from Georgia State University in 1998. His research has been published previously in JBIM, the Journal of Business Research, the Journal of the Academy of Marketing Science, and the Journal of Personal Selling and Sales Management. His previous co-authored publications in JBIM have received the High Distinction Award in 2000 and The Literati Award for Best Paper in 1998. His research interests include international marketing with an emphasis on Latin America, sales and sales management, and channels of distribution. James S. Boles is Professor of Marketing in the J Mack Robinson College of Business at Georgia State University. He received his PhD from Louisiana State University. His research has appeared in a variety of journals including: the Journal of Marketing, the Journal of Business Research, the Journal of the Academy of Marketing Science, the Journal of Retailing, the Journal of Personal Selling & Sales Management, and the Journal of Applied Psychology. He also serves on the JBIM Editorial Advisory Board, as well as the editorial boards of the Journal of Business Research, and the Journal of Personal Selling & Sales Management. His areas of research interest include personal selling, sales management, key and strategic account management, and business relationships. He has conducted research and/or training for a number of organizations including: AT&T, NationsBank, Bank of America, Scientific Atlanta, and the Atlanta Olympic Committee. Internationally, he teaches a four-day Sales and Marketing Management Seminar in Jamaica and has conducted corporate Sales Training Programs in Kingston, Jamaica.

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · pp. 357-358 q Emerald Group Publishing Limited · ISSN 0885-8624

This special issue on “Business-to-business marketing in Latin America” features four articles and two case analyses and focuses on a variety of timely and pertinent issues. Latin American markets, running from the Rio Grande to Tierra del Fuego, are now emerging as market economies as they continue to develop and adopt market oriented activities while developing stronger interregional and international trade relations. Latin American markets have begun an impressive transformation from predominantly closed markets with high inflation and uncertain stability to economies that serve as sources and locations for foreign investment and B2B exchange. The articles and cases in this special edition cover a variety of important issues and are abstracted below. We hope you find the contents interesting and motivating. Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders in the article, “Rationale and strategies of Latin American companies entering, maintaining, or leaving US markets”, evaluate foreign direct investment by Latin American companies in the USA. Their preliminary analysis of secondary data shows that Latin American investment is significant and growing at a fast pace. They find however that there is no complete analysis of the characteristics and trends in these investments, nor a review of the strategies used by these companies for entering or exiting the US market. The study, through the use of secondary data and a sample of Mexican companies to illustrate and analyze the commonly used strategies for the entry, maintenance, and exit strategies. The Mexican companies evaluated were primarily manufacturers of industrial goods. These companies’ preferred entry mode was through partnerships. In addition, the paper describes the patterns of direct investment, asset ownership and intrafirm B-to-B trade of Latin American operating in the USA. Andrew J. Rohm, Vishal Kashyap, Thomas G. Brashear and George R. Milne in their article, “The use of online marketplaces for competitive advantage: a Latin American perspective” identify small and medium enterprises (SMEs) as critical players in the market development throughout Latin America due to their numbers and their supporting roles in industrial commodity chains. They also show that SMEs have not adopted electronic commerce or become involved in B2B emarketplaces. The authors provide an overview of B2B ecommerce in Latin America and outline the evolution and forms of online marketplaces. This is followed by an integration of multiple frameworks of analysis in addition to an analysis of the factors influencing the extent to which Latin American businesses employ B2B online marketplaces. The authors conclude that B2B

357

Guest editorial

Journal of Business & Industrial Marketing

Thomas G. Brashear and James S. Boles

Volume 19 · Number 6 · 2004 · 357-358

e-commerce is essential, but that SMEs must analyze their positions and power before adopting a B2B ecommerce strategy and avoid the “launch and learn” approach of common among the larger players in their commodity chains. The next article by Jacqueline Pels, Roderick J. Brodie and Wesley J. Johnston, “Benchmarking business-to-business marketing practices in emerging and developed economies: Argentina compared to the USA and New Zealand” examines the marketing practices of Argentine business-to-business firms and compares them with the marketing practices of US and New Zealand firms. The authors employ the contemporary marketing practice framework to evaluate the marketing practices of firms in each country. The findings show many similarities between the Argentine and US/New Zealand firms particularly for Argentine firms that are foreign owned. The key differences however, are that Argentine firms tend to use less information technology in marketing and a put a much greater emphasis on face-to-face marketing interactions. Overall, the findings suggest that there are groups of Argentine firms that still operate in the traditional business environment and place less emphasis on marketing practices and activities. In the article “Trust and negotiation tactics: perceptions about business-to-business negotiations in Mexico” by Mohammad Elahee and Charles M. Brooks, the authors empirically test the effect of trust in cross- and inter-cultural negotiations. The study investigates a variety of behaviors that Mexican negotiators are likely to exhibit in initial meetings with both Mexican (inter-cultural) and foreign (cross-cultural) opponents and compares the cross-cultural and intra-cultural negotiations from the Mexican negotiators’ perspective. They compared the usage of widely accepted negotiating tactics to the use of questionable or dubious negotiation tactics. Their study used a data from a sample Mexican business people to test the hypotheses which was followed by a series of post survey interviews with negotiation experts. The authors report that Mexican business people indicate that trust plays a significant role in their choices of negotiating tactics. Further, they find that the context of the negotiation (intra-cultural vs cross-cultural) is predictive of a negotiators level of trust in their opponent and predictive of the likelihood of using different negotiation tactics. Danny Pimentel Claro and Priscila Borin de Oliveira Claro propose two models of B2B relationships for the Brazilian supply of organic coffee to international markets in their case study, “Coordinating B2B cross-border supply chains:

the case of the organic coffee industry”. The case study compares two possible organizations of the supply chain wherein B2B relationships are based less on formal contracts but on informal safeguards of mutual trust, long-term orientation and joint actions. In each of the two proposed supply chain structures, a cross-border integrator is used to assist the coordination of the business relationships. The principle focus is on developing high levels of coordination to reduce frictions such as internal costs and transactions costs. Celso Claudio de Hilderbrand e Grisi and Aurea Helena Puga Ribeiro, in their article “Supplier-manufacturer relationships in the Brazilian auto industry: an exploration of distinctive elements”, investigate the changing relationships among suppliers and manufacturers in the growing Brazilian auto industry. The authors performed an exploratory study which aimed to identify the presence of commitment, cooperation and interdependence in the buyersupplier relationships. Three dominant Brazilian automobile manufacturers were chosen as case studies to explore their B2B relationships. The authors used structured interviews that explored the emphasis on the standards and routines which control and manage the relationships. The authors conclude that B2B relationships in the Brazilian auto industry have reached the third level of relationships which includes highly developed rountines and procedures, along with elevated levels of commitment, interdependence and cooperative behaviors. We are very grateful for the opportunity to be involved with JBIM and to be able to focus on Latin American markets. This special issue would not have been possible without the support and patience of the JBIM Editor, Professor Wesley J. Johnston. We also thank the many authors for their contributions to this issue and for their patience in getting this completed. Finally, we acknowledge the time and effort of the reviewers whose input and comments were thorough, positive and timely. The reviewers for this special issue were: . Claudia Acevedo – Nove de Julho University, Brasil. . Charles M. Brooks – Quinnipiac University. . Cristian Chelariu – York University, Canada. . Vishal Kashyap – Xavier University. . Chris Manolis – Xavier University. . ˜ urea Helena Puga Ribeiro – Fundacao Dom A Cabral, Brasil. . Philip J. Rosenberger III – The University of Newcastle, Australia.

358

Thomas G. Brashear and James S. Boles

An executive summary for managers and executives can be found at the end of this issue.

Rationale and strategies of Latin American companies entering, maintaining or leaving US markets

Introduction

Arturo Z. Vasquez-Parraga Reto Felix and Aberdeen Leila Borders The authors Arturo Z. Vasquez-Parraga is an Associate Professor of Marketing and International Business at the College of Business Administration, The University of Texas-Pan American, Edinburg, Texas, USA. Reto Felix is an Associate Professor of Marketing in the Department of Business Administration at the Universidad de Monterrey, San Pedro Garza Garcia, Nuevo Leo´n, Mexico. Aberdeen Leila Borders is an Assistant Professor of Marketing, at the College of Business Administration, University of New Orleans, New Orleans, Louisiana, USA.

Keywords Management strategy, Marketing strategy, Market entry, Business-to-business marketing, Mexico, United States of America

Abstract Foreign direct investment by Latin American companies in the USA is growing and significant. Yet, the characteristics of and trends in these investments, and the strategies used by these companies to either enter or exit the USA as well as to maintain their presence are little understood. This paper explores and illustrates the entry, maintenance, and exit strategies exemplary companies from Latin America use when they become involved in US markets. A sample of Mexican companies that concentrate in manufacturing industrial goods and prefer partnerships as the entry mode to US markets is used. In addition, this paper describes the patterns of direct investment, asset ownership, gross product, and intra-firm B-to-B trade of Latin American companies in the USA.

Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · pp. 359-371 q Emerald Group Publishing Limited · ISSN 0885-8624 DOI 10.1108/08858620410556309

Latin American companies traditionally have invested in the USA, but not as heavily as their counterparts from Europe, Asia, and Canada. Neither do Latin American companies have the presence in the USA that US companies have in Latin America. But the presence of Latin American firms in US markets is beginning to be felt more intensely now than previously as companies from countries south of the US border attempt to establish stronger links between them and their home countries as producing bases for the US consuming markets. Despite the unsteady growth in the presence of Latin American companies in the USA, their importance in US markets is increasing. A clear picture of these new trends and their marketing, financial, and managerial implications would be useful, but it has yet to be drawn. Several factors have been discussed in attempts to explain why companies from Latin America invest in developed countries, and, more specifically, in the USA. The following sets of factors have been identified and considered: (1) the globalization of a growing number of industrial sectors, clusters, and networks (Salas-Porras, 1998); (2) market liberalization and free-market policies throughout the Latin American continent (Domı´nguez and Brenes, 1997); (3) the use of foreign direct investment by companies seeking to compete internationally (Chudowsky et al., 1999); (4) key changes in the organization, marketing techniques, and finances, as well as investments in plants and modern equipment, of big Latin American corporations (Garrido and Peres, 1998); and (5) the emphasis on cost-based strategies to enhance firms’ export performance in developed countries (Aulakh et al., 2000). Except for the first two sets of factors, which highlight macro-economic conditions, the other sets emphasize micro-economic or firm-related variables. In spite of the many factors already considered, several business and marketing factors driving the process of transforming Latin American companies into global players have been overlooked. As a result, researchers have not yet articulated the steps these companies take to enter, remain in or exit US markets. Thus, our research questions:

359

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

RQ1. How do Latin American companies enter US markets? RQ2. How do Latin American companies remain in US markets? RQ3. How do Latin American companies exit US markets? This study attempts to answer those questions by exploring the characteristics of Latin American companies in terms of the financial, marketing, and managerial strategies they employ to enter, maintain, and/or leave US markets. Departures from US markets can be abrupt, but some companies use withdrawal strategies when it is no longer possible to sustain their presence in the USA. This objective is achieved by using primary data and qualitative studies that provide an overview of the main strategies these companies use to penetrate US markets, remain in them, or leave. The marketing, financial, and managerial strategies that Latin American companies use to either enter, maintain, or leave US markets are reviewed with illustrations based on sampled surveys and researched cases. The survey was administered to a sample of Mexican companies. The cases are studied to discover the more general characteristics that have yet to be investigated regarding how and why Latin American companies use entry strategies, maintenance strategies and/or exit strategies. The practical implications of this knowledge are finally discussed and avenues for future research are considered. In order to have a meaningful framework that helps understand the entry, maintenance, and exit strategies of Latin American companies in the USA, we start by providing necessary background information about Latin American FDI in the USA. This is done by identifying some tendencies in the way Latin American companies invest in the USA, in order to detect the apparent trends of Latin American foreign direct investment (FDI) in the USA, as reflected by their patterns of investment, asset ownership, gross product, and trade. In examining trade trends, various approaches regarding intra-firm B-to-B trade relationships are also discovered. This objective is achieved using secondary data and quantitative studies describing the financial and economic characteristics of Latin American companies investing in the USA. Thus, the historical trends of Latin American investments in the USA are first presented and discussed on the basis of secondary data that relates to non-bank affiliates of Latin American companies in the USA and that is contained in several issues of the US Survey of Current Business that is published monthly. Table information in this manuscript is based on data extracted from several tables and various issues of this publication as cited in the source.

Background of Latin American FDI in the USA Latin American companies are not yet present in the USA to the same extent that US companies are present in Latin America. In 1998, US companies had 3,807 non-bank affiliates in Latin America, whereas 632 non-bank affiliates of Latin American companies were in the USA. Bank affiliates are excluded from this analysis. In relative terms, whereas 16 percent of all foreign affiliates of US companies were in Latin America, only 6.7 percent of all foreign companies in the USA were from Latin America. In 1995 and 1996, the number of Latin American companies in the USA reached 1,078 and 1,088, respectively, indicating significant fluctuations in that number from year to year. However, the presence of Latin American companies in the USA in terms of numbers (6.7 percent) seems to be greater than their presence in terms of assets (3.01 percent), sales (3.85 percent), and net income (2 5.18 percent), which are shown in Table I. It appears that the presence of Latin American companies is in smaller units than their counterparts from Europe, Asia, and Canada. Latin American companies have invested in the USA to either manufacture products for US markets or provide various services to US businesses, consumers, or both. In 1999, they invested $40.8 billion and owned $125.6 billion in assets to generate $78.7 billion in sales. This economic activity generated 247,000 jobs and capital outflows of $16.9 billion, even though net income was negative that year, as shown in Table I. Their world participation in capital outflows is significantly higher (5.97 percent) than their participation in other outputs such as exports (4.6 percent), imports (4.0 percent), and employment created (4.1 percent). Investment Although Latin American investments in the USA were only 4.5 percent of all FDI in the USA in 2001 (see Table II), Latin American companies have invested at a growing pace. From 1995 to 2001, Latin American FDI in the USA grew by 111 percent, or 18.5 percent per year. Companies from some countries, particularly those from Venezuela and Mexico, experienced even greater growth. In 2001, the largest contributors in terms of volume were Mexico (43.5 percent), Venezuela (27.7 percent), and Panama (24.6 percent). Brazil accounted for only 3.4 percent of the total. The countries with smaller contributions together accounted for 0.7 percent. In 2001, about half of total Latin American and Caribbean FDI was directed to insurance (24 percent), petroleum (16 percent), and real estate

360

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

Table I Presence of non-bank Latin American companies in the USA compared to presence of non-bank foreign affiliates of US companies in Latin America 1999 Non-bank LA companies in the USA Percent of corresponding world total

Main indicators Number Assets ($ millions) Sales ($ millions) Net income ($ millions) Direct investment ($ millions) Capital outflows ($ millions) Employees (thousands) Exports of goods shipped to affiliates ($ millions) Imports of goods shipped by affiliates ($ millions)

632a 125,562 78,658 2 1,376 40,771 16,929 246.9 6,995b 13,081c

6.7 3.01 3.85 2 5.18 4.27 5.97 4.10 4.55 4.02

Non-bank foreign affiliates of US companies in Latin America Percent of corresponding world total 3,807 688,777 299,839 28,816 237,748 34,277 1,827.5 40,912 37,134

16.0 14.88 11.59 14.48 20.26 19.63 20.52 19.59 19.18

Notes: a Most recent data is for 1997. Previous numbers are 1,078 for 1995 and 1,088 for 1996; b US exports of goods shipped by affiliates; US imports of goods shipped to affiliates Source: US Department of Commerce (2002)

c

Table II Latin American direct investment in the USA by country of foreign parent Region and country Total for Latin America and some Caribbean Islands Percentage of world total South and Central America Panama Mexico Brazil Venezuela Other countries Caribbean Islandsa

1995

1997

1999

2000

2001

27,873 5.2 8,067 4,939 1,850 750 2 152 673 19,806

33,008 4.8 9,989 5,898 3,244 703 2 360 505 23,019

44,591 4.5 10,606 5,896 3,612 651 2170 617 33,984

54,463 4.49 13,682 3,726 7,832 886 802 435 40,782

58,881 4.46 17,040 4,199 7,418 578 4,722 123 41,840

% Growth 1995-2001 111.2 111.2 215.0 301.0 222.9 4722.0 281.7 111.2

Notes: a Caribbean Islands included: Netherlands Antilles, Caribbean UK Islands, Bermuda and Bahamas. Figures based on millions of dollars – on a historical-cost basis Source: US Department of Commerce (September 2002)

(11.5 percent). Between 1997 and 2001, investments grew by 118 percent in insurance, 194 percent in petroleum, and 86.5 percent in real estate. During the same period, investments also grew above the average in retail (137 percent) and wholesale trade (87 percent), and below the average in manufacturing (34 percent) and nondepository finance (7 percent). Investments declined in more traditional industries such as services (2 51 percent) and depository institutions (2 24 percent), as shown in Table III. Although Latin American FDI in the USA was only 4.5 percent in 2001 (US Department of Commerce, 2002), Latin American assets in the USA was almost four times higher, 16.4 percent of all foreign assets in the USA (US Department of Commerce, 1999), according to reports from US banks. That is more than the foreign ownership of companies from some other regions, including Western Europe. This discrepancy might be explained by the long-term presence of some Latin

American companies in the USA. The longer they stayed in the USA, the more assets they acquired until they outstripped other foreign firms with a shorter history in the US marketplace. The following indicators show both how attractive the American market is to foreign companies and how successful Latin American companies have been in the USA. Whereas Latin American investments in the USA grew by 18.5 percent annually during the period 1995-2001 (Table II), the Latin American gross product increased 25.5 percent annually during the period 1992-2000 (Table IV), a strikingly positive outcome in terms of efficiency. Companies from Venezuela and Mexico experienced both greater gross products and more rapid growth, as shown in Table IV, than did other Latin American firms. The participation of Panamanian companies decreased after 1992, while participation of companies from Brazil increased after 1992 even though their gross products were relatively small.

361

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

Table III Latin American direct investment in the USA by industry of affiliate Industry

1997

%

1999

%

2001

%

% Growth 1997-2001

All industries Petroleum Manufacturing Services Insurance Real estate Finance, non depositary Depositary institutions Wholesale trade Retail trade Other industries

33,008 3,166 3,660 2,757 6,459 3,625 5,105 3,759 2,157 796 1,519

100 9.6 11.1 8.4 19.6 11.0 15.5 11.4 6.5 2.4 4.6

44,591 1,836 6,028 1,589 12,170 4,012 2,332 2,750 2,402 948 10,524

100 4.1 13.5 3.6 27.3 9.0 5.2 6.2 5.4 2.1 23.6

58,881 9,385 4,889 1,349 14,093 6,762 5,442 2,858 4,031 1,883 8,189

100 15.9 8.3 2.3 23.9 11.5 9.2 4.8 6.8 3.2 13.9

78.4 194.4 33.6 251.1 118.2 86.5 6.6 224.0 86.9 136.6 439.1

Notes: Includes some Caribbean Islands: The Netherlands Antilles, Caribbean UK Islands, Bermuda and Bahamas; Figures based on millions of dollars – on a historical-cost basis Source: US Department of Commerce (September 2000, September 2002)

Table IV Gross product of non-bank US affiliates of Latin American Companies by country of ultimate beneficial owner Region and country Total for Latin America and some Caribbean Islandsa Percentage of world total South and Central America Mexico Panama Venezuela Brazil Other Countries Caribbean Islands

1992

1995

1996

1997

1998

1999

2000

8,740 3.3 5,871 1,109 1,638 3,124 NA NA 2,869

12,367 3.8 7,977 1,754 (D) 4,712 159 (D) 4,390

12,955 3.6 8,408 1,862 826 5,089 328 303 4,547

13,682 3.5 7,903 1,418 701 5,258 131 395 5,778

16,995 4.1 8,418 1,582 943 5,301 160 432 8,577

20,426 4.46 8,171 1,739 897 4,985 347 203 12,255

26,597 5.09 10,632 2,952 524 6,480 380 296 15,965

% Growth 1992-2000 204.3 81.1 166.2 268.0 107.4 139.0b 22.3b 456.5

Notes: a Caribbean Islands included: Netherlands Antilles, Caribbean UK Islands, Bermuda and Bahamas; b Growth limited to the reported period; NA Data not available; (D) Suppressed by source to avoid disclosure of data of individual companies; Figures based on millions of dollars Sources: US Department of Commerce (June 1998, August 1999, August 2000, August 2001, August 2002)

B-to-B trade relationships US affiliates in general, are often designed to fulfill B-to-B trade functions overseas (Bach, 2000). Similarly, US affiliates of Latin American companies fulfill a necessary function as trade intermediaries between the USA and the country of ultimate beneficial ownership. In 2000, they accounted for $9.3 billion in US exports shipped by affiliates, and, more importantly, $21 billion in US imports shipped to affiliates, as shown in Table V. The ratio of US imports to US exports is 2.26 for US affiliates of Latin American companies, and 1.92 for US affiliates in general. The trade numbers are significantly lower in 1998 and 1996, but the ratios are very similar to the one for 2000. From that observation, the primary role of Latin American subsidiaries in the USA is to channel Latin American exports to US markets, particularly when the exporting country is distant from the USA. Over the four-year period from 1996 to 2000, the US affiliates of Latin American

companies imported a high percentage of Latin American exports: 82 percent in 2000, 86 percent in 1997, and 91 percent in 1996. In contrast, Caribbean countries accounted for only 18 percent, 14 percent, and 9 percent, respectively, of their national exports shipped to affiliates in the USA. The latter group had a greater role in US exports shipped by Latin American affiliates (65 percent of total US exports channeled to Latin America and the Caribbean in 2000), as shown in Table V. The above depiction is in line with FDI directed to developed economies, where investors fundamentally seek markets and assets, in contrast to what FDI directed to developing countries seek – resources and efficiency (Dunning and Narula, 1996). Both objectives (markets and assets) are paramount to companies in search of substantial technological innovation and organizational learning (Hunt, 2000). These are key resources in a competitive environment and are found in countries that offer complementary capabilities in both areas (Chen and Chen, 1998).

362

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

Table V Trade generated by non-bank US affiliates of Latin American companies by country of ultimate beneficial owner

Region and country

US exports of goods shipped by affiliates 1996 1998 2000

US imports of goods shipped to affiliates 1996 1998 2000

Total for Latin American and some Caribbean Islands South and Central America Mexico Brazil Panama Venezuela Other countries Caribbean Islandsa

5,772 2,992 872 1,185 506 302 127 2,780

10,589 9,678 2,573 1,216 291 5,068 530 910

5,537 2,310 720 749 599 115 127 3,227

9,272 3,270 (D) (D) 126 403 126 6,003

10,276 8,880 3,001 1,311 200 (D) (D) 1,396

20,978 17,292 3,291 2,510 109 10,590 792 3,686

Notes: a Caribbean Islands included: The Netherlands Antilles, Caribbean UK Islands, Bermuda and Bahamas; (D) Suppressed by source to avoid disclosure of data of individual companies; Figures based on millions of dollars Source: US Department of Commerce (August 1999, August 2000, August 2001, August 2002)

More specifically, companies use intra-firm B-to-B relationships in order to gain synergies and accelerate growth and, at the same time, acquire necessary knowledge about the market (Kuada and Sorensen, 2000). Thus, companies seek to expand their operations by producing and/or selling their existing products in new national markets when they assess that the specific assets they possess can be more economically transferred across international boundaries within the firm rather than by using markets (Lockett and Thompson, 2001). Moreover, knowledge and learning come more easily and less costly from intra-firm B-to-B trade relationships across markets (Pedler et al., 1991). In addition, acquired knowledge and learning in intra-firm B-to-B relationships can be applied more efficiently and effectively later in inter-firm B-to-B relationships across markets (Senge, 1990). When this is done across international markets, the internationalization of business takes place and multinational firms are formed, developed and grown (see Caves, 1996). Furthermore, in addition to product markets companies can also seek to establish a link to foreign strategic assets (see Nohria and GarciaPont, 1991). This is the reason, it seems, that Latin American assets are four times the number of Latin American investments in the USA.

Effects of B-to-B trade relationships The synergetic result of expanding markets and accessing strategic assets using intra-firm B-to-B trade relationships is often manifested in improved market position, production efficiency, and heightened firm-specific capabilities (Porter and Fuller, 1986). By selling to US markets ($21 billion in 2000) more than by buying from US vendors ($9.3 billion in 2000), as shown in Table V, Latin American companies use B-to-B

relationships in order to expand or strengthen market position, and these objectives involve upgrading product quality, improving product image, enhancing after-sales service, or circumventing trade barriers. Another effect of selective FDI by Latin American companies is intra-firm imports. The numbers show that Latin American subsidiaries have not internally traded as much as their European or Asian counterparts yet but are closing the gap. In 1998, intra-firm imports were 75 percent of total imports by all non-bank US affiliates, 88 percent by European US affiliates, 81 percent by Asian and Pacific US affiliates, and 49 percent by Latin American US affiliates. However, the Latin American percentage went from 41 percent to 49 percent between 1992 and 1998, whereas the worldwide percentage went from only 74.7 percent to 74.8 percent. Moreover, more distant countries such as Venezuela and Brazil have already increased their shares to 68 percent and 63 percent, respectively, as compared to Mexico, a US neighbor that stayed below the 45 percent average. An indirect effect of B-to-B trade relationships is employment generated (see Table VI), with a particular twist in the case of employment generated by US affiliates of Latin American companies. The states that benefit the most from employment generation by US affiliates of Latin American companies are Texas, California, and Florida, all of which have some of the largest concentrations of Hispanics in the country. Also New Jersey, New York, and Illinois have sizable Hispanic populations, but Louisiana, Ohio, and Georgia do not. But these last states do have logistical importance in transportation (e.g. New Orleans), manufacturing (e.g. Cincinnati), and distribution (e.g. Atlanta). The growing economic importance of Latin American companies in states

363

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

Table VI Employment generated by non-bank US affiliates of Latin American companies by country of ultimate beneficial owner Region and country All non-bank US affiliates of foreign companies Percent of US private-industry employment Total for Latin America and some Caribbean Islands South and Central America Brazil Mexico Panama Venezuela Other Caribbean Islandsa

1996

1998

2000

5,105.0 5.0 146.6 72.9 5.0 38.3 12.9 13.0 NA 73.8

5,633.0 5.2 222.0 61.9 4.7 29.2 13.4 9.1 NA 160.1

6,420.2 5.5 275.8 78.7 3.1 57.2 6.8 5.1 3.2 197.2

% Growth 1996-2000 25.8 88.1 8.0 2 38.0 49.3 2 47.3 2 60.8 167.2

a

Notes: Caribbean Islands included: The Netherlands Antilles, Caribbean UK Islands, Bermuda and Bahamas; Figures based on thousands of employees Source: US Department of Commerce (August 1999, August 2000, August 2001, August 2002)

such as Louisiana, Ohio, Georgia, and North Carolina has already spurred growth in Hispanic populations in states that have not attracted large numbers of Hispanics in the past. For instance, between 1990 and 2000, according to the US Census Bureau (2001), Georgia and North Carolina have already tripled the size of their Hispanic populations (435,227 and 378,963, respectively).

Strategies of Latin American Companies in the USA In order to know the entry, maintenance, and exit strategies Latin American companies use when engaged in US markets, we need information on individual companies. Because we are performing exploratory research on this phenomenon, we use a survey in Mexico and some exemplary cases. The survey consists of 13 Mexican companies headquartered in Monterrey. A questionnaire containing both closed-ended and open-ended questions was developed taking into account the necessity of achieving three basic levels of equivalence, namely construct equivalence, measurement equivalence, and equivalence of data collection techniques (Singh, 1995). All interviewers were of Mexican origin and educated in Mexico to secure construct equivalence and equivalence of data collection techniques. A complete section was developed to collect information on entry, maintenance, and exit strategies utilized in the USA. Executives were interviewed to obtain company data, and managers at specific levels of responsibility and in different organizational units were interviewed to collect data on specific strategies. In addition, some observations regarding entry, maintenance, and exit strategies are presented and discussed below on the basis of research performed

in two exemplary large Mexican corporations, CEMEX and VITRO. These two companies appropriately exemplify the use of entry, maintenance, and withdrawal strategies in US markets. Partial accounts of other companies, Univision Communications and The National Sports Daily, are also used. Secondary data (internal reports and public documents) and primary data (in-depth interviews with managers at various organizational levels) were collected from these companies and analyzed to carry out this focused research. Table VII shows a profile of the companies studied in this manuscript. Of the 13 companies, 11 are in manufacturing, whereas two are in finance. Moreover, seven companies manufacture industrial goods, signaling the importance of this type of goods in market entry to the USA and their strong commitment to intra-firm B-to-B trade relationships. Nine companies are large, as measured by the size of the personnel. Six companies have invested overseas besides investing in Mexico and the USA, and all but one have markets in countries other than Mexico and the USA. Generally, companies that seek foreign markets and/or foreign resources adopt entry strategies as well as maintenance strategies once they are established in a foreign country. They use exit strategies if remaining longer becomes a burden or better opportunities appear elsewhere. It is interesting to note that what constitutes an entry strategy into one country may be an exit strategy to leave another.

Entry strategies Latin American companies have almost always been present in the USA. Some came seeking political stability. In the past, some companies decided to leave their home country in Latin America because of economic or political turmoil

364

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

Table VII Profile of surveyed companies and their mode of market entry Firma

Economic sector

Main products

1 2 3 4 5 6 7 8 9 10 11

Manufacturing: industrial goods Manufacturing: industrial goods Manufacturing: industrial goods Manufacturing: industrial goods Manufacturing: industrial goods Manufacturing: industrial goods Manufacturing: industrial goods Manufacturing: consumer goods Manufacturing: consumer goods Manufacturing: consumer goods Manufacturing and Trade: consumer goods

12 13

Finance Finance

Portland and white cement Aluminum heads for motors Auto accumulators Steel Steel products, auto batteries Paper and paper products of various types Glass Chocolate and candy products Home cleaning Beer Tobacco, beverages, telephone, insurance, financial services Investment, capital and money markets Insurance services

Size totalb

Size in USAb

Years in USA

FDIc

Mode of entry

10,000 3,000 3,200 50 14,000 5,000 1,414 20 4,500 16,049

NA 10 NA NA NA 1,500 NA 5 250 535

4 9 9 NA 4 5 19 10 6 10

30 3 2 3 7 2 2 2 2 2

Acquisition Strategic alliance Joint venture Strategic alliance Acquisition Acquisition Joint venture Own plant Acquisition Joint venture

59,000 180 3,500

20,000 5 800

10 12 10

4 2 6

Notes: a Firm: unnamed because of company’s preference; b Number of personnel; c Number of countries including the USA where the company has FDI Source: LACUSA Survey

at home, and they often targeted the USA as a host country. Sometimes, nationalizations or confiscations in Latin America forced local companies to join confiscated/nationalized companies in flight because of their business dependency. Others found the USA offered a more amiable business climate. These Latin American companies were created and developed in the shadow of American companies that could provide the essential means to acquire necessary initial resources and/or sustain growth. But things have changed in the Latin American business sector. Today’s trends in Latin American investments in the USA no longer seem to reflect those historical periods in Latin American life. Current practice seems to point to partnerships as the preferred entry mode, mainly because partnerships lessen the risks involved in entering a new market and/or speed the process of acquiring the resources or assets needed to compete in new markets. Moreover, firms seeking to extend their profitable activities typically require assets to complement their existing resource bundles and frequently need to obtain these from existing firms through mergers and acquisitions, joint ventures and other collaborative associations (Lockett and Thompson, 2001). For instance, companies in the Mexican sample used the following entry modes, listed in order of preference: acquisitions, joint ventures, and strategic alliances. No one preferred mergers. Acquisition was the main entry mode for seven out of 13 companies, whereas joint venture was used by two, and strategic alliance, by the other two subsidiaries, as shown in Table VII. Direct access and no partnership were the preferred entry methods used by two companies. The paramount reasons justifying acquisitions include:

.

.

.

.

.

Immediate entry into the desired market – the acquired company brings in the desired market. Fast acquisition of needed resources to function in new markets – the acquired company brings in new resources. Fast adaptation to local customer needs – the acquired company has already served local customers. No need for learning the partner’s management rules and style, as in the case of joint ventures or strategic alliances. The probable obstacles in matching Mexican with American management rules and styles are avoided by using acquisition. Less risk associated with entry mode, as compared to direct access with no partnerships.

The subsidiaries of the Mexican companies are spread out in eight states, with five in Texas, two in California and one in each of the six other states. Thus, seven of 13 subsidiaries are located in a state that is geographically and culturally close to Mexico, underscoring the importance of both geographic and cultural proximity in Mexican FDI in the USA, a predominantly Anglo-Saxon country. The literature suggests that psychic and cultural differences (in language, culture, religion, education, political systems, and economic development (Johanson and Vahlne, 1977; Johanson and Weidershiem-Paul, 1975) are important criteria for the market entry decision. The higher the difference, the more difficult will be the market entry. Companies exhibit a preference for cultures that are similar to their own culture in an initial phase of direct investment abroad, while they do prefer any culture in an advanced phase of foreign

365

Acquisition Own office Acquisition

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

expansion (Davidson, 1980). Concurrently, Dow (2000) found that cultural distance is an important factor for explaining market selection, but its importance declines significantly after the first market entry decision has been made. Exemplifying the latter trend, Grosse and Trevino (1996) found that the cultural, as well as geographic, distance between 23 countries and the USA were significantly, although negatively, related to the amount of FDI in the USA. Moreover, not realizing that similarities facilitate market entry and that learning about critical differences is necessary in subsequent stages, can lead executives into a wrong path of decisionmaking (O’Grady and Lane, 1996). Broadly speaking, FDI in the USA is expected to be more difficult for Mexican companies because of the large cultural differences between Mexico and the USA, in general. However, the cultural proximity of the Hispanic population (about 80 percent Mexican) in the US southern states may help overcome such difficulty. Hispanic businesses and Hispanic consumers in Texas, California, and other states with large Hispanic populations may have provided fertile terrain to Mexican FDI and some business continuity at the time of market entry. All Mexican companies studied, except one, established subsidiaries in Texas or California rather recently (1994-1995 or after), underscoring their first experience in US markets. It seems that it made good sense to the executives of these companies to enter US markets where cultural similarity and geographical proximity can help establish their business faster and more successfully. Such timing also coincides with the approval of the North American Free Trade Agreement (NAFTA) and its initial implementation. NAFTA became effective on 1 January 1994. It is reasonable to expect that NAFTA could have been a factor in the company decision to enter US markets at this time. However, the NAFTA effect did not continue after 1995 mainly because of the peso crisis at the end of 1994. This crisis also produced negative trends in Mexican capital inflows to the USA in 1995 and 1996. The entry methods of CEMEX, a large Mexican company that produces cement, is a case in point. It uses acquisitions as a preferred entry mode on the basis of its prior market experience. The literature shows that prior market experience encourages expansion by acquisition rather than joint venture (Hennart and Reddy, 1997; Thompson, 1999). Because of its product and size ($5.62 billion in consolidated net sales in 2000 and $1.08 billion in consolidated net income in 2000), CEMEX (2000) needed to position itself in international markets. Although this company’s

main strategy was to concentrate in developing countries based on their growth prospects (Dombey, 1997), it also went to developed countries because it needed earnings in dollars from stable economies. Such earnings helped the company survive the 1994/1995 peso crisis and avoid the damage other companies that lacked this safety cushion suffered (Millman, 1996). CEMEX also internationalized with the idea of diversifying geographically and avoiding dependence on one or a few countries (Dombey, 1997). CEMEX’s example, however, is counter to what the literature shows, that is, the use of specific criteria to evaluate different countries for market entry (Johanson and Vahlne, 1977; O’Grady and Lane, 1996; Papadopoulos and Denis, 1988). CEMEX has not used such criteria; instead, it seeks expansion in any market that may show it to be attractive enough regardless of what country it is located in. CEMEX also chose foreign direct investment over exports mainly because of the high transportation costs involved in exporting cement. Unlike other cement companies, CEMEX uses sophisticated information technology: its operations are connected via satellite; its ready-mix delivery trucks are equipped with dashboard computers that enable tracking with global positioning satellite technology (Dolan, 1998); and it is a player in Latinexus, an e-procurement marketplace. Maintenance strategies Staying in the USA, a highly competitive market, may require both the effective use of survival strategies and the efficient use of cumulative resources. Knowing more about the markets, positioning the products correctly, and creating a loyal customer base are only some of the salient survival strategies. Becoming cost competitive, eliminating contra-resources, and securing methods to achieve systematic gains in efficiency are also necessary to compete successfully in US markets. The market positioning strategies used by the subsidiaries of the Mexican companies include quality in product and service (54 percent) or the combination of low price and high quality or high service (38 percent). The focus on quality in most cases is consistent with the expectation that investment from LDC’s companies in developed countries aims at expanding or strengthening market position (Dunning and Narula, 1996). Even CEMEX, which sells commodities, uses branding to enter markets of more sophisticated buyers. The focus on the combination of low price and high quality is in tune with a competitive strategy that combines efficiency (through cost cutting) and effectiveness (through differentiation

366

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

on the basis of greater value) in order to prevail in a particular market (Hunt, 2000). This view goes beyond previous recommendations that emphasized one strategy (differentiation or cost cutting) at a time (Porter, 1980) or a trade-off between quality and price (Briley et al., 2000). To learn about customers and markets, almost all companies in the Mexican sample used market research before entering US markets, and twothirds continued utilizing it after entering the US marketplace. Moreover, two-thirds of the firms modified their products when they entered US markets, whereas one-third neither made modifications at the time of entrance nor afterwards, suggesting that these companies had a clear picture of what the markets required. However, when modifications were made in most cases, they were rather minor and included changes due to legal requirements, customer needs, profitability requirements, and/or to avoid the risk of losing the markets. A company selling batteries and accumulators adapted its standards for the products destined to US markets, mainly because it confronted high quality products from the competition in those markets. As a result, this company’s products also became very competitive in other markets. Such behavior seems to be appropriate in companies that have technological and marketing expertise, which, in turn, would help them determine which new product markets they should enter (Scott Morton, 1999). Regarding market pricing, more than half (56 percent) used initial US prices, which were the same as the Mexican prices, and 11 percent sold at prices lower than US prices, underscoring the importance of using penetration prices to enter US markets. However, one-third sold at prices higher than US prices, signaling price skimming on the basis of their superior product. All prices remained at the same level afterwards to secure penetration and expansion of company products in the USA. Regarding market channels, two-thirds used external channels (agents, wholesalers, or similar arrangements) to distribute their products. This behavior is consistent with high-risk markets, where it is preferable low-risk indirect distribution to high-risk direct distribution. Yet, one-third risked direct distribution but probably in markets with geographical and cultural proximity, as discussed above. Finally, regarding promotional tools, the preferred promotional method was personal selling, followed by public relations and discounts, in agreement with the nature of most promoted products, that is, industrial goods (see Table VII). The use of advertising was extremely limited again mainly because of the nature of the business. Only two companies used it and both sold consumer goods in US markets.

Univision Communications, Inc. is a good example of how some Latin American companies have not only remained but also prospered in the USA. Factors facilitating Univision’s entry and contributing to its steady growth include: a growing concentrated population of about 30 million Hispanic consumers, their steadily increasing buying power, their ample use of the Spanish language, and a growth in advertising spending on Spanish-language media. Univision is now the leading Spanish-language television broadcaster in the USA. It reaches more than 92 percent of all Hispanic households, and maintains approximately 85 percent share of the US Spanish-language network television audience (Hoover, 1998). The cost of achieving such leadership in the market has been high for Univision but bearable. Its current long-term debt/equity ratio is 1.0, its return on equity (2.5 percent), and its return on assets (1.1 percent) are currently at their lowest points during the last five years. Univision invested significantly to develop popular and high-quality programming. It went through a period of trial and error before securing an accurate and credible rating system to measure Hispanic viewership. Its pioneering efforts made advertisers recognize the effectiveness and economic potential of Spanishlanguage television. Latin American companies have performed well in general but remain inconsistent in their financial performance. Compared to US affiliates of companies from other continents, Latin American companies performed better than those from Europe, Africa, and the Middle East in the exports/sales ratio, as reported for 1998 (US Department of Commerce, 2000). Only the Asian companies had a better ratio. Latin American firms were also better performers than companies from Europe and Africa in the imports/sales ratio for the same year, but they performed worse than the Asian and Middle Eastern companies. They did better than firms from all the other countries in R&D/sales. However, they performed worse than the European and African companies, but better than the Asian and Middle Eastern firms, in net income/sales and net income/assets, as reported in the Survey of Current Business (US Department of Commerce, 2000). Exit strategies Companies that decide to withdraw from an established market usually have good reasons for doing so. Two prevailing reasons for leaving desirable markets seem to be the failure in achieving marketing objectives and corporate refocusing. The latter is defined as the disposal of peripheral activities (divestiture) and the renewed

367

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

concentration on core businesses in order to raise performance (John and Ofek, 1995; Johnson, 1996; Markides, 1992). In addition, some companies may get discouraged from remaining by cultural barriers (Ricks, 1993), legal barriers, political problems, economic downturns in the industry or specific market, and consolidation. Exiting seems to be a recurrent strategy among Latin American companies investing in the USA as some numbers indicate. In 1996, there were 1,088 affiliates of Latin American companies doing business in the USA; in 1997 that number plummeted to 632 firms. The use of exit strategies in two cases, The National Sports Daily (The National), a specialized newspaper owned by a Mexican investor, and VITRO, a Mexican glass manufacturer are revealing. In 1990, The National began simultaneously printing and distributing a sports newspaper six times a week in three US cities: New York, Chicago, and Los Angeles. The idea was to offer sports news in the same manner as entertainment, centered on popular stars. Because of the nature of sports in the USA, The National became a hybrid newspaper that carried stories of general interest along with stories based on local sports heroes. To boost readership, The National hired Frank Deford, a sportswriter who gained widespread celebrity by being chosen national sportswriter of the year six times (Schlossberg and Deford, 1992). But these efforts were little help when the newspaper company failed to deliver its issues by 6 a.m. as fans expected. Many sport events took place at night, leaving too little time to process all the stories in the few hours before publication, so the paper was often late getting to its readers. Moreover, games played in Los Angeles sometimes did not interest fans in Chicago or New York, and vice versa, thus limiting the critical mass of readers. The newspaper was published at a loss for some time, but when the losses reached $100 million, the owner, Emilio Azcarraga (the founder of Grupo Televisa in Mexico), established and implemented a limit. VITRO affords another informative case and illustrates corporate refocusing. VITRO started operations in the USA by acquiring Anchor Glass Container Corporation, the largest American producer of glass, in 1989. VITRO paid $900 million for Anchor, which owned 22 plants and had secured 24 percent of the American market (Vitro, 1989). With this expansion, VITRO bolstered its Mexican blue-chip status, gained in reputation (It was the first Mexican multinational to take over a large American company), and boosted margins in its strongest businesses, chiefly glass-making. The luster lasted only until 1994,

when a major change occurred in the main client’s industry – soft drink bottling. Soft drink bottlers (particularly those bottling Coca-Cola) began shifting from glass containers to plastic containers. VITRO expanded its market to include beer and iced tea bottles, but the expansion failed to help it overcome the losses in bottles for soft drinks. It did not help matters either when the bottom dropped out of the iced tea business soon after. These events threw VITRO into a financial crisis. At the end of 1995, VITRO’s costs had increased by 17 per cent, its debts had piled up to $550 million, and the number of its plants was reduced to 14 (Vitro, 1996). Its situation was compounded by the fact that the company could not modernize technologically as pressure from the competition was forcing it to do (Duff and Phelps de Mexico, 1997). The situation led to the disincorporation of Anchor in 1996. This measure helped VITRO save $100 million in liabilities, increase its operational margins, and cut the cash flows used to finance Anchor’s liquidity (Vitro, 1997). To further ease the situation, VITRO took additional measures. It reduced the number of employees and eliminated or modified existing partnerships (such as those with Grupo Financiero Serfin, Vitrosa, Acero Porcelanizado, and Cydsa) to increase liquidity and reduce its financial burden, particularly its debt, by $300 million (Malkin et al., 1996). The restructuring improved the company’s financial condition; it also enabled the company to sharpen its focus and gain new capabilities. The firm strengthened its core competence and increased its export capabilities by $100 million annually (Vitro, 1998). As part of the experiment, which was considered costly and bitter by some company executives (Leal, 1999), VITRO gained valuable experience in the American market, where it recently formed new strategic alliances with several American companies such as Vitro Packaging, Crisa Corporation, VVP America, Unimin Corporation, Libbey Inc., Owen Corning Fiberglass, Vitro-American National, Vitro Plan, Vitro Flex, PQ Corporation Kimble, Ford Motor, General Electric, Monsanto, and Whirlpool (Vitro, 1999). Company executives are aware of the lessons learned. Most of the managers we interviewed agreed that a lack of guidance from the headquarters in Mexico City and a lack of integration among the subsidiaries are to be blamed for the failure in the acquisition of Anchor Glass. They assert that after the acquisition, VITRO executives in Mexico City remained in a wait-and-see posture leaving the US subsidiary to virtually stand alone in the new venture. Today, VITRO is building company-controlled networks

368

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

and relying on its new core competence, its ability to integrate foreign acquisitions into a balanced web of companies. After each acquisition, the company sets the tone on recruitment, training, teamwork, delegation, and decision-making. To exercise leadership the company uses integrated procedures and organizational culture all over the world. For some executives, however, VITRO’s decentralized strategy does not seem to be as successful as CEMEX’s more centralized approach.

companies, and 1.92 for US affiliates in general. The trade-role played depended on the geographical proximity of the country. Companies from distant exporting countries (e.g. South American countries) emphasized Latin American exports (85 percent of the corresponding total), whereas companies from close exporting countries (e.g. Caribbean countries) had a greater role in US exports to the home countries (65 percent of the corresponding total). The above trends are in line with FDI directed to developed countries, where investors fundamentally seek markets and assets in order to secure economies of scale, technological innovation, organizational learning, and strategic assets from countries that offer complementary capabilities (Chen and Chen, 1998; Dunning and Narula, 1996; Hunt, 2000; Nohria and Garcia-Pont, 1991). Sampled companies from Mexico were found to be mostly in manufacturing of industrial goods and to prefer partnerships (acquisitions, joint ventures, and strategic alliances) as the entry mode, mainly because partnerships lessen the risks involved in entering a new market and/or speed the process of acquiring the resources or assets needed to compete in the USA. Mexican companies formed partnerships in several states but concentrated somewhat in states that are geographically and culturally close to Mexico in order to overcome the cultural distance between Mexico and the USA. This strategy is used advantageously at the time of entry, not in subsequent stages. Almost all subsidiaries studied entered US markets in 19941995 or after, stressing the recency of their entry. In addition, this period coincides with the start of NAFTA (1994-1995), underscoring the importance of this cooperation agreement between the United States, Mexico, and Canada as a business opportunity in their decision to venture at this time FDI into the USA. To maintain their presence in US markets, Mexican companies investing in the USA: . used market positioning strategies that focus on quality in product and service or the combination of low price and high quality or high service; . performed market research before and after entering US markets; . made minor modifications to their products at the time of entrance; . applied Mexican prices in US markets at the time of entrance and afterwards in order to secure penetration and expansion of company products; . used external channels to distribute their products; and . preferred promotional methods (personal selling, public relations, discounts) to advertising.

Summary and conclusions In response to the proposed research questions, this study explored how and why Latin American companies enter, remain in or exit US markets. Consequently, we examined the characteristics of Latin American companies in terms of their financial, marketing and managerial strategies employed to enter, stay in, and/or leave US markets. We also studied how some companies used withdrawal strategies when it was no longer possible to sustain their presence in the USA. Background information about Latin American FDI in the USA was used to provide a framework that helps understand the entry, maintenance, and exit strategies of Latin American companies in the USA. Some tendencies were identified in the way Latin American foreign direct investment is channeled into the USA. Latin American companies have invested in the USA at a growing pace (18.5 percent per year), in spite of their small share of only 4.5 percent of all FDI. Investments grew even faster in some industries, particularly in petroleum (194 percent), retail (137 percent), insurance (118 percent), wholesale trade (87 percent), and real state (87 percent). Insurance (24 percent), petroleum (16 percent), and real state (11.5 percent) captured most investment in terms of volume. Moreover, assets of Latin American companies investing in the USA represent a world share four times higher (16.4 percent of all foreign assets in the USA) than their investment, which can be explained by their long-term presence in the USA, and gross product grew faster (25.5 percent annually in eight years) than the corresponding investment, a positive sign of gained efficiency. In examining trade trends, a significant use of intra-firm B-to-B trade was discovered. The subsidiaries of Latin American companies in the USA fulfill a primary role as trade intermediaries between the USA and the home country, with emphasis on US imports as compared to US exports. The ratio of US imports to US exports is 2.26 for US affiliates of Latin American

369

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

Latin American companies that left US markets either failed to achieve marketing objectives or became discouraged from remaining by a number of factors or barriers, mainly cultural differences, legal obstacles, political concerns, and economic downturns in the industry or the market. Occasionally, consolidation was also a factor in the decision to leave. Some companies, such as VITRO, left in one form (acquisition) and came back in another form (refocused company and new alliances). Today, VITRO is building companycontrolled networks and relying on its new core competence, its ability to integrate foreign partners into a balanced web of companies. Arguably, VITRO’s current strategies to stay in US markets are modern, comprehensive, and superior to previous strategies it used. Seeking markets and assets seem to be of paramount importance to Latin American companies in search of technological innovation and organizational learning. Moreover, remaining in competitive markets such as the US markets has been a challenge that many Latin American companies that possess the technological and marketing expertise are willing to take. Even though it was only partly shown, the procurement marketplace can no longer ignore the attention driven by the steadily increasing Hispanic buying power in the USA.

Limitations and future research The use of secondary data, limited samples and cases provide a wealth of information to detect patterns, explore strategy characteristics, and envisage a potential theory. However, they do not suffice to test hypotheses in order to explain the phenomenon under consideration. Future research should expand the samples to all or, at least, most Latin American companies investing in the USA, and formulate hypotheses regarding the reasons they invest in the USA and the strategies they use to enter, stay in or exit US markets. The patterns uncovered using Mexican companies may or may not resemble the patterns characterizing other Latin American companies; yet, they are symptomatic of large and mostly industrial companies investing in the USA. In addition, future studies should consider comparing Latin American FDI with European or Asian FDI in the USA in terms of both, their rationale and the strategies used to enter, remain in or exit US markets. Such comparisons will not only lead us to a better understanding of investors’ behavior around the world, but also explain the commonalities and differences of investment decisions across countries and continents.

References Aulakh, P.S., Kotabe, M. and Teegen, H. (2000), “Export strategies and performance of firms from emerging economies: evidence from Brazil, Chile and Mexico”, Academy of Management Journal, Vol. 43 No. 3, pp. 342-61. Bach, C.L. (2000), “US international transactions: fourth quarter and year”, Survey of Current Business, 1999, April, pp. 146-68. Briley, S.E., Morris, M.W. and Simonson, I. (2000), “Reasons as carriers of culture: dynamic versus dispositional models of cultural influence on decision making”, Journal of Consumer Research, Vol. 27, pp. 157-78. Caves, R.E. (1996), Multinational Enterprise and Economic Analysis, Cambridge University Press, Cambridge. CEMEX S.A. de C.V. (2000), Annual Report, Monterrey. Chen, H. and Chen, T.-J. (1998), “Foreign direct investment as a strategic linkage”, Thunderbird International Business Review, Vol. 40 No. 1, pp. 13-30. Chudowsky, D., Kosakoff, B.P., Lopez, A. and Garrido, C. (1999), Las Multinacionales Latinoamericanas: Sus Estrategias en un Mundo Globalizado, Fondo de Cultura Economica, Buenos Aires. Davidson, W.H. (1980), “The location of foreign direct investment activity: country characteristics and experience effects”, Journal of International Business Studies, Vol. 11 No. 2, pp. 9-22. Dolan, K.A. (1998), “Cyber-cement”, Forbes, Vol. 161 No. 12, pp. 60-1. Dombey, D. (1997), “Well-built success”, Industry Week, Vol. 246 No. 9, pp. 32-5. Domı´nguez, L.V. and Brenes, W. (1997), “The internationalization of Latin American enterprises and market liberalization in the Americas: a vital linkage”, Journal of Business Research, Vol. 38 No. 1, pp. 3-16. Dow, D. (2000), “A note on psychological distance and export market selection”, Journal of International Marketing, Vol. 8 No. 1, pp. 51-64. Duff and Phelps de Mexico S.A. de C.V. (1997), Vitro, S.A. Web Document. Dunning, J.H. and Narula, R. (1996), “The investment development path revisited: some emerging issues”, in Dunning, J.H. and Narula, R. (Eds), Foreign Direct Investment and Governments: Catalysts for Economic Restructuring, Routledge, London. Garrido, C. and Peres, W. (1998), “Big Latin American industrial companies and groups”, CEPAL Review, Vol. 66, December, pp. 129-50. Grosse, R. and Trevino, L. (1996), “Foreign direct investment in the United States: an analysis by country of origin”, Journal of International Business Studies, Vol. 27 No. 1, pp. 139-55. Hennart, J.F. and Reddy, S. (1997), “The choice between mergers/ acquisitions: the case of Japanese investors in the United States”, Strategic Management Journal, Vol. 18, pp. 1-12. Hoover (1998), Hoover’s Handbook of World Business, Hoover, Stanford, CA. Hunt, S.H. (2000), A General Theory of Competition: Resources, Competences, Productivity, Economic Growth, Sage Publications, Thousand Oaks, CA. Johanson, J. and Vahlne, J.E. (1977), “The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments”, Journal of International Business Studies, Vol. 8 No. 1, pp. 23-32. Johanson, J. and Weidershiem-Paul, F. (1975), “The internationalization process of the firm: four Swedish

370

Rationales and strategies

Journal of Business & Industrial Marketing

Arturo Z. Vasquez-Parraga, Reto Felix and Aberdeen Leila Borders

Volume 19 · Number 6 · 2004 · 359-371

cases”, Journal of Management Studies, Vol. 12, October, pp. 305-22. John, K. and Ofek, E. (1995), “Asset sales and the increase in focus”, Journal of Financial Economics, Vol. 37, pp. 105-26. Johnson, R.A. (1996), “Antecedents and outcomes of corporate refocusing”, Journal of Management, Vol. 22 No. 3, pp. 439-94. Kuada, J. and Sorensen, O. (2000), Internationalization of Companies from Developing Countries, International Business Press, Binghamton, NY. Leal, A. (1999), La Nueva Herejı´a de Vitro, Web Document. Lockett, A. and Thompson, S. (2001), “The resource-based view and economics”, Journal of Management, Vol. 27, pp. 723-54. Malkin, E., Zachary, S. and DeGeorge, R. (1996), “Fixing the cracks at Vitro”, Business Week, No. 3483, p. 129J. Markides, C.C. (1992), “Consequences of corporate refocusing”, Academy of Management Journal, Vol. 35, pp. 398-412. Millman, J. (1996), “Cementing Latin America”, Forbes, Vol. 4 No. 157, pp. 45-6. Nohria, N. and Garcia-Pont, C. (1991), “Global strategic linkages and industry structure”, Strategic Management Journal, Vol. 12, pp. 105-24. O’Grady, S. and Lane, H. (1996), “The psychic distance paradox”, Journal of International Business Studies, Vol. 27 No. 2, pp. 309-33. Papadopoulos, N. and Denis, J.E. (1988), “Inventory, taxonomy, and assessment of methods for international market selection”, International Marketing Review, Vol. 5 No. 3, pp. 38-51. Pedler, M., Burgoyne, J. and Boydell, T. (1991), The Learning Company: A Strategy for Sustainable Development, McGraw-Hill, London. Porter, M.E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York, NY. Porter, M.E. and Fuller, M.B. (1986), “Coalitions and global strategy”, in Porter, M.E. (Ed.), Competition in Global Industries, Harvard Business School Press, Boston, MA. Ricks, D.A. (1993), Blunders in International Business, Blackwell, Cambridge.

Salas-Porras, A. (1998), “The strategies pursued by Mexican firms in their efforts to become global players”, CEPAL Review, Vol. 65 August, pp. 133-53. Schlossberg, H. and Deford, G. (1992), “Blast media, ponder society’s priorities”, Marketing News, Vol. 26 No. 12, pp. 6-7. Scott Morton, F.M. (1999), “Entry decisions in the generic pharmaceutical industry”, Rand Journal of Economics, Vol. 30, pp. 421-40. Senge, P. (1990), The Fifth Discipline: The Art and Practice of the Learning Organization, Country Business, Doubleday, New York, NY. Singh, J. (1995), “Measurement issues in cross-national research”, Journal of International Business Studies, Vol. 26 No. 3, pp. 597-620. Thompson, S. (1999), “Takeovers, joint ventures and the acquisition of resources for diversification”, Scottish Journal of Political Economy, Vol. 46, pp. 303-18. US Census Bureau (2001), Census 2000 Redistricting Summary Table, Government Printing Office, Washington, DC. US Department of Commerce (1998), Survey of Current Business, June Issue, US Department of Commerce, Washington DC. US Department of Commerce (1999), Survey of Current Business, August, September, October, and November Issues, US Department of Commerce, Washington DC. US Department of Commerce (2000), Survey of Current Business, August, September, October, November and December Issues, US Department of Commerce, Washington DC. US Department of Commerce (2001), Survey of Current Business, August and September Issues, US Department of Commerce, Washington DC. US Department of Commerce (2002), Survey of Current Business, August and September Issues, US Department of Commerce, Washington DC. Vitro, S.A. de C.V. (1989), Informe Anual, Monterrey, Mexico. Vitro, S.A. de C.V. (1996), Informe Anual, Monterrey, Mexico. Vitro, S.A. de C.V. (1997), Informe Anual, Monterrey, Mexico. Vitro, S.A. de C.V. (1998), Informe Anual, Monterrey, Mexico. Vitro, S.A. de C.V. (1999), Informe Anual, Monterrey, Mexico.

371

An executive summary for managers and executives can be found at the end of this issue.

The use of online marketplaces for competitive advantage: a Latin American perspective

Introduction

Andrew J. Rohm Vishal Kashyap Thomas G. Brashear and George R. Milne .

The authors Andrew J. Rohm is an Assistant Professor, Marketing Group, College of Business Administration, Northeastern University, Boston, Massachusetts, USA. Vishal Kashyap is an Assisstant Professor of Marketing at Williams College of Business, Xavier University, Cincinnati, Ohio, USA. Thomas G. Brashear and George R. Milne are both Associate Professors of Marketing, at Isenberg School of Management, University of Massachusetts, Amherst, Massachusetts, USA.

Keywords Business-to-business marketing, Internet, Electronic commerce

Abstract The promise of B2B e-commerce had led to an explosion in the number of e-marketplaces as firms adopted a “launch and learn” strategy. However a cash crisis and continuing losses led to tremendous consolidation in these marketplaces. This scenario was mirrored in Latin America too. With the growing importance of B2B e-commerce worldwide, Latin American firms cannot ignore the competitive advantages that accrue by employing the Internet into their strategies. This paper presents a variety of decision models that small and medium enterprises can employ to integrate the Internet into their business decisions and thereby remain competitive.

Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · pp. 372-385 q Emerald Group Publishing Limited · ISSN 0885-8624 DOI 10.1108/08858620410556318

From a predominantly physical marketplace, the marketplace for products has grown to include an electronic marketplace (Varadarajan and Yadav, 2002). E-commerce and its enabling force, the Internet, have a crucial role to play in this growth. Despite the existence of different varieties of e-commerce, the two that are most important are business-to-consumer (B2C) and business-tobusiness (B2B) e-commerce. While B2C refers to the transfer of goods and services to the individual consumer, B2B e-commerce refers to the procurement, logistics and administrative processes that occur between firms (Gereffi, 2001). Early speculation had portrayed B2C as being the major benefactor of the internet but the importance of B2B e-commerce can be found in the creation of one exchange, Covisint. Developed by three automakers, General Motors, Ford and DaimlerChrysler, this exchange moved between one-quarter to one-half billion dollars in purchasing throughout the automobile commodity supply chain. That one B2B exchange overwhelmed the totality of B2C ecommerce and strategists began to realize that the B2B market is estimated to be six times larger than the B2C market (Business Week, 2000) and is expected to reach 2.7 trillion dollars in 2004 or by Gartner estimates, a worldwide total of $US 8.5 trillion. Online marketplaces are typically defined as an inter-organizational information system through which multiple buyers and sellers interact electronically to identify potential trading partners, select them and execute transactions (Grewal et al.., 2001; Choudhury et al.., 1998; Bakos, 1991). Such marketplaces allow buyers, sellers, independent, third parties and multi-firm consortiums to exchange information about prices and product offerings (Mahadevan, 2000). B2B electronic transactions have influenced the entire procurement process and supply chain management, including the flow and quality of information, negotiations, purchasing, invoicing, shipping and payment, among others. The nature of the Internet makes it easier for buyers and sellers to search, meet, compare prices and negotiate and thereby helps in reducing transaction costs (Berthon et al.., 2003). It enables a large number of buyers and suppliers to come together thus expanding the choices available to both buyers and sellers (Kaplan and Sawhney, 2000). Producers, buyers and suppliers benefit in different ways. For producers, the benefits of B2B

372

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

online marketplaces include lower administrative and transaction costs, reduction of inventories, and increased production flexibility due to just-intime delivery. For buyers, the Internet has reduced search costs, made prices more transparent and competitive, and facilitated more cooperation with suppliers. For suppliers, the Internet has expanded markets. However, the advantages of such marketplaces are not related only to low transaction or procurement costs. The proper strategy can turn an unstable, ill fitting e-commerce albatross into a marketplace that will provide a direct competitive advantage for firms. For firms, whether to develop an e-commerce component is not an option anymore, since any organization that wants to remain competitive must utilize the e-commerce capabilities that the Internet delivers (Porter, 2001). To fully realize the promise of the Internet in the business-to-business context, many firms used a “launch and learn” strategy and developed a broad range of online marketplaces to facilitate commercial dealings. These electronic marketplaces were developed with the possibility that such marketplaces might control trade in industries, with free-flowing venture capital and relatively low entry barriers. The days of “launch and learn” are over. A cash crisis brought about by continuing losses and a decline in venture capital led to a shakeout (Day et al.., 2003) and B2B e-marketplaces underwent a tremendous consolidation. The number of online marketplaces has dropped substantially from the 1,500+ marketplaces during the “launch and learn” days (Laudon and Traver, 2001). Some analysts predict that 90 percent of current online marketplaces will become bankrupt, merge or be acquired (Lichtenthal and Eliaz, 2003). This trend across the USA and Western Europe has also been seen in budding e-commerce markets such as Latin America, where many B2C and B2B Internet firms have failed over the past two years (IDC Latin America, 2002), where only two out of the nine hot Latin American B2B marketplaces listed in a 2001 Jupiter Research report (Jupiter Research, 2001) are active today. The survival guides for e-commerce have called for the creation of killer apps, becoming a onestop-shop, acting as a principal (BCG, 2000), creating a proprietary marketplace, restructuring the value chain, or building a consortium of other firms. The problem with most if not all of these recommendations is that alone these do not provide a stategic analaysis of organization markets, industries, internal capabilities nor the specific instance on when to use such approaches. Likewise, these recommendations do not take into account the extraordinary financial, technological,

human resource and reorganization demands. Additionally, small and medium size enterprises (SMEs) for the most part, do not have the capital or the market power to implement such systems, which makes these “one-size-fits-all” suggestions impractical for many of the small to medium firms. Another limitation of these general recommendations is that although the US markets are the largest users of Internet commerce, that position of eminence is eroding with the largest growth occuring in the Eurpean Union, Asian and Latin America. Due to the global nature of the Internet, the emergence of online marketplaces affords Latin American businesses the opportunity to expand the range of their exporting and importing activities as well as conduct business in a more efficient manner. Similar to the US market, the larger players such as the financial institutions and multi-national manufacturers are the largest investors in e-commerce but the SMEs that produce for domestic and export markets have more severe limitations on their ability to develop ecommerce technology. The importance of the SMEs in Latin America in B2B markets both internally and externally cannot be underestimated. These smaller firms are of critical concern to economic planners, developmental economists and governments throughout Latin America, because, even though there are large dominant firms throughout these markets, SMEs dominate the numbers as seen in Table I. B2B ecommerce among small, medium and mirco firms throughout Latin America is staggering. These firms work with the larger manufacturers as suppliers and are in tremendous need of ecommerce strategies to maintain their viability and support the efficiency of the entire commondity supply chain. Although there are various alternatives for SMEs, choosing the appropriate structure, the partners and capturing the added value of such marketplaces must be based on a strategic analysis of each company’s own characteristics and competencies as well as the broader industry characteristics and where each firm fits into the industry. An analysis of competencies, company value chains and industry Table I SMEs in Latin America

Argentina Brazil Chile Colombia Mexico Peru Venzuela

SME total

Medium

Small

Micro

393,083 1,049,063 154,851 290,727 742,690 202,497 223,024

11,912 93,145 4,223 8,783 26,390 5,114 6,738

55,587 413,977 131,858 240,955 606,970 176,929 189,334

393,083 1,542,06 154,851 290,727 742,690 202,497 223,024

Source: InfoAmericas (2000a)

373

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

value chains are important. Although there seem to be some similarities in trends across the global ecommerce marketspace, the understanding of these factors and the extension of this knowledge to SMEs in Latin America is very timely. According to Forrester Research’s projections, Latin America will reach hypergrowth in Internet commerce six to eight years behind the USA and Western Europe. Thus knowledge and strategies are necessary to the successful development of B2B ecommerce marketplaces among SMEs in Latin America. The purpose of this paper is to present an overview of B2B ecommerce marketplace opportunities and various strategic decisionmaking tools for small and medium enterprises to determine the appropriate fit of company and industry characteristics to the potential marketplace structures that are available. The paper starts with a brief overview of B2B ecommerce in Latin America. In the next section, we trace the evolution of online marketplaces and provide a brief review of online marketplaces. This is followed by an overview of frameworks that portrays the factors influencing the extent to which Latin American businesses employ B2B online marketplaces. Then, we discuss and provide examples of how Latin American businesses can gain competitive advantage from online marketplaces.

(Palacios, 2003). A United Nations (2003) report notes that B2B ecommerce volume is pushed upward by the enormous developments in Brazil for the most part and to a lesser extent, Argentina and Mexico as seen in Figure 1. Other statistics show that Mexico and Brazil account for more than 74 percent of Latin American B2B trade, and in 2000 Brazil reached US$1.7 billion of transaction volume, matching that of Mexico (Tigre, 2003). The most recent analysis shows that the size of the Brazilian B2B transactions was reported to be approaching $12 billion for the first quarter of 2003 (United Nations, 2003). Even with those numbers, many enterprises and industries as well as functions such as e-procurement, are still in the early stages of their development. The centralization of the vast majority of Latin American B2B ecommerce, suggests the tremendous unnetworked potential of the other countries and the smaller businesses. The large versus small company distinction is very relevant but also the location of the firms has a great deal to do with the differences in the extent of B2B importance versus B2C. Furthermore, the top 30 Brazilian companies control more than 90 percent of the B2B e-commerce, and as such also a significant share of Latin American ecommerce as a whole (United Nations, 2003). Location also affects the levels of B2B influence. In the larger markets, with more concentrated populations and better infrastructure, B2B is two to three times the size of B2C. But, in smaller Andean markets, infrastructure limitations dampen B2C growth and make B2B ecommerce potentially 20 to 30 times the size of B2C, thus emphasizing the extreme importance of B2B ecommerce in the large Latin American markets but even more so for the very small markets. For SME companies in Latin America, the nature of B2B exchange and the integration of ecommerce applications would lend itself to the development of more effective and efficient supply chain models (Gereffi, 2001) and in an effort to gain supply chain and efficiency gains, new and established companies have begun to look towards online marketplaces. InfoAmericas (2000a) reports that the top four factors for using ecommerce (in the order of importance), are: (1) price; (2) delivery time; (3) reliability (delivery and product matching); and (4) security of data transfer.

B2B e-commerce in Latin America Latin America is one of the fastest growing online markets – overall Internet usage in the region is forecast to grow 40 percent annually between 2000 and 2004 (BtoB, 2002) and studies estimate that 70 percent of Latin American e-commerce will be done through B2B exchanges by 2004 (IDC Latin America, 2002). Approximately 50 percent of companies in the Latin American region are now online, and 30 percent of these firms can perform financial transactions over the Internet (IDC Latin America, 2002). Although the massive shakeout of e-commerce sites has sent tremors throughout the market, B2B e-commerce is growing again in Latin America and a second round of Internet start-ups, fuelled by a desire to stake a claim in the region’s businesses, has taken off (Info Americas, 2002), and B2B volume is expected to exceeed $58 billion by the end of 2004 and to account for approximately 88 percent of the overall e-commerce volume in Latin America. In 2000, B2B e-commerce accounted for approximately 90 to 97 percent of e-commerce in Argentina (92 percent), Brazil (90 percent), Chile (94 percent), Mexico (96 percent) and Venezuela (97 percent)

Reports of significant efficiency gains are beginning to emerge from ecommerce activity with Avings Grupo Techint from Argentina reports savings between 9 and 16 percent. Telmex the dominant Mexican telecommunications firm

374

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

Figure 1 E-commerce distribution in Latin America, 2001 and 2004 (in billions)

reports savings close to 20 percent on purchased made through the Eficentrum marketplace. But, such gains on productivity and savings are not sufficient for small and medium size enterprises to justify the investment in proprietary systems. Large companies also have the power the push their suppliers to use their marketplaces but smaller firms cannot force their larger suppliers to integrate. This places smaller firms at a disadvantage with regard to ensuring usage of their invested proprietary systems. Tigre (2000) finds that the pattern and use of the internet differs dramatically between large and small firms. Smaller firms are in the early stages of use of the Internet while in the larger firms use has evolved to a high level of transactions. In 2000, almost all of the large enterprises in Argentina had Internet access but only about 60 percent of small and medium enterprises (Orton, 2000). As reported in Table II, Latin American companies with more than $100 million in sales are much more integrated than companies below $100 million in purchases. Of the larger companies, 38 percent reported being about halfway integrated or better, to only 19 percent of responding firms in the smaller category. The report also found that larger

Table II Latin American e-procurement readiness by business size

Large > 250 Medium < 100-249 > Small < 5-99 > Could do ERP*/e-procurement integration Source: InfoAmerica (2002)

Argentina

Brazil

Mexico

560 8,045 85,679

8,729 18,733 771, 325

3,456 9,494 290,786

923

4,576

1,739

companies have the ability to contain their costs more easily than smaller firms. Size is also a key factor in the ability of suppliers or buyers to participant in online exchange. Across all markets, the readiness and capabilities are determined both by the institutional environment and corporate readiness. Economic liberalization and government focus on developing a more network ready infrastructure has been evolving over the past 20 years. Liberalization and the opening of markets has made the focus on SMEs even more important as free trade in Latin American economies in the 1980s and 1990s has led to a massive shake-out of small and mid-size firms with approximately 40 percent of these firms failing between 1995-2000 (InfoAmericas, 2000b) but the numbers are still staggering as reported in Figure 1. The survivors are mainly suppliers for the large domestic firms and multinationals. Therefore the integration of the SME supply chains with large firms and the coordination of SME inbound supply chains will focus on e-commerce more and more (Gereffi, 2001). The limitations in developing and emerging markets are typically infrastructure, access, institutional support and diffusion. Haley (2002) in a study of emerging and developing economies notes that the limitations go beyond the nature of the industry. An institutional environment that facilitates integrity is critical to the development of e-commerce (Oxley and Yeung, 2001). Limitations include the lack of connectability, infrastructure limitations and the lack of a supporting service infrastructure development. As seen in Table III, these limitations exist in Latin America too but to a lesser degree as firms have adopted and begun to focus on e-commerce.

375

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

Table III Success factor

are available and in some cases in use in Latin America.

Latin America status (as of 2000)

Computer penetration Internet connection Payment method Delivery Average purchase Border crossing

Buyer-seller relationships

65-90 percent of mid size firms purchasing departments have a computer 50-70 percent of mid-size firms’ purchasing departments have access to the Internet Most suppliers are willing to establish a direct payment system with regular customers Business in large and mid-sized cities are covered by all courier networks. COD is limited $1,500-3,000 USD depending on industry. Delivery may be free of charge on large orders Importing businesses work with their own customs brokers to facilitate entry. Almost all mid-large business import some products Buyers often switch to online purchasing because their traditional supplier modernized first

Source: Adapted from www.infoamericas.com (March, 2000)

Additional studies support that assertion. According to the Networked Readiness Index for 2003-2004, Chile (32), Brazil (39) and Mexico (44) are among the top 50 with regard to each countries relative network environment, readiness and usage (Dutta and Jain, 2003). Institutional change throughout Latin America has also been the driver of e-commerce growth. Examples include Mexico’s evolving legal and regulatory framework for e-commerce transactions which was initially passed in December 1999. This package of reforms covered electronic documents, signatures and legal recognition with the exception of digital invoices (Palacios, 2003). Tigre (2003) notes that two government policies have affected the diffusion of the Internet in Brazil, the Telecommunicaitons Universalization Fund (FUST) and the Br@gov program which is focused on increasing Internet use in information and services, procurement and tax collection. All three are structural changes that add credibility to the system. The B2B e-commerce market in Latin America is exploding. Larger markets dominate the levels of trade but that supports the need to establish more networks of suppliers and buyers across Latin America as well as supports the fact that smaller and medium enterprises need to develop online marketplaces and take advantage of the growing opportunities. As suggested earlier, Latin American firms must avoid the “launch and learn” philosophy of the early years of B2B ecommerce. They must adopt strategic decision models based on their individual capabilities and value chains, as well as look at the industry supply chains and evaluate their role in the value creation. The following sections provide an overview of factors than suggest further strategic analysis as well as delineate the various forms of e-marketplaces that

Factors that affect the use of online marketplaces While an array of typologies exists to classify online marketplaces, certain specific factors favor the use of electronic marketplaces in the B2B arena (Klein and Quelch, 1997). These factors are common to different types of online marketplaces and are relevant to such marketplaces everywhere in the world. We propose that these are also the factors that would affect the functioning of e-marketplaces in Latin America. Inefficiencies in traditional distribution channels often lead to buyers and sellers having difficulty in locating each other. As a result the prices paid are not optimal for both the parties. A mid-size dealer in Argentina can now directly source from a manufacturer in Brazil rather than going through a national distributor in Argentina. An increase in the efficiency of the distribution channels can lead to a disintermediation and reduce costs substantially. This benefits both buyers and sellers. In Latin America, infrastructure limited the manageability of supply chains within and across borders (Jupiter Research, 2001). Market fragmentation is another important factor that is relevant to the establishment of electronic marketplaces. Markets with geographically dispersed buyers are often found to be operating sub-optimally in terms of transaction costs which are often defined as the costs of running the system and include such costs such as the drafting and the negotiating of contracts, and the monitoring and the enforcing of agreements (Rindfleisch and Heide, 1997). Transaction costs are thus the costs other than those of price. The different types of transaction costs that are affected by the migration of procurement processes to online marketplaces are of two types (Berthon et al., 2003). One is related to the coordination of producers and customers (search costs, information costs, bargaining costs and decision costs) and the other is related to the motivation of producers and customers by achieving information symmetry (policing costs and enforcement costs). Patino (2001) suggests that many large industries in Latin America are fragmented including ground transportation and other industries have been mentioned as fragmented including office supplies, retailing, and printing. The third factor that is important to the establishment of online marketplaces is the existence of minimum scale barriers. In traditional

376

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

markets, smaller manufacturers may be left out of channels that offer economies of scale advantages to larger manufacturers as well as exclusive distribution contracts. There may also be smaller customers who are not offered normal quantity discounts on account of their small size (Klein and Quelch, 1997). However, small firms can get certain advantages as well as a 15 to 25 percent reduction on prices in online marketplaces than those that would have been negotiated by the business itself (Lichtenthal and Eliaz, 2003). Entry barriers are removed in electronic marketplaces. This has been seen in Latin markets where reverse auctions and spot sourcing are proving to be beneficial to small and medium size firms. Reverse auctions are the fastest-growing segment in Latin America where firms with limited capital can participate with no up-front costs (InfoAmericas, 2002). Commodity-style products that have well known technical specifications, manufacturer brands that can be easily compared with regards to prices and products that do not require substantial after sales service are especially suitable for electronic marketplaces. This is evidenced by the kind of products that are sold in B2B marketplaces that are required for manufacturing as well as MRO operations. Coffee, cotton, sugar, minerals and oil are examples of the various commodities. Short-life cycle products lead to large quantities of obsolete and discontinued items. In such cases, customers in international markets may find it difficult to find parts for products that have been launched after the US launches.

the trading volume even further. However that did not happen and the general result of the proliferation phase were simple online markets that varied in functionality and focus as such markets tried to leverage their assets. Online markets in the proliferation phase have low transaction volumes and a low number of active participants. The next phase in the development of electronic markets is the phase of expansion where firms start realizing the importance of strategies to attract participants and achieving economies of scale with an expanded market scope. As a result of expansion, a set of e-markets with relatively similar functionality and services develop. Such markets either compete directly for the same participants or compete for overlapping participants in the neighboring markets. Once participants grow more comfortable with online markets and as the functionality of such markets expand, the network effect starts pulling participants to the largest market. As the different markets achieve critical mass they look to consolidate by absorbing other online markets that compete with it. While such markets can grow, their competitors will need to look for alternative strategies in order to survive. In early 2001 this scenario was evident when many start-up marketplaces begin running out of cash. In an effort to survive, they opted to be acquired by other marketplaces (Day et al., 2003). This is the phase of consolidation. Analysts are now looking at the next phase of online B2B marketplaces and view collaboration as the near future of B2B e-commerce. The main advantage of B2B e-commerce does not lie in lower prices since easier access to pricing information now gives all businesses the option to buy at lower prices (Bloch and Catfolis, 2001). The cardinal value that B2B online marketplaces will help create will be related to collaboration activities between firms that such marketplaces enable (BCG, 2000). The shakeout in online marketplaces and the consolidation following the shakeout implies that some smaller marketplaces will survive through partnerships. In addition larger marketplaces may find it difficult to remove the well-established marketplaces. As a result more marketplaces will look at increasing collaboration between them for increased efficiency and flexibility. This is also a way of increasing competitive advantage. Collaboration will thus lead to an increase in the competitive advantage of firms.

The evolution of online marketplaces Analysts note that the B2B marketspace itself has and will go through different phases of evolution. These phases in the evolution of the B2B e-marketspace can be sequentially termed: (1) proliferation; (2) expansion; (3) consolidation; and (4) collaboration (Accenture, 2000). The proliferation phase of B2B online marketspace development is characterized by a large number of new online markets. This was the phase that was observed in the initial years of B2B e-commerce as numerous firms rushed to set up online marketplaces with the belief that an early-mover advantage would secure the firms’ position in the marketspace due to a network effect. The network effect implies that once a critical volume of trading is achieved in a market, the volume makes the market more attractive to potential participants who then trade through the market and increase

Review of online market places There is a confusing variety of online marketplaces available today and any classification scheme has

377

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

to take into account various factors. Usually online marketplaces are sponsored and maintained by market makers whose primary function is to bring buyers and sellers together in a marketspace (Klein and Quelch, 1997). For purposes of classification, we consider a typology which uses buying behavior as the classification criteria offered by Kaplan and Sawhney (2000) and seen in Figure 2. Using buying behavior as the criteria implies that all generally classified online marketplaces can be applied to this classification (Skjott-Larsen et al., 2003). The authors make an important distinction between what products and inputs do businesses buy and how they buy these products and inputs. Businesses buy different products and services that can be classified as indirect or operating inputs and direct or manufacturing inputs. Operating inputs are the goods that are not directly used in the product or the production process. Often called maintenance, repair and operation (MRO) goods, such goods include office supplies, spare parts, airline tickets and services that are used by different industries. As a result they tend to be more “generalist” and can be procured from horizontal marketplaces that can serve a wide variety of industries. Manufacturing inputs are the raw materials and components that can directly go into the product or the production process. Since these goods vary across industries, they are bought from industry-specific or vertical suppliers. The second distinction of how companies buy refer to sourcing strategies where companies can engage in either strategic or contract sourcing or spot sourcing. Strategic or contract sourcing involves long-term written agreements to purchase specified products, with agreed on terms and quality, for an extended period of time. Spot purchasing, on the other hand, involves the purchase of goods based on immediate needs in larger marketplaces that involve many suppliers (Laudon and Traver, 2001). The more powerful market makers’ decision on how to compete is more dependent on corporate strategy and not completely financial. For small and medium size firms, the decisions are both financial and must also take into account the forces

which influence industry structure (Porter, 2001). Porter blames much of the reason for the collapse of many e-commerce forays can be traced to a lack of strategic planning and truly understanding how the Internet can compliment or leverage a company’s essential competencies.

Overview of a model of online marketplaces Kaplan and Sawhney (2000) classify online market places into four categories, namely: (1) MRO hubs; (2) yield managers; (3) exchanges; and (4) catalogues (Figure 2). MRO hubs, also known as e-procurement marketplaces, are horizontal markets that connect hundreds of buyers and sellers through independently owned intermediaries for the longterm purchasing of MRO or indirect goods. Yield managers or e-distributors are horizontal marketplaces that offer industrial customers a single source from which to order indirect goods on an as-needed “spot” basis. Exchanges are vertical markets that enable purchasing managers to make spot purchases of required manufacturing inputs. Finally, catalog hubs or industry consortia are vertical markets that enable buyers to purchase direct inputs of both goods and services from a limited set of invited participants on a long-term, contractual basis. These four different kinds of online marketplaces thus differ along three main characteristics: (1) the kind of input bought (manufacturing vs operating); (2) the way in which these inputs are procured (systematic sourcing vs spot sourcing); and (3) the scope of the markets (horizontal vs vertical).

Figure 2 Kaplan and Sawhney’s framework

378

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

In the next section, we discuss ways in which several Latin American firms have already undertaken efforts to gain competitive advantage through the development of B2B online marketplaces. In this discussion, we draw on Kaplan and Sawhney (2000) classifications of online marketplaces shown in Figure 2. In some cases, these “case studies” do not represent pure types of the classification; some online marketplaces may exist in multiple quadrants of Figure 2. Such purity is hard to maintain with the constant evolution of B2B online marketplaces.

marketplaces that seek to connect buyers of direct inputs with suppliers. Typically, B2B exchanges operate in vertical markets where large manufacturers or producers seek outside sources for goods or services for spot purchases. Esteel.com is an example of a widely known B2B exchange operating in the USA. However, independently-owned B2B exchanges have in large part failed because suppliers are put at a disadvantage because the nature of exchanges is that many suppliers bid against each other, in effect driving down profit margins; hence, B2B exchanges suffered from a dearth of suppliers (Laudon and Traver, 2001).

E-distributors Because of the vast cultural, economic, and political differences across Latin American markets, the development of e-distributors serving these markets may be an important step towards leveraging business resources and partnership opportunities in the region. E-distributors provide a single source for online sales of indirect inputs (both goods and services) on a spot, or as-needed, basis (Laudon and Traver, 2001). E-distributors are essentially electronic catalogs that help business across all types of industries buy supplies on a spot basis. An example of this type of online market place in the USA is staples.com. Typically, e-distributors operate in horizontal markets where they offer different products from numerous suppliers. However, in some cases, e-distributors may serve vertical markets – for instance, in the case of B2B Ecuador. B2B Ecuador works with Isabelle Escargots, an Ecuadorian firm specializing in exporting live as well as frozen escargots worldwide from South America (www.isabelleescargots.com). By developing a net marketplace for their escargots products, Isabelle Escargots has gained access to new wholesale and restaurant markets. In another example, SED International, a distributor of computer hardware and wireless communications components, opened operations in Columbia, Brazil, and Argentina. In order to enhance its value as a distributor in the USA and Latin American regions, SED recently established its e-store, an online marketplace that provides its direct customers as well as value-added resellers expanded customer service, Web hosting, and warehousing operations. One area of particular importance to the Latin American market is in computer asset recovery services, in which SED, through its E-Store channel, will assist companies in re-furbishing and reselling excess computer products (Cirillo, 2001). B2B exchanges B2B exchanges exist to facilitate buying and selling between partners and are characterized as online

E-procurement E-procurement marketplaces act as conduits between buyers and suppliers for purchases and long-term sourcing of indirect goods. The primary difference between an e-procurement organization and an e-distributor is that the former places a greater emphasis on long-term purchasing and supply chain management processes rather than one-time or as-needed purchases (Laudon and Traver, 2001). E-procurement is perhaps the most wide-spread type of B2B net marketplace in Latin America. In the past, domestic firms competing in Latin American markets have been limited with regard to purchasing power by their size and scope. Recently, several organizations have emerged whose role is to centralize purchasing of indirect goods online for partner firms through the Internet. E-procurement functions include supplier identification, electronic catalog management and hosting, forward and reverse auctions, and contract management. Benefits to these partner firms participating in e-procurement marketplaces include reduced prices for products and services purchased, shortened sourcing times, lower administrative costs, a broader ranges of goods available to the partner, and greater efficiency in the purchasing process. One Latin American firm competing in e-procurement marketplace is Latinexus, a joint venture of Mexican cement company Cemex and industrial conglomerate Alfa. Based in Mexico, Latinexus has expanded its procurement systems to major retailers and suppliers in both the Latin American and US markets and added value-added services in logistics, tax and tariff issues, and financing areas (Latinexus, 2002) to assist its partners in working through tangential issues related to procurement. For Cemex, based in Mexico with additional Latin American operations in Costa Rica, Dominican Republic, Panama, and Venezuela, its e-procurement systems have helped the firm streamlining its purchasing process. Whereas its purchasing process used to be largely paper-based, Cemex over 138 local and global

379

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

suppliers provide and maintain catalog information in a standard format. For Alfa, a Mexican industrial conglomerate in the petrochemical, steel, processed foods, auto parts, and telecommunications industries, management objectives were to increase efficiencies and savings in the procurement process (KPMG, 2002). Under Alfa’s current system, indirect goods and services purchases – approximately US$600 annually – were fragmented and handled by independent business units. Alfa’s e-procurement system was developed to allow the firm to benefit from volume purchasing and discounts across its five business units. Since this effort was one of the first of its kind in Mexico, Alfa management also initiated a supplier training program, including online catalog development assistance. While firms such as Latinexus concentrate on indirect goods and servicing sourcing, Exiros, a spin-off of Italian-Argentine steel maker Techint, connects global operations in Argentina, Brazil, Mexico, and Italy with online regional procurement systems for both direct industrial and indirect supplies (Exiros, 2002). Instituting e-procurement processes has enabled both Cemex and Techint greater demand- and supply-side access to new markets, the potential for reduced transaction and administrative costs, and overall increased efficiency in the supply chain management process. Another example of e-procurement in the Latin American marketplace is Eficentrum. Eficentrum has helped Mexico’s Grupo Carso, Telmex, and America Moviles to leverage increased purchasing volume with an expanded set of suppliers. Its purpose is to integrate their spot purchasing activities with their goods and service suppliers and is expanding to include horizontal sourcing and e-procurement for the automotive, computer equipment, industrial and paper products, electronic goods, uniforms, paints, and industrial security products categories (Business News Americas, 2002a). Eficentrum’s e-procurement system has reported savings of up to 20 percent on its firms purchases (Brown and Estevez, 2001) – for instance, Mexican telephone company Telmex averages 20 percent savings on indirect goods such as office supplies.

industry, Covisint is major consortium example linking large automotive manufacturers with a defined supplier base. One important distinguishing factor between consortia and exchanges is that consortia emphasize long-term partnerships rather than specific transactions and transaction-related costs. B2B consortiums offer numerous advantages to producers as well as suppliers. For consortia manufacturers, potential benefits include reduced spending and expenses through improved demand projections, reduced order errors and streamlined supply chain operations, lower purchasing costs, the ability to more efficiently target households with relevant promotional incentives. On the supply side, benefits may include better supplier integration with key manufacturers and improved demand planning and logistics and inventory management. Also, consortiums may allow suppliers and retailers to forge closer relationships with manufacturers. While forecasts for overall B2B net marketplace activity in Latin America indicate growth, there are few initiatives at this point focused on the consumer products industry. Transora, a Chicagobased Net marketplace jointly owned by consumer goods giants Coca-Cola, Unilever, and Nestle´, among others, was the first Net marketplace to enter the $85 million South American consumer products industry (Transora, 2002). In Latin Amercian, Transora is a joint venture between 56 consumer goods companies in Brazil and Mexico and projects revenues to reach US$ 10 million in 2002, with plans to open operations in Chile and Venezuela in late 2002 (Business News Americas, 2002b). Transora’s advantage in South America is that it is the first entrant in the consumer goods industry and it has brought together some of the major players within the Latin American consumer goods market. B2B consortia such as Transora stand to succeed in the Latin American market because they provide an efficient mechanism with which to facilitate communication and information flow, lower procurement costs and sourcing times, enhance supply chain management, and reduce non-value added costs (e.g. paperwork and travel). The overarching benefit for Latin American firms may be the enhanced ability to collaborate with other enterprises. Consortia partners and suppliers may more efficiently provide and share valueadded information that can aid business planning and overall competitiveness.

B2B consortia B2B consortia are company- or industry-owned organizations serving vertical markets that enable consortia partners to buy direct inputs from an “invited” set of suppliers (Laudon and Traver, 2001). Consortia are marketplaces owned by industry participants that help buyers purchase inputs to the manufacturing process from a select number of qualified suppliers. In the automobile

Gaining competitive advantage from Net marketplaces While B2B online marketplaces may offer cost savings in the form of low procurement costs, that

380

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

is not the only reason why such marketplaces are important. A substantial proportion of any procurement savings will ultimately be passed on to the end-consumer. The more important effect of B2B online marketplaces will be on the competitive advantage of firms (BCG, 2000). The B2B marketspace will make different kinds of sophisticated collaboration between companies possible, the last phase in the evolution of online marketplaces. Marketplaces such as PaperExchange.com and Impresses have already indulged in such collaboration. Such collaboration is the result of a desire to achieve sustainable competitive advantages in a highly competitive marketplace. For competitive advantage to be sustainable, marketplaces have to operate at lower costs, command a premium price or indulge in a mixture of both. The ways to do so would be by either doing the same things as a firm’s competitors but doing them better or by doing things in ways that delivers unique values to customers (Porter, 2001). The former is called operational effectiveness while the latter is known as strategic positioning. The Internet is a powerful tool for enhancing operational effectiveness but sustained competitive advantage is only possible when a marketplace can sustain higher levels of operational effectiveness than its competitors. However the openness of the Internet and advances in software and applications development tools means that companies can develop, design and copy best practices very quickly. This implies that it is very hard for a firm to stay ahead of its rivals and such best practice competition can lead to convergence where many marketplaces can end up doing the same things. As a result operational advantages are increasingly harder to sustain. In such a situation strategic positioning becomes increasingly important as a means of sustaining competitive advantages. Strategy goes beyond developing best practices. It involves developing activities in a value chain that would enable the marketplace to offer unique value in the delivery of services to their customers. Integrating the Internet into a firm’s supply chain and its value chain can open up opportunities for collaboration, thereby increasing the competitive advantage of firms and marketplaces.

online marketplaces provide opportunities to create value by improving supply chain effectiveness and efficiency through new technologies. Utilizing the right combination of B2B marketplaces in the value chain can help firms to gain significant value and be a source of competitive advantage. The benefits of such a combination can accrue to both customers and suppliers. Value chains consist of a number of steps and in each of these steps there is potential for the use of different B2B marketplaces. The most successful firms will create some sort of portfolio that will enable them to use a combination of online marketplaces rather than any one marketplace. An example from the apparel industry can help to illustrate the variety of marketplaces that can be used in a value chain. The apparel industry’s value chain consists of a number of steps as shown in Figure 3. Each of these steps can be supported by different marketplaces. We consider three such marketplaces – third party marketplaces, industry consortia and private marketplaces. Third-party marketplaces, which focus on narrow functions, will most likely cater to small apparel retailers as well as larger retailers. Smaller retailers cannot afford custom solutions but want to conduct business with an efficient network of suppliers. Larger retailers that need specific services or find capacity outside their traditional networks are also likely to use these marketplaces. TexWatch, Fabria and Tradeweave are examples of such third-party marketplaces in the apparel industry. Consortium-backed marketplaces are owned by the leading participants in an industry but are open to everybody. While the leading participants make capital investments, other participants pay either transaction or membership fees. Such markets are used for commodity purchases such as indirect goods but they also use Internet technologies too aggregate across multiple retailers and can be used for sourcing and procurement. Worldwide Retail exchange and GlobalNet Exchange are among the early consortia in the apparel industry. Finally, the large retailers develop private marketplaces for internal use only. These are also likely to be used by the retailers in the future and will take on many shapes and forms depending on the scale, category mix, and the most significant challenges in the retailer’s supply chains. Some of the early examples of private marketplaces are Freeborders and The Thread. The variety of marketplaces in the previous example indicates that there is the opportunity for various marketplaces in different stages of the industry value chain. Depending on their position in the value chain, firms can benefit by using a variety of marketplaces. While buyers can employ

The value chain portfolio The value chain is a model that describes a series of value-adding activities connecting a company’s supply side comprising of raw materials, inbound logistics and production processes with its demand side comprised of outbound logistics, marketing and sales (Rayport and Sviokla, 1995). Firms must pay attention to how their companies create value in both the physical and the virtual world and

381

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

Figure 3 The value chain portfolio

different marketplaces for different stages of the value chain, suppliers can find different niches in the value chain to participate in thereby improving profitability. The value chain thereby provides a useful way for both buyers and suppliers to utilize a portfolio approach as a means of participating in different B2B marketplaces. Such a portfolio approach, when integrated into the competitive strategy of firms, will contribute to the competitive advantage of firms. Power and capability – a decision framework Given the benefits and advantages of electronic marketplaces, not utilizing the potential of B2B e-commerce might differentiate winners from losers. While the value-chain portfolio might be one way of exploring the possibilities of B2B ecommerce, firms can look to their own capabilities before deciding on using B2B e-commerce as a strategy to gain competitive advantage. Two potential considerations for a firm exploring the possibility of integrating B2B e-commerce in their array of strategic tools are the costs and the potential effort. Internet technologies such as XML are being widely adopted, obviating the need to reconfigure proprietary ordering systems and to create new procurement and logistical protocols when changing suppliers (Porter, 2001). In spite of this standardization, customer requirements, terminologies and part requirements can vary and this might imply that firms may have to join different marketplaces. However, given the potential benefits, firms have certain options in joining different marketplaces. These options depend on the information technology capabilities of the firm and the power that the marketplace welds in the supply chain. In making the important decision of participating in electronic marketplaces, firms have the option to either join an existing marketplace or build e-commerce capabilities of their own. In

developing e-commerce capabilities, the challenge that firms face is to acquire the systems and technical proficiency required for on-line interaction. In addition, organizations with prior experience in serving customers online are in a better position to overcome the organizational cultural and political hurdles in developing such capabilities. Moreover, the power that organizations weld in supply chains can also play an important role in determining their decision to either build or join existing marketplaces. For instance, a marketplace like Covisint, developed by the leading automobile manufacturers, reflects both the supply chain power and the technological capabilities that these firms have. The strengths garnered by the merging of these capabilities make it more advantageous for these firms to develop their own marketplace. Once a company has considered the dual factors of IT capabilities and supply chain power, a simple framework as seen in Figure 4, can often suggest the best way to proceed. In certain industries, organizations have the IT capabilities to develop Figure 4 A decision framework for B2B e-commerce

382

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

an electronic marketplace of their own. However, the firms that have the required IT capabilities but not the supply chain power may benefit by joining an existing marketplace. Firms that have the supply chain power in the offline environment but not the required necessary IT skills may not be in a position to launch their own marketplaces. In such cases, these firms could build some sort of a portal that would cost less to build but would enable these firms to build an online presence and capitalize on the firm’s brand name. Finally, firms that have little or no power in the supply chain and also lack the necessary IT capabilities need to establish an online presence to stay competitive. These firms need not be at a competitive disadvantage and can use intermediaries to gain online visibility. The use of such intermediaries can help such firms to build online capabilities, gain experience and orient the company towards integrating IT and internet capabilities in their competitive strategy. The objectives of Latin American firms in developing B2B online marketplaces are numerous and include the ability to locate and do business with domestic as well as non-domestic buyers or sellers (e.g. increase access to Western markets), track the flow of goods across borders, and add efficiency to supply chain processes and activities. Particularly in the Latin American market, a key opportunity with net marketplaces lies in the ability to tap into the worldwide online export market, which is forecast to reach $1.4 trillion by 2004 and of which e-marketplaces are projected to account for 30 percent of the total volume (Levaux, 2001). Online marketplaces in Latin American markets may also in the future seek to add value by advising on legal issues on both the demand and supply side, because violations of tariff laws can be costly. In emerging B2B markets such as Latin America, the frameworks discussed above are important in that they offer guidance to firms seeking to position themselves competitively in a dynamic and turbulent economic and political environment.

Marketplace efficiency can be achieved in various forms but the above analyses have not mentioned the matching of efficiency gain to the context of the exchange or the exchange partner. Jap and Mohr (2002) build a decision model based on the relational or transactional nature of the business exchange. Their model proposes three different forms of Web efficiency factors: dynamic pricing, increased reach and information sharing. Dynamic pricing allows firms to constantly update prices given market conditions. The use of e-marketplaces allows companies to monitor the demand of a product and to change prices almost simultaneously. The dynamic nature of the pricing allows companies to capture the added value as demand increases or to move their inventory if demand falls substantially. E-marketplaces, with their omnipresent virtual location, allows firms to be available to customers who they may not be able to reach through a traditional channel or distribution for either products or information. Traditional boundaries and limitations on access are almost non-existent as buyers and sellers can access each other from a multitude of fixed or mobile locations. Information sharing through connected networks, allows all member of the supply chain to access information from their direct exchange partner or from more distant members of the networked supply chain. This access and sharing of information allows members of the commodity chain to anticipate upstream or downstream contingencies as well as changes to procurement lots, delivery times and specifications sooner, rather than later, and allows members to adjust their operations more dynamically. Information flows enhance the productivity and efficiency of the supply chain. These three efficiencies, dynamic pricing, increased reach and information sharing, must be matched to the context or nature of the exchange relationship. Companies must look at both the context or type of relationship and the form of efficiency that they gain from the use of electronic marketplaces. Relational exchanges are ongoing, long-term relationships which have high levels of interaction, norm development and high levels of communication. These exchanges are typically not arms-length negotiations but carry a history of the relationship. Transactional contexts or exchanges tend to be “one shot” deals where there is no anticipation or expectation of a continued relationship other than that which occurs at the time of exchange. These two forms of exchange carry different expectations regarding the communications, interactions and expectations of continuity. The wrong combination of efficiency and context may lead to negative results as seen in Table IV. For example, dynamic pricing in

Matching efficiency and context The previous discussions have made explicit mention of efficiency as one of the key advantages of using electronic marketplaces. In the analysis of different marketplaces and the look at decision tools for strategic advantage, the capabilities of the firm and the nature of the industry have been important criteria to examine. But analysis of the value chains, the industry commodity chain or the power relationships among participants as decision tools tends to overlook the nature of the exchange relationship with the users of the marketplace.

383

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

Table IV Matching efficiency and context Web efficiency Information sharing Increased reach Dynamic pricing

Exchange context Relational Transactional Success Success Failure

Failure Failure Success

Source: Adapted from Jap and Mohr (2002)

capabilities and capacities that are peculiar to each firm, thinking along the lines of these frameworks are an important first step towards achieving B2B ecommerce capabilities.

References

relational exchanges may lead to failure in that it lowers customer service, has downward pressure on relationship quality and may raise channel resistance (Jap and Mohr, 2002). In a transaction context, dynamic pricing may increase customer service, reduce channel resistance and increase both cooperation and relationship quality.

Conclusion B2B e-marketplaces present an opportunity for growth to various Latin American SMEs. With the collapsing of trade barriers in the region, such marketplaces enable these small firms to significantly extend their reach beyond the borders of their own countries. Trading across different cultures, economies and languages becomes a reality with the Internet. However the promise of the Internet brings with certain difficulties as well. Logistics (such as shipping and order tracking), legal environments, infrastructure, and financial factors remain a concern for Latin American companies. In addition, slow Internet adoption rates and competition from other firms are a distinct possibility. Against the backdrop of these difficulties lie certain advantages. As an example, the underdeveloped technological infrastructure in the region has the potential to enable the region to be at the forefront of wireless technologies. Given the projections and potential of B2B e-commerce in Latin America, it becomes evident that SMEs in the region cannot afford to miss out on the numerous opportunities that the Internet offers in terms of ecommerce. Missing out on this wave of e-commerce may very well differentiate the winners from the losers. However, SMEs are not in a position to employ a “launch and learn” approach to enjoying the benefits of B2B ecommerce. The strategic decision models presented in this paper are important decision tools for SME firms that are exploring the possibility of integrating the Internet into their business decisions. Firms can use these frameworks to understand the nature of their capabilities and make a decision on the basis of these frameworks. While we understand that the decisions of different firms are based on the

Accenture (2000), “Developmental phases of the B2B emarket space” Research note, 1 June, available at: www.accenture.com Bakos, Y. (1991), “A strategic analysis of electronic markets”, MIS Quarterly, Vol. 15, September, pp. 295-310. BCG (2000), “The B2B opportunity: creating advantage through e-marketplaces”, available at: www.bcg.com Berthon, P., Ewing, M., Pitt, L. and Naude, P. (2003), “Understanding B2B and the Web: the acceleration of coordination and motivation”, Industrial Marketing Management, Vol. 32 No. 7, pp. 553-61. Bloch, N. and Catfolis, T. (2001), “B2B e-marketplaces: how to succeed”, Business Strategy Review, Vol. 12 No. 3, pp. 20-8. Brown, G. and Estevez, M. (2001), “Building e-business savings”, Latin Trade, Vol. 9 No. 6, p. 44. BtoB (2002), “Number of Internet users forecast to rise steadily”, available at: www.btobonline.com/cgi-bin/ article.pl?id ¼ 861 (accessed 27 June). Business News Americas (2002a), “Eficentrum moves forward expansion agenda”, available at www.bnamericas.com (accessed 6 June). Business News Americas (2002b), “Transora expects US$ 10mn LatAm Revs in 2002”, available at: www.bnamericas.com (accessed 6 June). Business Week (2000), “B2B is the password”, Business Week, 22 May, (international edition), available at: www.businessweek.com Choudhury, V., Hartzel, K.S. and Kosynski, B.R. (1998), “Uses and consequences of electronic markets: an empirical examination into the aircraft parts industry”, MIS Quarterly, Vol. 22 December, pp. 471-507. Cirillo, R. (2001), “VARBusiness, slow and steady growth brings success for distributor SED”, August 30, available at: http://vb.channelsupersearch.com/news/var/29424.asp (accessed 6 June 2002). Day, G.S., Fein, A.J. and Ruppersberger, G. (2003), “Shakeouts in digital markets: lessons form B2B exchanges”, California Management Review, Vol. 45 No. 2, pp. 131-50. Dutta, S. and Jain, A. (2003), “The networked readiness index 2003-2004: overview and analysis framework”, Global Information Technology Report, World Economic Forum, Geneva. eMarketer (2001), “eMarketer names emerging leaders among B2B exchanges”, February, available at: http:// retailindustry.about. com/library/b1/b1_em0215.htm. Exiros (2002), available at: www.exiros.com (accessed 17 June). Gereffi, G. (2001), “Shifting governance structures in global commodity chains, with special reference to the Internet”, American Behavioral Scientist, Vol. 44 No. 10, pp. 1616-37. Grewal, R., Comer, J.M. and Mehta, R. (2001), “An investigation into the antecedents of organizational participation in business-to-business electronic markets”, Journal of Marketing, Vol. 65, July, pp. 17-33. Haley, G.T. (2002), “E-commerce in China: changing business as we know it”, Industrial Marketing Management, Vol. 31, pp. 119-24.

384

The use of online marketplaces for competitive advantage

Journal of Business & Industrial Marketing

Andrew J. Rohm et al.

Volume 19 · Number 6 · 2004 · 372-385

IDC Latin America (2002), available at: http://www.idclatin.com/ InfoAmericas (2000a), “Industry analysis: Latin America B2B e-commerce – a promising future”, Tendencias: Latin American Market Report, available at: www.infoamericas.com InfoAmericas (2000b), Regional Trends: The Plight of the Mid-Size Company, Coral Gables, FL. InfoAmericas (2002), Industry Analysis: In Latin America, Online B2B is the Place to Be, January, available at http:// tendencias.infoamericas.com/article_archive/2002/0201/ 0201_industry_analysis.pdf Jap, S.D. and Mohr, J.J. (2002), “Leveraging Internet technologies in B2B relationships”, California Management Review, Vol. 44 No. 4, pp. 24-40. Jupiter Research (2001), “Net markets in Latin America”, Jupiter Concept Report 31 January. Kaplan, S. and Sawhney, M. (2000), “E-hubs: the new B2B marketplaces”, Harvard Business Review, May, pp. 97-103. Klein, L.R. and Quelch, J.A. (1997), “Business-to-business market making on the Internet”, International Marketing Review, Vol. 14 No. 5, pp. 345-61. KPMG (2002), “Alfa case study”, available at: www. kpmgconsulting.com/clients/case_studies/ alfa_english.html (accessed 24 June). Latinexus (2002), Company Info, available at: www.latinexus. com Laudon, K.C. and Traver, C.G. (2001), E-Commerce: Business, Technology, Society, Addison Wesley, Boston, MA. Levaux, J.P. (2001), “B2B exchanges: will they survive?”, World Trade, Vol. 14 No. 3. Lichtenthal, J.D. and Eliaz, S. (2003), “Internet integration in business marketing tactics”, Industrial Marketing Management, Vol. 32 No. 1, pp. 3-13. Mahadevan, B. (2000), “Business models for Internet-based e-commerce: an anatomy”, California Management Review, Vol. 42 No. 4, pp. 55-69. Orton, C.W. (2000), “Se Habla Internet!”, World Trade, December, pp. 71-4. Oxley, J.E. and Yeung, B. (2001), “E-commerce readiness: institutional environment and international competitiveness”, Journal of International Business Studies, Vol. 32 No. 4, pp. 705-23. Palacios, J.J. (2003), “The development of e-commerce in Mexico: a business-led passing boom or a step toward the emergence of a digital economy?”, The Information Society, Vol. 19, pp. 69-79. Patino, M. (2001), “Focus on Latin America”, World Trade, Vol. 14 No. 2, p. 46. Porter, M.E. (2001), “Strategy and the Internet”, Harvard Business Review, March, pp. 1-18. Rayport, J.F. and Sviokla, J.J. (1995), “Exploiting the virtual value chain”, Harvard Business Review, November-December, pp. 75-85. Rindfleisch, A. and Heide, J.B. (1997), “Transaction cost analysis: past, present, and future applications”, Journal of Marketing, Vol. 61 No. 4, pp. 30-54.

Skjott-Larsen, T., Kotzab, H. and Grieger, M. (2003), “Electronic marketplaces and supply chain relationships”, Industrial Marketing Management, Vol. 32, pp. 199-210. Tigre, P.B. (2000), E-commerce: o modelo competitivo na internet (A Competitive Model of the Internet), Plano Editorial, Sao Paulo. Tigre, P.B. (2003), “Brazil in the age of electronic commerce”, The Information Society, Vol. 19, pp. 33-43. Transora (2002), Web site available at: www.transora.com/ repository/en/about/value_proposition.jhtm (accessed 17 June). United Nations (2003), news release 18 December. Varadarajan, P.R. and Yadav, M.S. (2002), “Marketing strategy and the Internet: an organizing framework”, Journal of the Academy of Marketing Sciences, Vol. 30 No. 4, pp. 296-312.

Further reading Bartels, A. (2003), “ISM/Forrestore report on technology in supply management: Q3 2003, available at: www.forrester.com (accessed 23 October). Brooks, J.D. and Cantrell, S. (2000), “Developmental phases of the B2B e-market space”, Research Note, Accenture Institute for Strategic Change. Dedrick, J., Kraemer, K.L. and Palacios, J.J. (2001), “Impacts of liberalization and economic integration on Mexico’s computer sector”, The Information Society, Vol. 17, pp. 119-32. DePalma, D.A. and Putnam, M. (1999), “City states will drive Internet commerce in South America”, Forrester Research, 9 February. Eng, T.Y. (2004), “The role of e-marketplaces in supply chain management”, Industrial Marketing Management, Vol. 33 No. 2. Gibbs, J., Kraemer, K.L. and Dedrick, J. (2003), “Environment and policy factors shaping global e-commerce diffusion: a cross country comparison”, The Information Society, Vol. 19, pp. 5-19. Hoffman, W., Keedy, J. and Roberts, K. (2002), “The unexpected return of B2B”, The McKinsey Quarterly, Vol. 3, pp. 97-105. Kirkman, G.S. (2000), “Andean readiness for the networked world,”, Corporacion Andino de Fomento, available at: www.caf.com/attach/4/default/AndeanReadinessforthe NetworkedWorld_Kirkman.pdf Mattoo, A., Perez-Esteve, R. and Schudnecht, L. (2001), “Electronic commerce, trade and tariff revenue: a qualitative assessment”, The World Economy, Vol. 24 No. 7, pp. 955-70. Swenson, J. (2001), “An online launching pad”, LatinFinance, June.

385

Benchmarking business-to-business marketing practices in emerging and developed economies: Argentina compared to the USA and New Zealand Jaqueline Pels Roderick J. Brodie and Wesley J. Johnston The authors Jaqueline Pels is based at the Universidad Torcuato Di Tella, Min˜ones, Argentina. Roderick J. Brodie is based at the University of Auckland, Auckland, New Zealand. Wesley J. Johnston is based at the Georgia State University, Georgia, Atlanta, USA.

Keywords Emerging markets, Marketing, Business-to-business marketing, Argentina, United States of America, New Zealand

Abstract This paper examines the marketing practices of Argentine business-to-business firms and compares them with the marketing practices of US and New Zealand firms. While the results show marked similarities in the practices for a certain proportion of Argentine firms, there are also some differences. Overall, Argentine firms tend to have lower use of information technology in marketing and a greater emphasis on face-to-face interaction. There is also a group of Argentine firms that operates in the traditional business environment where less emphasis is placed on marketing activity. Implications of these results for managers and academics are discussed.

Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · pp. 386-396 q Emerald Group Publishing Limited · ISSN 0885-8624 DOI 10.1108/08858620410556327

An executive summary for managers and executives can be found at the end of this issue.

Introduction In the last two decades economies worldwide have been influenced by a number of pervasive forces that are changing the nature of business and marketing practices. These include the impact of information technology, forces of globalization, increased competition, and more demanding customers. Questions arise as to whether these changes are having the same influence on marketing practices in different types of businesses and in different cultural settings. In response to theses questions Coviello and Brodie (2001) investigated whether there were differences in marketing practices between consumer and business-to-business firms for firms from Canada and New Zealand. In this paper we further investigate these questions by examining whether there are differences in marketing practices for business-to-business firms in an emerging economy (Argentina) and for business-to-business firms in two developed economies (USA and New Zealand). Argentina provides a useful example of a emerging economy for two reasons. First, as with most emerging economies, only a small proportion of the households are affluent and the majority of households have income levels well below those in developed economies. Thus, there is a dual economy with an affluent group of households with sophisticated demand and a large low-income group of households with very basic demands. Second, the Argentine economy has undergone radical market deregulation in the last decade. As a result the competitive environment has radically changed, and now there is a mix of multi-national firms with considerable knowledge of state-of-theart management, new emerging local firms that are adopting sophisticated marketing practices, and local firms with little marketing experience and (Pels and Brodie, 2001). Business-to-business firms from the USA and New Zealand were chosen as points of comparison with the Argentine firms for a number of reasons. Both the USA and New Zealand economies are regarded as developed and are ranked as being economies that are internationally competitive (see, IMD’s World Competitiveness Yearbook – available at:www02.imd.ch/wcy/). While the USA is consistently ranked as first in the IMD world competitiveness rankings in the last few years New Zealand’s rankings have ranged from 11th to 21st. The USA provides an example of a very large

386

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

sophisticated service based economy, while New Zealand provides an example of an economy that, like Argentina, traditionally depended on exports of primary products, in the mid 1980s underwent a strong market deregulation and now is rapidly becoming more of a service economy. In order to profile the marketing practices of the business-to-business firms we use the contemporary marketing practice (CMP) framework (Coviello et al., 1997). This was first operationalised by Berry (1983) using data from New Zealand firms and more recently using data from firms form the USA, Canada, Finland Sweden and New Zealand (Coviello et al., 2002). The CMP framework takes a pluralistic approach considering a wide range of marketing practices. It synthesis the North American writings about contemporary marketing practice (e.g. Berry, 1983; Houston et al., 1992; Hunt and Morgan, 1994; Parvatiyar and Sheth, 1994; Webster, 1992,) with the Nordic and European writings (e.g. Easton, 1992; Ford, 1990; Gronroos, 1994; Gummesson, 1987; Hakansson and Snehota, 1995) and the Anglo-Australasian writings (e.g. Christopher et al., 1991). It is from this extensive review of the literature that the CMP research perspective was derived and identified four aspects of marketing practice; (1) transaction marketing (managing the 4Ps to attract and satisfy customers); (2) database marketing (using technology-based tools to target and retain customers); (3) interaction marketing (developing interpersonal relationships between individual buyers and sellers); and (4) network marketing (positioning the firm in a connected set of inter-firm relationships). The key findings from the CMP research, that came first from the New Zealand research (Brodie et al., 1997) and has been confirmed in subsequent studies in other countries (e.g. Coviello et al., 2002), are: . managers of all types of organisations (goods and services, consumer and business-tobusiness) are emphasising managing marketing relationships; . in most cases traditional transaction marketing is practiced in conjunction with relational practices; and . the traditional dichotomies that have distinguished between different types of practice are not nearly as relevant (e.g. goods versus services, consumer versus business-tobusiness, large versus small, local versus international). The specific objectives of this paper are: . To profile the marketing practices of Argentine business-to-business firms.

.

To examine the extent the marketing practices of the Argentine firms differ from those of USA and New Zealand firms.

The paper proceeds as follows. First, we identify the environmental characteristics of Argentina’s emerging economy, second we outline the CMP framework developed to classify marketing practice and we describe the research method that is used. Third, we profile the marketing practices of the Argentine firms comparing them with the USA and New Zealand firms. Next, we provide a more detail analysis of the Argentine firms. The paper concludes by discussing the implications for academics, educators and managers.

Argentina as an emerging economy The changes 1990-1996 Since economic and political reforms such as privatization, deregulation, and democratic elections were enacted in the early 1990s, Argentina enjoyed periods of widespread change and rapid growth. First, the economy stabilized. The inflation rate declined from 5,000 per cent in 1989 to 0.2 per cent in 1996. Argentina’s annual change in Gross National Product was 2 7 per cent in 1989 and reached 8.5 per cent, its highest level ever in 1994. Second, the economy was deregulated and international trade was encouraged. Most public services were privatized (e.g. highways, phone, water and electricity), import barriers were suppressed, and taxes and regulations were reduced. Third, in 1992, Mercado Comun del Sur or MERCOSUR was established and the alliance made significant economic gains. MERCOSUR is now the third largest trading block in the world. It includes Brazil, Paraguay, Argentina and Uruguay, as well as two associate members, Chile and Bolivia. The changes 1996-2001 The recent financial crises in Mexico, Russia and Brazil have resulted in a major decline of the value of Argentine exports. This has lead to a 36-month recession and growing unemployment. As a result, financial investors have tempered their optimism and interest rates on Argentine bonds have soared. Clearly, at the time of the study Argentina already faced uncertain and challenging economic times. The end of 2001-2002 crisis In late December 2001, following a cacerolazo (when the citizens of Buenos Aires took the streets banging pots and pans) the president Fernando De La Rua resigned. A week later Argentina declared itself in default. At the beginning of January, the

387

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

Figure 1 Business market 1990 and 2000

new government abandoned the convertibility plan (that for ten years had anchored the peso to the US dollar), devaluated, and pesified all deposits. The result was a paralyzed country. Impact of the changes The changes in the first half of the last decade have had a major impact on the market structure and competition between firms. The combination of low inflation (20.7 in 2000), available credit, deregulation of the economy, and the MERCOSUR alliance has served as strong incentives for international investment during the first half of the 1990s. In 1992, the US Department of Commerce, ranked Argentina as one of ten, “big emerging markets” worldwide. In response, direct foreign investment exploded from US$2.6 billion in 1990 to US$19.7 billion in 1997 (Pereiro, 1998). These investments lead to a dramatic change in the ownership of Argentina’s major firms. In 1991, 131 (66 per cent) of the largest 200 firms in Argentina were locally owned. By 1998, only 69 (35 per cent) of the largest 200 firms remained locally owned (Economia, 2000). However, in the last 30 months, the rate of foreign investments in Argentina has slowed down. This shift in the investment tendency not only reduced the number of new foreign direct investments, but mainly it affected the investment plans of the corporations that had arrived in the early 1990s. In particular, the newly privatized services, which are the backbone of a developed society (i.e. the area of telecommunications), trimmed down their 2000-2001 projects. However the flow of foreign direct investments and joint ventures that took place in the 1990s changed the Argentine competitive scene. In contrast to the changes in the competitive structure, the social-economic structure of the Argentine population has remained relatively stable in the last decade. Only 11 per cent of the population are affluent (social-economic levels A, B, C1) with an average monthly income of $6,000, 35 per cent have a basic standard of living (socialeconomic levels C2, C3) with an average monthly income of $1,000 and 54 per cent have very low standard of living (social-economic levels D, E) with an average monthly income of $400 (Gonzalez Arcila and Schmeichel, 1996). The business market The business-to-business and business-toconsumer multinationals that have invested in the country (and in MERCOSUR) in the mid 1990s have modified both the level of competition and the degree of sophistication of the demand in the business markets (see Figure 1). These firms have not only increased the competitive intensity in the

sectors they operate, but have also brought with them international managerial standards that they require their suppliers to adopt thus creating a more sophisticated business-to-business demand. This shift in the intensity of competition has impacted the established local firms, some of which have had difficulties understanding these environmental changes and still make a very limited use of marketing tools. In contrast, new local start-ups have a better understanding of the implications of working in an open economy and are using a wider range of marketing techniques. In summary, in the consumer markets, the opportunities in Argentina contrast with that of the more affluent western economies because of the large sectors of basic and intermediate endconsumer demand that have not changed in the last decade, while, in the business-to-business market structure, there has been a major shift with intense competition in a large number of industries and, as a result, the market has become more sophisticated. In the next sections we will show that not all firms have responded to these changes in a similar manner and different marketing practices have resulted.

Classification scheme of contemporary marketing practice As outlined in the introduction section the CMP classification scheme was derived from a broad range of literature. Not only does it draw on the classical consumer goods marketing literature but also on a number streams of research including services research, inter-organizational exchange

388

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

relationships, resource dependency theory, channels research, network relationships, strategic management and information technology (Brodie et al., 1997). The framework was developed by systematically examining how previous researchers conceptualized marketing and more specifically relationship marketing. Special attention was given to the way the literature defined and used various terms associated with marketing. In addition a number of informal interviews with marketing practitioners were used to refine the framework. While the framework distinguishes between four aspects of marketing practice transactional marketing (TM), database marketing (DM), interaction marketing (IM) and network marketing (NM) it does not assume these practices are mutually exclusive. This means all firms can practice TM, DM, IM, and NM. What is important is the extent they practice these different aspects. For example a consumer goods firm may be expected to practice higher levels of TM and DM and lower levels of IM and NM. The nine dimensions used to define these four aspects of marketing practice are given in Table I. From Table I it can be seen that transaction marketing is defined as focusing on the exchange process between customers and suppliers, and is centered on discrete economic transactions. While the single transactions may continue over time they are largely treated in isolation, at arm’s length and mainly in the context of formal, impersonal process. Database marketing, involves both economic and information exchange. Relationships do not generally involve on-going interpersonal communication and interaction between individuals, but some attempts to “personalize” the relationship, through the use of technology, are made. While database marketing involves a distant form of relationship, interaction marketing implies face-to-face interaction within the relationship. Thus, it is a process where individuals initiate and handle complex, personal interactions. The totality of relationships in a market or industry i.e. the multiple, networked relationships between firms are the focus of network marketing.

included to allow for more comprehensive descriptions of marketing practice, and to provide an opportunity to validate and explain the quantitative responses. The Argentinean version of the survey also included sections on market orientation, and performance. The market orientation section of the questionnaire was based on the work of Kolhi and Jaworski (1990) and Kolhi et al. (1993). It was used to examine the associations between different marketing practices and market orientation. An additional section was also added on performance using a number of measures that were derived from Kolhi and Jaworski (1990), Kaplan and Norton (1992), Han et al. (1998), Matsuno and Mentzer (2000), Hartenian and Gudmundson (2000), and Slater and Narver (2000). The questions used to measure each of the nine items for each of the constructs, TM, DM, IM and NM are given below. For example, for the first component “Purpose of exchange,” the item for the TM was “to generate an economic return in the form of profit or other financial measure(s) of performance”, while the remaining items pertained to each of the three other aspects of marketing (database, interaction and network marketing). (1) Purpose of exchange. When dealing with our market, our focus is on: . generating a profit or other “financial” measure(s) of performance [TM] . acquiring customer information [DM] . building a long-term relationship with a specific customer(s) [IM] . forming strong relationships with a number of organizations in our market(s) or wider marketing system [NM] (2) Nature of communication. Our marketing communication involves: . our organization communicating to the mass market [TM] . our organization targeting a specifically identified segment(s) or customer(s) [DM] . individuals at various levels in our organization personally interacting with their individual customers [IM] . senior managers networking with other managers from organizations in our market(s) or wider marketing system [NM] (3) Type of contact. Our organization’s contact with our primary customers is: . impersonal (e.g. no individualized or personal contact) [TM] . somewhat personalized (e.g. by direct mail) [DM] . interpersonal (e.g. involving one-to-one interaction between people) [IM/NM]

Research approach Data collection method The standard CMP questionnaire, first developed by Brodie et al. (1997), is a self-administered structured questionnaire developed to collect data about the various aspects marketing practice, demographics and other characteristics of the firms. The questionnaire allows for open-ended responses. These qualitative questions were

389

390

Source: Adapted from Coviello et al. (1997, 2000)

Managerial level

Internal marketing assets (focusing on product/service, price, distribution, promotion capabilities) Functional marketers (e.g. sales manager, product development manager)

Managerial investment

Formal

Formality in exchange

Product or brand

Discrete (yet perhaps over time)

Duration of exchange

Managerial focus

Arms-length, impersonal

Type of contact

Customer attraction (to satisfy the customer at a profit)

Firm “to” mass market

Nature of communication

Managerial intent

Economic transaction

Purpose of exchange

Transaction marketing

Customer retention (to satisfy the customer, increase profit, and attain other objectives such as increased loyalty, decreased customer risk, etc.) Product/brand and customers (in a targeted market) Internal marketing assets (emphasizing communication, information, and technology capabilities) Specialist marketers (e.g. customer service manager, loyalty manager)

Formal (yet personalized via technology)

Discrete and over time

Firm “to” targeted segment or individuals Personalized (yet distant)

Information and economic transaction

Database marketing

Table I Four aspects of marketing classified by exchange and managerial dimensions

External market assets (focusing on establishing and developing a relationship with another individual) Managers from across functions and levels in the firm

Relationships between individuals

Interactive relationships between a buyer and seller Individuals “with” individuals (across organizations) Face-to-face, interpersonal (close, based on commitment, trust, and cooperation) Continuous (ongoing and mutually adaptive, may be short or long term) Formal and Informal (i.e. at both a business and social level) Interaction (to establish, develop, and facilitate a cooperative relationship for mutual benefit)

Interaction marketing

Impersonal-interpersonal (ranging from distant to close) Continuous (stable yet dynamic, may be short or long term) Formal and Informal (i.e. at both a business and social level) Co-ordination (interaction between sellers, buyers, and other parties across multiple firms for mutual benefit, resource exchange, market access, etc.) Connected relationships between firms (in a network) External market assets (focusing on developing the firms position in a network of firms) General manager

Firms “with” firms (involving individuals)

Connected relationships between firms

Network marketing

Benchmarking business-to-business marketing practices Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston Volume 19 · Number 6 · 2004 · 386-396

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

(4) Duration of exchange. When a customer buys our products we believe they expect: . no future personalized contact with us [TM] . some future personalized contact with us [DM] . one-to-one personal contact with us [IM] . ongoing one-to-one personal contact with people in our organization and wider marketing system [NM] (5) Formality of exchange. When people from our organization meet with our primary customers, it is: . mainly at a formal, business level [TM] . mainly at an informal, social level [DM] . at both a formal, business and informal, social level [IM] . at both a formal, business and informal, social level [NM] (6) Managerial intent. Our marketing activities are intended to: . attract new customers [TM] . retain existing customers [DM] . develop cooperative relationships with our customers [IM] . coordinate activities between ourselves, customers, and other parties in our wider marketing system [NM] (7) Managerial focus. Our marketing planning is focused on issues related to: . our product/service offering [TM] . customers in our market(s) [DM] . specific customers in our market(s), or individuals in organizations we deal with [IM] . the network of relationships between individuals and organizations in our wider marketing system [NM] (8) Managerial investment. Our marketing resources (e.g. people, time, money) are invested in: . product, promotion, price, and distribution activities (or some combination of these) [TM] . technology to improve communication with our customers [DM] . establishing and building personal relationships with individual customers [IM] . developing our organization’s network relationships within our market(s) or wider marketing system [NM] (9) Managerial level. In our organization, marketing activities are carried out by: . functional marketers (e.g. marketing manager, sales manager, major account manager) [TM]

.

.

.

specialist marketers (e.g. customer service manager, loyalty manager) [DM] non-marketers who have responsibility for marketing and other aspects of the business [IM] the managing director or CEO [NM]

Construct validity of the instrument is justified on the basis that the measures were developed from a theoretical framework derived from an extensive literature review. In order to check for face validity, 12 marketing practitioners evaluated each item, and the questionnaire was pre-tested with a set of English proficient executive students similar to those targeted to participate in the research. Some minor wording changes were suggested but overall the questionnaire was understandable, interpreted appropriately, and captured the aspects of marketing practice defined by the conceptual framework. It was therefore concluded that the instrument had adequate content and face validity. Measure of marketing practice For the survey firms, responses to each of the questions pertaining to the TM dimensions were summed and then converted to an index ranging from 0.0 to 1.0. Indices for DM, IM, and NM were calculated in a similar way. Thus for each company, there were four independent measures indicating the extent to which the company practiced transaction, database, interaction, and network marketing. Respondents and sample As with the previous studies a convenience sample of mid-career managers enrolled in a part-time MBA, taught by members of the research team was used. While non-random in nature, the use of working MBAs in cross-national research is a common approach (see Neelankavil et al., 2000). The respondents may be regarded as “participant observers” for their organizations and because the research was incorporated into their course work they were highly motivated. Thus, this approach provided a practical way to get high quality responses. The survey was in English, and all respondents were proficient in it. Participants were advised to use a variety of sources within the firm to gather the information needed to complete the survey. Thus, although a single manager was asked to report on his/her organization, they were encouraged to consult others in their organization. Participants received the survey in the first week of a course in marketing, and were asked to complete it as part of their assignment work. Having the data collection at the beginning of the course minimized the chance of any bias created by

391

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

classroom exposure to marketing theory and/or the instructors’ personal views on the topic. The New Zealand sample of 122 business-tobusiness firms was collected in 1997 and 1998, the USA sample of 79 business-to-business firms was collected in 2001 and the Argentine sample of 83 firms was collected in between 1999 and 2001. The sample characteristics in each country were reasonably similar and so are unlikely to lead to any bias in comparisons between countries (see Table II). Differences that emerged were that the Argentine sample had younger firms and more firms that had not grown in the last three years and some of these firms’ sales volumes had decreased in the last year. Second the USA sample had more business-to-business service firms, more locallyowned firms and larger firms and finally the New Zealand sample had more business-to-business goods firms. Comparative analysis of the main constructs under investigation revealed no significant differences for the USA and New Zealand in terms of key variables of interest in the study: the construct means for the four indices (TM, DM, IM, NM) and the results of the cluster analysis. Therefore the USA and New Zealand data was pooled.

Results Combinations of marketing practice The index scores developed from the responses to the questionnaire provide measures of the extent to which each of the four aspects of marketing was practiced by the firms in the three countries studied. These are reported in Table III. While over 70 per cent of the firms in the USA and

Table III Comparison of index values by marketing type by country

Transaction marketing

Database marketing

Interaction marketing

Network marketing

Low Medium High Low Medium High Low Medium High Low Medium High

NZ (n 5 122)

USA (n 5 79)

Argentina (n 5 83)

27 53 19 29 50 21 7 35 58 28 37 35

19 54 27 18 52 30 9 33 58 17 40 43

48 40 12 60 31 9 10 21 69 24 46 30

New Zealand were rated as medium to high on the TM and DM indices, Argentina only had 50 per cent for TM and 40 per cent for DM. However for IM and NM the results between the three countries were more similar. Over 90 per cent of the firms in all three countries rated medium-high on the IM index, with Argentina having almost 70 per cent of the cases with high values. While over 70 per cent of firms in all three countries rated medium-high on the NM index. Given that in the majority of cases combinations of marketing are practiced across firms, the question arises as to which combinations are most evident? The correlations that are reported in Table IV indicate that for all countries DM is strongly associated with TM and IM is strongly associated with NM. In contrast, while the USA and New Zealand firms have strong associations between DM and IM this is absent in the Argentina. Taken together, the results from Tables III and IV indicate that the Argentina

Table II Characteristics of companies in survey

Firm type Age

Growth in revenue (in last three years) Employees

Exports

Ownership

Bus to bus goods Bus to bus services Less than five years 6-10 years Older than 10 yrs No growth 1-10% growth More than 10% 20 or less 21-100 101-1,000 Greater than 1,000 None 1-10% of sales More than 10% Locally owned Foreign owned

NZ (n 5 122) (%)

USA (n 5 79) (%)

Argentina (n 5 83) (%)

44.3 55.7 11.5 15.6 73.0 18.8 39.3 41.9 24.0 34.7 31.4 9.9 52.2 33.9 13.9 48.8 51.2

27.8 72.2 12.7 7.6 79.7 18.3 31.0 50.7 9.9 16.9 26.8 46.5 50.0 10.3 39.7 68.4 31.6

36.1 63.9 18.8 32.5 48.8 24.7 35.1 40.3 19.0 32.9 38.0 10.1 48.4 25.6 26.0 51.6 48.4

392

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

Table IV Correlations between indices by country USANew Zealand

Transactional marketing and relational marketing Transaction marketing with database marketing Transaction marketing with interaction marketing Transaction marketing with network marketing

0.39* 20.18* 20.03

Relational marketing Database marketing with interaction marketing Database marketing with network marketing Interaction marketing with network marketing

Argentina

0.62* 20.05 0.09

0.41*

0.15

0.39**

0.31*

0.66*

0.67*

Notes: * = p , 0.01, ** = p , 0.05

business-to-business firms tend to have a more personalized (IM) approach to marketing with a low use of technology (DM) to enhance these relationships. This could be explained either because of the Latin “need” for a face-to-face contact or because the current recession has drawn back many of the investments in the telecommunication sector. K-means cluster analysis was used to further investigate the most common combinations of different aspects of marketing practice within the combined USA and New Zealand and the Argentinean samples. In each case the number of groups was varied between one and six, resulting finally in a three-group solutions on the basis of the average within-group difference criterion (Hair et al., 1998). For the USA-New Zealand cases (see Table V), the first group (37 per cent) represents those firms which are using intensively all four approaches to marketing TM, DM, IM and NM, we have named these the pluralistic group. The second group (38 per cent) represents firms that are focused on interaction and network marketing and we have named these the relationship and network group. Finally the third group (25 per cent) represents firms that have not integrated a strong relational marketing approach and are mainly using

transaction marketing, we have labeled these as the transactional group. For the Argentine cases (see Table VI), the first group (32 per cent) uses all four marketing approaches and, though the means are comparatively lower, following the USA-New Zealand denominations; we have also labelled it the pluralistic group. The second group (50 per cent) represents those firms that are focused in interaction and network marketing and though the values are slightly higher than those of the second USA-New Zealand group we have also named it as relationship and network group. Finally the third group (18 per cent) represents a group of firms that are using a very moderate approach to marketing and we have named this group the low marketing group. When the cluster analysis results of the USA and New Zealand sample are compared to the Argentine sample we see that marketing practices in the business-to-business market across nations have become very similar with the similarities in the first two clusters (pluralistic and relationship and network). This similarity could be expected because as shown in Figure 1 Argentina now has a large section of the business market with competitive conditions similar to developed economies. However, there are also some differences, the DM mean for Argentina is lower than the USA-NZ mean. Also the third cluster groups transactional and low marketing are different. The USA-NZ group is higher on TM and lower on the other indices while the Argentine group is lower on all four indices.

Further analysis of Argentine business firms The three cluster groups of Argentine firms have different characteristics. The pluralistic group had more foreign owned firms, while the relationship and network group had more local ownership, a variety in size, and older firms. The low marketing group had more local ownership and firms of smaller size (see Table VII). The 2001 survey of the Argentine firms included additional measures of market orientation and performance that we now examine. With regard to approaches to market orientation (see Table VIII) the pluralistic group was the most market oriented across all three

Table V Cluster analysis results for USA and New Zealand

Transaction Database Interaction Network Percentage of firms

Pluralistic

Relationship and network

Transactional

Mean score (all firms)

0.71 0.76 0.84 0.80 37

0.60 0.62 0.77 0.69 38

0.73 0.64 0.64 0.57 25

0.67 0.67 0.76 0.70

393

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

Table VI Cluster analysis results for Argentina Pluralistic

Relationship and network

Low marketing

Mean score (all firms)

0.68 0.67 0.80 0.73 32

0.51 0.46 0.82 0.71 50

0.60 0.51 0.61 0.51 18

0.61 0.57 0.76 0.68

Transaction Database Interaction Network Percentage of firms

Note: the values in the table reflect the mean scores.

Table VII Characteristics of the Argentine clusters

Ownership Employees Age

Pluralistic (%)

Relationship and network (%)

Low marketing (%)

19.5 80.5 50.0 50.0 17.9 38.5 43.6

59.3 40.7 54.6 45.4 7.7 30.8 61.5

60.0 40.0 75.0 25.0 40.0 20.0 40.0

Locally owned Foreign owned 100 or less Greater than 100 Less than five years Six to ten years Older than ten yrs

Table VIII Cluster groups by market orientation measures Market orientation measure Generation of information Dissemination of information Responsiveness to information

Pluralistic

Traditional B2B

Low marketing

Mean score (all firms)

0.73 0.70 0.72

0.75 0.65 0.69

0.67 0.63 0.63

0.71 0.66 0.69

dimensions: generation, dissemination and responsiveness. In contrast the low marketing group was the lowest on all three dimensions. On the other hand, the relationship and network group had high generation and responsiveness values and a lower dissemination. This group is characterized as locally owned and on average these companies have been operating in Argentina for more than ten years, so this could explain the lower mean values for dissemination. This group is more traditional in their managerial approach but they have been in Argentina long enough so as to understand the importance to gather information about the marketplace. They are also quick in their responsiveness to it and they tend to concentrate information and decisions in the higher levels of the organization. When asked to describe the performance measures actually used, the pluralistic and relationship and network groups used a wider range of performance tools compared to the measures applied by the low marketing group. The pluralistic group used sales growth, new customers gained, customer retention, profitability and customer satisfaction, while the relationship and network group uses: sales growth, new customers gained, customer retention, profitability, customer satisfaction as well as market share; finally the low marketing group focuses just on sales growth and profitability.

When asked to compare their turnover and ROI with that of their competitors, once again, the pluralistic and relationship and network groups have declared that they have been performing the same or better than their competitors while the low marketing group answered that they had worse results.

Conclusions and implications What is particularly notable about the results is that marketing practices of a large proportion of Argentina business-to-business firms are similar to those for the USA and, New Zealand firms. However the Argentina firms tended to have has a lower use of DM (and information technology) and higher emphasis on IM with a face-to-face interaction. Thus, the approach to IM as practiced in Argentina is different from the USA and New Zealand where the trend is toward supporting the interaction with e-business tools. Perhaps this will eventually develop in the marketing practices of Argentine companies like it has in the other two countries. If one tries to characterize the basic difference between the three countries it appears that the USA leads the way in NM, New Zealand uses TM more than the others, and Argentina is highest in IM but low in DM.

394

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

Argentina’s return to democracy almost two decades ago, the deregulation and stabilization of the economy in the early 1990s, and the privatization process, opened the economy to international business practices. These radical changes, if compared to the 1960s and 1970s, have brought better conditions for firms to operate in, which in turn lead to new investments, that resulted in higher competition and a more sophisticated demand. These changes have lead towards an internationalization of the business-tobusiness marketing practices. However further analysis shows that, in Argentina, there are three co-existing types of marketing practices: the pluralistic, the relationship and network and the low marketing firms. The pluralistic and the relationship and network groups have a higher level of market orientation and declare a better performance than the low marketing group. These results have implications for managers, educators, and researchers.

marketing and database marketing are still very much in use in the developed countries while in the emerging economy, “low” levels of any type of marketing is common among a large segment of companies. What leads each company to a different selection of contemporary marketing practices in dealing with their primary customers is a difficult question to answer. Is it that the companies practice marketing as they have always done with little migration to what might be considered the “latest” and best approaches? Or is it a very slow transition from transaction marketing to different types of marketing? The results of our study seem to indicate that this is the case. With the USA using network marketing in a greater amount the other two countries; New Zealand still with a heavy emphasis on transaction marketing; and Argentina having low levels of marketing in some firms it appears that there might be a continuum that firms move along with respect to marketing practices. This is only suggested by our results and warrants further investigation.

Managerial implications It is important to understand the influence that multinational corporations, represented by the pluralistic group, have in introducing an international managerial approach. This can be seen in their high level of market orientation, the multiple uses of performance measurements, the sophisticated application of information technology, and the use of different marketing tools. These firms are directly responsive to the forces of globalization, international competition, and more sophisticated customer demand. Second, not only the pluralistic group but also the relationship and network groups have positive performance. The firms in the relationship and network group are mainly older and locally owned companies that base their exchange strategy in high levels of close interaction. This concurrency of marketing practices indicates not only that “there is more than one way to do things right”, but also that the business-to-business marketplace is becoming more complex and as different player can (and will) choose different approaches. Finally, the low marketing group isn’t performing well, furthermore, some firms in this cluster are loosing sales. In other words, not all strategies are good strategies and giving ones back to the market is dangerous, particularly, as the marketplace becomes more competitive and buyers mature. It is also important to note that the vast majority of firms use a mix of marketing practices to reach their primary customers. There may be a growing emphasis on relationship and network marketing practices, but they are not yet the dominant contemporary marketing approaches. Transaction

Other implications From the educator’s point of view it is important to understand the nature of markets and marketing in emerging economies and the extent it is similar and/or different to more developed economies. In Argentina there are still huge social-economic inequities that create a dual economy that has a high impact on the way goods and services are bought and sold and hence there are a variety of types of marketing When teaching marketing management it cannot be assumed that all economies practice marketing in the same way. The demand driven practices of marketing in developed countries often need to give way to the supply and infrastructure issues of marketing in developing countries. For instance, while relationship and network marketing is practiced in Argentina, there is a very different emphasis on technology (database) support. Thus if educators are to properly train marketing managers, they have to be sensitive to the fact that there are developmental stages in each of the types of contemporary marketing practice. Companies cannot simply lay down one type of marketing approach and pick up another. There are discontinuities in some cases in moving from one type of marketing to another. From a researcher’s point of view it is it is clear that further research about emerging economies is needed. This work has mainly replicated the CMP framework in Argentina, and it would be interesting to analyze the results from other countries, which have undergone such changes. It is also important to conduct more longitudinal

395

Benchmarking business-to-business marketing practices

Journal of Business & Industrial Marketing

Jaqueline Pels, Roderick J. Brodie and Wesley J. Johnston

Volume 19 · Number 6 · 2004 · 386-396

studies in order to see the effect of these changes over time, on both marketing and managerial practices. Finally it is important to expand the research towards understanding the antecedents and consequences of these marketing practices both in emerging and developed countries.

Hair, J.F., Anderson, R.E., Tatham, R.L. and Black, W. (1998), Multivariate Data Analysis, 5th ed., Prentice-Hall, Englewood Cliffs, NJ. Hakansson, H. and Snehota, I. (1995), Developing Relationships in Business Networks, Routledge, New York, NY. Han, J.K., Namwoon, K. and Srivastava, R. (1998), “Market orientation and organizational performance: is innovation a missing link?”, Journal of Marketing, Vol. 62 No. 4, pp. 30-45. Hartenian, L.S. and Gudmundson, D.E. (2000), “Cultural diversity in small business: implications for firm performance”, Journal of Developmental Entrepreneurship, Vol. 5 No. 3, pp. 209-20. Hunt, S.D. and Morgan, R.M. (1994), “The commitment-trust theory of relationship marketing”, Journal of Marketing, Vol. 58 No. 3, pp. 20-38. Houston, F.S., Gassenheimer, J.B. and Maskulka, J.M. (1992), Marketing Exchange Transactions and Relationships, Quorum Books, Westport, CT. Kaplan, R. and Norton, D.P. (1992), “The balanced scorecard – measures that drive performance”, Harvard Business Review, January/February. Kolhi, A.K. and Jaworski, B.J. (1990), “Market orientation: the construct, research propositions, and managerial implications”, Journal of Marketing, Vol. 54, April. Kolhi, A.K., Jaworski, B.J. and Kumar, A. (1993), “MARKOR: a measure of market orientation”, Journal of Marketing Research, Vol. XXX, November, pp. 467-77. Matsuno, K. and Mentzer, J.T. (2000), “The effects of strategy type on the market orientation-performance relationship”, Journal of Marketing, Vol. 64 No. 4, pp. 1-16. Neelankavil, J.P., Mathur, A. and Zhang, Y. (2000), “Determinants of managerial performance: a crosscultural comparison of the perceptions of middle-level managers in four countries”, Journal of International Business Studies, Vol. 31 No. 1, pp. 121-40. Parvatiyar, A. and Sheth, J. (1994), “Paradigm shift in marketing theory and approach: the emergence of relationship marketing”, in Sheth, J.N. and Parvatiyar, A. (Eds), Relationship Marketing: Theory, Methods, and Applications, Center for Relationship Marketing, Atlanta, GA. Pels, J. and Brodie, R.J. (2001), “Profiling marketing practice in transition economy: the Argentine case”, Proceedings of the 30th. EMAC Conference, Bergen, Norway, 8-11 May. Pereiro, L. (1998), “Patterns and determinants of foreign direct investment in emerging economies”, Research Seminar, School of Business Economics Universidad Torcuato Di Tella, Buenos Aires. Slater, S.F. and Narver, J.C. (2000), “The positive effect of a market orientation on business profitability: a balanced replication”, Journal of Business Research, Vol. 48 No. 1, pp. 69-73. Webster, F.E. (1992), “The changing role of marketing in the corporation”, Journal of Marketing, Vol. 56 No. 4, pp. 1-17.

References Berry, L.L. (1983), “Relationship marketing”, in Berry, L.L., Shostack, G.L. and Upah, G.D. (Eds), Emerging Perspectives of Services Marketing, American Marketing Association, Chicago, IL. Brodie, R.J., Coviello, N.E., Brookes, R.W. and Little, V. (1997), “Towards a paradigm shift in marketing? An examination of current marketing practices”, Journal of Marketing Management, Vol. 13 No. 5, pp. 383-406. Christopher, M., Payne, A. and Ballantyne, D. (1991), Relationship Marketing, Bringing Quality, Customer Service, and Marketing Together, Butterworth-Heinemann, Oxford. Coviello, N.E. and Brodie, R.J. (2001), “Contemporary marketing practices of consumer and business-to-business firms: how different are they”, Journal of Business and Industrial Marketing, Vol. 16 No. 5, pp. 382-400. Coviello, N.E., Brodie, R.J. and Munro, H.J. (1997), “Understanding contemporary marketing: development of a classification scheme”, Journal of Marketing Management, Vol. 13 No. 6, pp. 501-22. Coviello, N.E., Brodie, R.J. and Munro, H. (2000), “An investigation of marketing practice by firm size”, Journal of Business Venturing, Vol. 15 No. 5/6, pp. 523-45. Coviello, N.E., Brodie, R.J., Danaher, P. and Johnson, W. (2002), “How firms relate to their markets: an empirical analysis of contemporary marketing practices”, Journal of Marketing, Vol. 66 No. 3, pp. 33-47. Easton, G. (1992), “Industrial networks: a review”, in Axelsson, B. and Easton, G. (Eds), Industrial Networks: A New View of Reality, Routledge, London, pp. 3-27. Economia (2000), “Ocho de cada diez lı´deres esta´n en manos extranjeras”, Economia, 27 May, p. 23. Ford, D. (1990), Understanding Business Markets: Interaction, Relationships and Networks, Academic Press, London. Gonzalez Arcila, M. and Schmeichel, N. (1996), Indice de Nivel Socioecono´mico, Asociacio´n Argentina de Marketing, Buenos Aires. Gronroos, C. (1994), “From marketing mix to relationship marketing: towards a paradigm shift in marketing”, Asia-Australia Marketing Journal, Vol. 2 No. 1, pp. 9-29. Gummesson, E. (1987), “The new marketing – developing long-term interactive relationships”, Long Range Planning, Vol. 20 No. 4, pp. 10-20.

396

An executive summary for managers and executives can be found at the end of this issue.

Trust and negotiation tactics: perceptions about business-to-business negotiations in Mexico

Introduction

Mohammad Elahee and Charles M. Brooks

The authors Mohammad Elahee is an Assistant Professor in the Department of International Business and Charles M. Brooks is an Associate Professor and Chair in the Department of Marketing and Advertising, both at Quinnipiac University, Hamden, Connecticut, USA.

Keywords Negotiating, Competitive strategy, Trust, Ethics, Mexico

Abstract Trust plays a significant role in business peoples’ choices of negotiating tactics. This study compares the use of generally accepted negotiating tactics with dubious ones. Findings from a sample of Mexican business people indicate that the type of negotiation (intra-cultural vs cross-cultural) is predictive of the level of trust that a negotiator will place in an opponent and of the likelihood of using various negotiation tactics.

Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · pp. 397-404 q Emerald Group Publishing Limited · ISSN 0885-8624 DOI 10.1108/08858620410556336

With the creation of the North American Free Trade Association (NAFTA) in 1994, Mexico has emerged as a key trading partner of the USA. Since 1994, US-Mexico trade has increased by nearly seven-fold. In 1997, Mexico replaced Japan as the second largest trading partner of the USA; and if the current rate of growth in US-Mexico trade continues, Mexico will soon overtake Canada as the USA’s largest trading partner. One notable aspect of the growing economic ties between the USA and Mexico is the importance of industrial products. Unlike the economic ties that the USA has with the European Union and many East Asian countries, which are characterized mostly by the exchange of consumer goods, the trading relationship between the USA and Mexico is noted more for the exchange of industrial goods. Along with the increase in business-to-business exchange between Mexico and the USA, there has also been an increase in the number of strategic alliances and joint ventures as well as the development of new forms of business relationships and organizational structures. For example, many large corporations from the USA, EU, Japan, and Korea have established manufacturing facilities in special economic zones along the US-Mexico border known as “maquiladoras”. These foreign firms often manufacture as well as outsource industrial goods from these “maquiladoras”, which employ more than one million people and account for over 50 percent of total Mexican exports (Sowinski, 2000). Finally, with the move toward harmonization of business laws under the World Trade Organization and NAFTA, we are likely to witness more negotiations on issues such as protecting intellectual properties, maintaining environmental standards, and adhering to labor, health, and industrial standards (e.g. ISO 9000). Such complex issues will require extensive interorganizational negotiations. While a number of researchers have focused on different aspects of negotiations in Mexico (e.g. Husted, 1998; Volkema, 1998; Adler et al., 1987), we know little about the differences between crosscultural and intra-cultural negotiation behaviors from the perspective of Mexican business people. The purpose of this paper is to bridge this gap in the literature by focusing on the role of trust in business-to-business negotiations. Specifically, we compare the level of trust that Mexican negotiators

397

Trust and negotiation tactics

Journal of Business & Industrial Marketing

Mohammad Elahee and Charles M. Brooks

Volume 19 · Number 6 · 2004 · 397-404

have in foreign opponents with that of Mexican opponents. We then examine how trust may affect the likelihood of using certain competitive bargaining tactics. This study investigates the behaviors that Mexican negotiators are likely to display in initial meetings with both foreign and Mexican opponents and compares cross-cultural and intracultural negotiations from the Mexican negotiators’ perspective. A review of relevant research is presented and hypotheses are developed. Data from a sample of Mexican business people was collected to test the hypotheses. A discussion of the statistical findings complemented with an analysis of insights gained from interviews with several negotiation experts is presented. Finally, managerial implications and directions for future research are provided.

appropriateness and likelihood of use of such tactics. Lewicki and his colleagues (Lewicki and Robinson, 1998; Lewicki and Stark, 1996; Robinson et al., 2000) developed and validated a five-factor classification scheme of negotiation tactics. These factors include traditional competitive bargaining, false promises, misrepresentation of position, attacking opponent’s network, and inappropriate information gathering. Traditional competitive bargaining includes tactics such as hiding the real bottom line from the opponent or making an opening demand so high (or low) that it seriously undermines the opponent’s confidence that a satisfactory settlement will be negotiated. False promises is a tactic where the negotiator states intentions to perform some act, but has no actual intentions to follow through. For example, bluffing can generally be described as making false promises. Under misrepresentation of position, the negotiator distorts his or her preferred settlement point in order to create a rationale for the opponent to make concessions. When attacking an opponent’s network, the negotiator tries to create dissension in the opponent’s network or tries to lure the opponent’s people to join the negotiator’s group. Finally, with inappropriate information gathering, the negotiator attempts to gain information about the opponent through the use of payments or bribes. In addition to validating the classification scheme, these researchers (Lewicki and Robinson, 1998; Lewicki and Stark, 1996; Robinson et al., 2000) have evaluated the ethicality of the various negotiation tactics. Generally, they have found that people are more accepting of traditional competitive bargaining than they are from the other four classes of tactics. Volkema (1998, 1999) reports similar results from data collected in the USA, Mexico, and Brazil. Research also indicates that perceptions of the acceptability of tactics vary across demographic variables such as gender and nationality. Although they found no difference between women and men in terms of their perceptions of the appropriateness of traditional competitive bargaining tactics (the most acceptable of negotiating tactics), they did find significant differences between women and men on the other four categories of tactics (Lewicki and Robinson, 1998). Men were more accepting of ethically questionable negotiating tactics than were women. These findings have been replicated in other studies (Robinson et al., 2000; Volkema, 1999) with similar sets of scale items. Research also indicates that the acceptability of tactics differs by nationality. Lewicki and

Literature review Negotiations require that parties with opposing interests come together to make a decision. Robinson et al. (2000, p. 650) note that while some theorists view negotiations as cooperative, others consistently describe negations as a competitive process in which “negotiators will attempt to seek whatever ‘opportunistic’ advantage may be available”. Carr (1968, p. 144) states: Most executives from time to time are almost compelled, in the interests of their companies or themselves, to practice some form of deception when negotiating with customers, dealers, labor unions, government officials, or even other departments of their companies. By conscious misstatements, concealment of pertinent facts, or exaggeration – in short by bluffing – they seek to persuade others to agree with them.

It is widely held that such tactics are not only common but are also critical for a negotiator to be effective (Lewicki, 1983; Carson, 1993; Cramton and Dees, 1993). While Carr (1968) argues that these tactics are necessary in the conduct of business, he also notes that there is no clear consensus among business executives concerning the ethicality of such practices. The ethicality of negotiation tactics In light of the innately competitive nature of negotiations and the potential for deceptive, dishonest, or opportunistic behavior in the process, a number of researchers have investigated the ethics of common negotiating tactics. These studies have commonly pursued two paths. Researchers have developed classification schemes to categorize negotiation behaviors, and they have evaluated negotiators’ perceptions of the

398

Trust and negotiation tactics

Journal of Business & Industrial Marketing

Mohammad Elahee and Charles M. Brooks

Volume 19 · Number 6 · 2004 · 397-404

Robinson (1998) found that US citizens are more accepting of traditional competitive bargaining and of false promises than were citizens of other countries; however US citizens were less accepting of attacking opponent’s network when compared to citizens of the other countries. An examination of differences across regional groupings of countries (e.g. Latin American, Western Europe, Pacific Asia) revealed that no group was consistently more accepting or was consistently less accepting of all five categories tactics (Lewicki and Robinson, 1998; Robinson et al., 2000). In other words, no one country is across the board more ethical or less ethical that another when it comes to negotiation tactics. While investigating perceived appropriateness of negotiation tactics, Volkema (1998, 1999) also investigated the likelihood of the use of alternative tactics. He found no differences between the USA and Mexico concerning the acceptability of 12 out of 17 bargaining tactics, but did find that five of the ethically questionable tactics were more acceptable in the USA. However, results from that same study indicate when the acceptance of tactics was compared to the likelihood of the use of those same tactics, there was a greater disparity within the Mexican group. Although members of the Mexican sample found certain tactics to be less acceptable than did members of the US sample, Mexicans were more willing to compromise their standards of ethics. In addition to the five categories of negotiation tactics developed by Lewicki and his colleagues, tacit bargaining in which communication is conducted in a non-explicit form (e.g. messages are passed between the negotiators in the form of hints, signs, and obscure imitations) has been identified as an important negotiation technique (Wall, 1985). According to Schelling (1960), tacit bargaining is typically used when negotiating parties do not trust each other in an explicit negotiation. Volkema (1998) notes that non-verbal forms of communication are very important to negotiations in Mexico. Therefore, in addition to the five negotiation tactics identified by Lewicki and his associated, we also investigate the perception of Mexican business people about tacit bargaining as a negotiation tactic. Just as research has shown that traditional competitive bargaining is generally more acceptable as a tactic as compared to the four other negotiations tactics, we posit that tacit bargaining will also be viewed as an acceptable practice and will be seen as distinct from the four other categories of questionable tactics. We, therefore, label traditional competitive bargaining and tacit bargaining as “generally acceptable tactics” and the four other tactics: false promises, misrepresentation of one’s position, attacking

opponent’s network, and inappropriate information gathering as “dubious tactics.” The role of trust in negotiations Within the context of negotiations, the importance of trust has been considered in a number of studies. Walton and McKersie (1965) indicate that trust is related to integrative bargaining in labor negotiations, and Butler (1995) has found that the expectation of trust leads to increased information sharing between parties involved in a negotiation. In a later study, Butler (1999) confirmed that relationship and found that information sharing leads to collaborative negotiation. He also found that trust between negotiating parties can result in less complex and more efficient outcomes. Trust has also been linked to the types of bargaining tactics used during negotiations (Kimmel et al., 1980). Kimmel et al. (1980) found that when negotiators had high aspirations (as it commonly the case in business-to-business negotiations) trust was positively related to information exchange. That is, higher levels of trust lead to more communication between parties involved in negotiations. Again, under a condition of high aspirations, they found that when males were negotiating with a more trusted partner, there was less use of tactics aimed at pressuring the other party into making concessions (i.e. the use of threats, requiring heavy commitments, making derogative comments about the other party, or introducing extraneous issues into the negotiations). Many researchers (e.g. Gewirth, 1982; Hosmer, 1995) argue that ethics and trust are highly related. Following the assertion of Brien (1998) that trust promotes ethical behavior, we posit that trust plays an important role in the ethical behavior of negotiators during a negotiation process. Specifically, we hypothesize that trust will be negatively related to all six categories of negotiation tactics. H1. Trust will be negatively correlated with the use of traditional competitive bargaining, tacit bargaining, false promises, misrepresentations of position, attacks on the opponent’s network, and inappropriate information gathering. In addition, as suggested by the distinction between generally acceptable tactics and dubious tactics, we hypothesize: H2. The degree of negative correlation between trust and generally acceptable tactics (traditional competitive bargaining and tacit bargaining) will be less than that between trust and dubious tactics (false promises, misrepresentations of position, attacks on the opponent’s network, and inappropriate information gathering).

399

Trust and negotiation tactics

Journal of Business & Industrial Marketing

Mohammad Elahee and Charles M. Brooks

Volume 19 · Number 6 · 2004 · 397-404

Trust can evolve from a number of different bases. Deutsch (1958) suggests that trust exists when an individual is able to predict the actions of another. In the context of international business, Brenkert (1998) argues that trust comes about when two parties share common values. Based on this, two negotiators from the same country – by being able to predict the one another’s behaviors and by being more likely to share common values – should have more trust in each other than two negotiators from different countries. As such, during a negotiation, a negotiator may make certain judgments about the trustworthiness of an opponent based on that opponent’s nationality. Such judgments may in turn influence the negotiator’s choice of tactics. Therefore, nationality of the negotiating parties becomes very important in international negotiations where ethnocentric and nationalistic tendencies often impede the development of trust. H3. Negotiators will place more trust in an opponent from their own country than they will place in a foreign opponent.

a series of in-depth interviews were conducted with a group of Mexican negotiation experts. Those interviewed were a diplomat, a law professor, two negotiation consultants, a director of a family business center at a Mexican university, and an attorney specializing in international dispute resolutions.

Adair et al. (2001) found that some negotiators adapt their behaviors across cultural contexts. That is, they negotiate differently in a crosscultural situation than in an intra-cultural situation. Research indicates that cross-cultural negotiations tend to be more difficult and result in less favorable outcomes than do intra-cultural negotiations (Sawyer and Guetzkow, 1965; Graham, 1985; Brett and Okumura, 1998). Individuals bargain harder in a cross-cultural context than in an intra-cultural arena. Rubin and Brown (1975) found that when parties were from different racial groups, they tended to be less cooperative when negotiating. They suggest that the similarity between the negotiating parties increases the level of trust, and trust allows for more cooperative behaviors. H4. Negotiators will engage in more tacit bargaining, traditional competitive bargaining, false promises, misrepresentations of position, attacks on the opponent’s network, and inappropriate information gathering in cross-cultural negotiations as compared to intra-cultural negotiations.

Methodology A questionnaire was developed to test the hypotheses. The survey instrument was first pretested with a sample of Mexican business students, and then data was collected from sample of Mexican business people. In addition, to gain a clearer picture of negotiation practices in Mexico,

Questionnaire The questionnaire included measures previously reported in the literature. Two bilingual marketing professors translated the questionnaire into Spanish. The Spanish version of the questionnaire was then back-translated by a different individual. In translating the questionnaire, efforts were made to ensure equivalence, and not just literal translation. The translation process went through several iterations before the questionnaire was deemed acceptable. Following Lewicki and Robinson (1998), all respondents were asked to assume that they are about to enter into a negotiation for something that was very important to their business. They were further requested to assume that the opponent was of the same gender as the respondent, that the opponent was unknown to the respondent, and that they are negotiating for the first time with each other. No information about the negotiation context that might have influenced responses (such as the negotiator’s own personal motivations, the specific issues being negotiated, or the relationship between the parties) was provided. Because the study involved a comparison of intra-cultural and cross-cultural negotiation behaviors, two separate sets of questionnaires were administered. The respondents were randomly divided into two groups. In the first group, respondents were asked to assume that they are negotiating with someone from Mexico. The second group was asked to assume that they are negotiating with someone from Maldives. This second set of questionnaires contained a brief description about the location of the Island of Maldives, but otherwise was identical to the first. Evidence suggests that negotiators commonly develop biases based on the nationality of their opponents. For example, Mexican negotiators commonly have a more positive perception of Spanish opponents than they have of opponents from the USA. In the survey concerning intracultural negotiations, we portrayed Maldives as the home country of the opponents. Since Mexico does very little business with Maldives, Mexican respondents are less likely to suffer from any bias – positive or negative – toward opponents from Maldives. To further guard against any bias, all respondents were asked if they knew anyone from

400

Trust and negotiation tactics

Journal of Business & Industrial Marketing

Mohammad Elahee and Charles M. Brooks

Volume 19 · Number 6 · 2004 · 397-404

Maldives. Any respondent who knew someone from Maldives was excluded from the analysis. Three items drawn from the work of Rotter (1967) and Dwyer and Oh (1987) were used to measure the level of trust that respondents felt toward their opponents. These items were measured along a seven-point scale with a score of “7” indicating more trust than a score of “1.” The likelihood that respondents would use various negotiation tactics was initially measured with a 19-item scale. Out of these 19 items, 16 statements are taken from the “Self-reported inappropriate negotiation strategies scale” (SINS) developed by Robinson et al. (2000). For these items, respondents were asked to indicate their likelihood of using of the various tactics along a seven-point scale with a “1” indicating “Not very likely” and a “7” indicating “Very likely.” Finally, the questionnaire contained demographic questions that were used to develop a profile of sample. The instrument was validated in a pre-test using a student sample. Questionnaires were distributed among students enrolled in a bachelor’s business degree program in a North Mexican university. Students were randomly divided into two groups of equal size. Two different sets of questionnaires, one dealing with intra-cultural negotiations and one dealing with cross-cultural negotiations, were given to the two groups of students. A total of 84 usable responses were collected. Of these, 47 were completed by male respondents, and 37 were completed by females. Factor analysis and reliability tests were conducted. Based on the pretest results, one item was dropped from the final version of the questionnaire.

72 were from the manufacturing sector, while only ten were from the service sector, indicating the dominance of manufacturing sector in Mexico. Questionnaires were mailed in two different waves. The responses of the two waves were compared to determine if non-response error existed. Separate MANOVAs examining the likelihood rating were performed for both intracultural and cross-cultural negotiations. No significant differences were found between the two waves.

Sample A systematic random sample was used for the study. To ensure representativeness of the sample and to increase the generalizability of the study, respondents were selected from different geographic regions of Mexico. Samples were selected from the members of Chambers of Commerce of Mexico D.F., Monterrey, and Guadalajara-Jalisco. Samples were also selected from the members of the Mexican-American National Chambers of Commerce and from a Bancomext database, the largest listing of Mexican exporters and importers. Out of the 600 questionnaires mailed, 84 responses were completed and returned, including two responses received by fax. A total of 23 questionnaires were undeliverable due to changes in respondents’ addresses. The effective response rate was 14.6 percent. Of the 84 responses, 41 pertained to intra-cultural negotiations, while the remaining 43 pertained to cross-cultural negotiations. Of the respondents, 76 were males,

Instrument validation Principal component analysis with a varimax rotation was performed on the 18 items measuring the likelihood of use of negotiation tactics. As in the pre-test and as suggested by the literature, these items clustered into six categories. The Cronbach alphas computed from the aggregate responses on the six categories as well as trust are as follows: trust 0.8261; tacit bargaining 0.7732; traditional competitive bargaining 0.8567; attacks on opponent’s network 0.8595; false promises 0.8257; misrepresentations 0.8991; and inappropriate information collection 0.8532.

Hypotheses tests Pearson’s correlations were computed to assess the relationship between trust and each of the six categories of negotiation tactics (H1 and H2). The correlation results, reported in Table I, show that, as hypothesized in the paper, trust is negatively correlated with each of the types of negotiation tactics. Also, an examination of the correlations between negotiation tactics and trust indicates that the negative correlation between dubious negotiation tactics (false promises, misrepresentations of position, attaching opponent’s network, and inappropriate information gathering) and trust is stronger than that between generally acceptable tactics (tacit bargaining and traditional competitive bargaining) and trust. When Mexican negotiators do not trust their opponents, they are more likely to use ethically questionable negotiation tactics. H1 and H2 were both supported. As indicated in H3, respondents were predicted to place more trust in opponents from their own country than they would in opponents from a foreign country. Mexican negotiators were more trusting of their opponents in intra-cultural negotiations (m ¼ 5:4472, std. dev: ¼ 0:7977) than they were of their opponents in cross-cultural negotiations (m ¼ 3:3256, std. dev: ¼ 0:8050). The test of difference between these means (t-statistic ¼ 12.125, p ¼ 0:000) indicates a significant difference and provides support for H3.

401

Trust and negotiation tactics

Journal of Business & Industrial Marketing

Mohammad Elahee and Charles M. Brooks

Volume 19 · Number 6 · 2004 · 397-404

Table I Correlations between trust and alternative negotiation tactics

Trust Tacit bargaining Traditional competitive bargaining False promises Misrepresentations of position Attaching opponent’s network Inappropriate information gathering

Trust

TB

TCB

FP

MOP

AON

IIG

1.000 20.386 20.502 20.584 20.624 20.638 20.527

1.000 0.612 0.206 0.381 0.324 0.442

1.000 0.365 0.419 0.447 0.449

1.000 0.847 0.889 0.679

1.000 0.951 0.895

1.000 0.852

1.000

Note: All correlations are significant at p , 0.05; (n = 84)

Differences in the likelihood of using the various types of negotiation tactics (comparing intracultural and cross-cultural negotiations) were assessed with t-tests. As indicated in Table II, results from the analysis show significant differences between intra-cultural and crosscultural negotiations. Mexican negotiators were more likely to “bargain harder” (and engage in more of all six categories of negotiation tactics) when dealing with a foreign opponent than when dealing with a Mexican opponent. These findings provide support for H4.

school, college, and inter-generationally – such as young men doing business with their friends’ fathers, etc. In Mexico, personal relationship and mutually understood patron-client relationship substitute for the rule of law.

Even though the statistical results indicate that, Mexican negotiators are likely to be hard bargainers when negotiating with foreigners, caution should be exercised before making any broad generalization of this finding. Although foreign negotiators may find that Mexican negotiators often make false promises or misrepresent their positions, there may be a cultural explanation behind this type of behavior. To quote another of our negotiation experts:

Discussion and implications The study makes an important contribution by demonstrating that negotiation behavior differs as a function of the trust that is reposed on an exchange partner during a negotiation. The results of the statistical tests show a strong negative relationship between trust and the likelihood of using six negotiation tactics. Since trust has been shown to be influenced by the nationality of the opponent, it is important that negotiators try to build some form of relationship with their counterparts, especially when the counterparts come from collectivist, strong uncertainty avoidance, large power distance, and high context countries such as Mexico. To quote one of the negotiation experts that we interviewed:

[T]ime is not perceived in the same way in Mexico as it is in the USA. Deadline is something unknown in Mexico and there is always a possibility to defer a work till tomorrow. Saying “yes” and “no” does not necessarily mean yes and no. At times, people say “yes” just to make the other person feel good. “Yes” does not necessarily mean a commitment. And Mexican people will hardly say “no”, especially in a face-to-face conversation.

In this regard, another interviewee commented: We need to distinguish between honest mistake and deliberate falsehood . . . Generally, Mexican people try to please the foreigners, but at times due to lack of relevant information and out of their politeness, they make promises that they cannot keep or follow up. The intention is good (to please the foreign guest), but at the end it is a disaster as they often fail to meet the deadline or buy or supply what they had promised to buy or sell.

Business relationships in Mexico are very highly personalized. Many business relationships have begun in childhood and developed through high

Table II A comparison of likelihood of using various negotiation tactics in intra-cultural and cross-cultural negotiations Tactics Tacit bargaining Traditional competitive bargaining False promises Misrepresentations of position Attaching opponent’s network Inappropriate information gathering

Intra-cultural Mean SD 4.04 3.91 2.02 1.89 1.69 2.31

1.14 1.51 1.58 1.52 1.49 1.78

402

Cross-cultural Mean SD 5.58 5.54 3.50 4.18 3.65 4.89

0.84 0.96 0.79 0.23 0.48 0.62

t

Sig.

27.027 25.085 25.469 29.701 28.147 28.909

0.000 0.000 0.000 0.000 0.000 0.000

Trust and negotiation tactics

Journal of Business & Industrial Marketing

Mohammad Elahee and Charles M. Brooks

Volume 19 · Number 6 · 2004 · 397-404

The unstable business environment of Mexico may also explain some Mexican negotiation behaviors that may seem questionable in the eyes of their foreign counterparts. To quote one of the interviewees: The Mexican business environment is far more chaotic than the predictable environment of the USA, Europe, or Japan. In a developing, thirdworld, less industrialized country like Mexico, delivery times, deadlines and resources can be subject to electrical supply failures, truck accidents, train hi-jacks, currency devaluation, 100 percent plus annual inflation, industrial sabotage, customs and tax authority interference, etc., etc. Also, Mexican people operate in a highly volatile economic environment where orders for products and services can be suddenly placed and then just as suddenly evaporate. As a result and as an effort to compensate for possible financial losses due to this volatility, Mexican businesses as a common practice take on more work orders than they can normally complete on time. The alternative is to have a highly planned and scheduled system that looks good on paper but results in not enough orders to keep busy. Everybody in Mexico understands and practices this “Mexican scheduling”.

While commenting on Mexican peoples’ level of trust toward foreigners, one interviewee commented: Generally with foreigners, there is a mixture of eagerness, combined with low self-esteem. Mexicans tend to over-value or respect persons from foreign cultures. But there is also always a deep feeling of suspicion.

Just as many foreigners may have had bad experience dealing with Mexican business people, Mexican business people have had bad experiences with a number of foreign firms. In this regard, one interviewee noted that the Mexican Ministry of Commerce maintains a “blacklist” that contains names of Taiwanese and US firms that have engaged in cheating and other unscrupulous business activities in Mexico. A number of implications can be drawn from this study for practitioners. First, to successfully conduct business-to-business negotiations, efforts should be made to build trust and relationships not just between the business firms, but also between the people representing the firms. In this regard, an interviewee commented: The most effective way for a foreigner to negotiate effectively is to develop a network of personal relationships within the company or group of people with whom they are going to negotiate. This should be done long before the negotiation begins. Established personal relationships are an absolute requirement for successful [business] negotiations in Mexico.

Conclusions and directions for future research Results from this research indicate that the nationality of an opponent plays an important role in determining the extent to which a Mexican business person will trust that opponent and the extent to which that businessperson will use various negotiation tactics. The findings presented in this paper are expected to deepen our understanding of how Mexican negotiators may behave in business-to-business negotiation with both Mexican and foreign opponents. However, the analyses presented in this paper should be viewed in light of the limitation that the findings represent measures of likelihood, not actual behavior. Future efforts should be directed towards understanding the role of trust in actual business-to-business negotiation behavior in various settings. Future researchers should, therefore, make an attempt to complement their studies with lessons from actual negotiation behavior. Moreover, any study focusing on such controversial and sensitive issues like trust and ethical behavior are likely to suffer from social desirability bias displayed by the respondents (Dubinsky et al., 1991). While this study is expected to make a significant contribution toward understanding the likely behavior of Mexican negotiators in a business-to-business context, there remain certain unexplored areas for potential research. Future studies should focus on the role of power in increasing or mitigating the incidents of unethical tactics in negotiation. Future research should also investigate how time, budgetary constraints, and the context of the negotiation may influence ethicality in international negotiation behavior. Finally, since a large percentage of Mexico’s international trade comes from family-owned enterprises, the role of families in the process and outcome of negotiations should be investigated.

References Adair, W.L., Okumura, T. and Brett, J.M. (2001), “Negotiation behavior when cultures collide: the United States and Japan”, Journal of Applied Psychology, Vol. 86 No. 3, pp. 371-85. Adler, N.J., Graham, J.L. and Schwarz Gehrke, T. (1987), “Business negotiations in Canada, Mexico and the United States”, Journal of Business Research, Vol. 15 No. 2, pp. 411-29. Brenkert, G.G. (1998), “Trust, morality and international business”, Business Ethics Quarterly, Vol. 8 No. 2, pp. 293-317. Brett, J.M. and Okumura, T. (1998), “Inter- and intracultural negotiations: US and Japanese negotiators”, Academy of Management Journal, Vol. 41 No. 5, pp. 495-510.

403

Trust and negotiation tactics

Journal of Business & Industrial Marketing

Mohammad Elahee and Charles M. Brooks

Volume 19 · Number 6 · 2004 · 397-404

Brien, A. (1998), “Professional ethics and the culture of trust”, Journal of Business Ethics, Vol. 17, pp. 391-498. Butler, J.K. (1995), “Behaviors, trust, and goal achievement in a win-win negotiating role play”, Group and Organization Management, Vol. 20, pp. 486-501. Butler, J.K. (1999), “Trust expectations, information sharing, climate of trust, and negotiation effectiveness and efficiency”, Group and Organization Management, Vol. 24 No. 2, pp. 217-38. Carr, A.Z. (1968), “Is business bluffing ethical?”, Harvard Business Review, January/February. Carson, T. (1993), “Second thoughts about bluffing”, Business Ethics Quarterly, Vol. 3 No. 4. Cramton, P.C. and Dees, J.G. (1993), “Promoting honesty in negotiation: an exercise in practical ethics”, Business Ethics Quarterly, Vol. 3 No. 4, pp. 359-94. Deutsch, M. (1958), “Trust and suspicion”, Journal of Conflict Resolution, Vol. 2, pp. 265-79. Dubinsky, A.J., Jolson, M.A., Kotabe, M. and Lim, C.U. (1991), “A cross-national investigation of industrial salespeople’s ethical perceptions”, Journal of International Business Studies, Vol. 22 No. 4, pp. 651-70. Dwyer, F.R. and Oh, S. (1987), “Output sector munificence effects on the internal political economy of marketing channels”, Journal of Marketing Research, Vol. 24, November, pp. 347-58. Gewirth, A. (1982), “Human rights and the prevention of cancer”, in Gewirth, A. (Ed.), Human Rights, University of Chicago Press, Chicago, IL, pp. 181-96. Graham, J.L. (1985), “Cross-cultural marketing negotiations: a laboratory experiment”, Marketing Science, Vol. 4 No. 2, pp. 79-94. Hosmer, L.T. (1995), “Trust: the connecting link between organizational theory and philosophical ethics”, Academy of Management Review, Vol. 20, pp. 379-403. Husted, B.W. (1998), “Mexican small business negotiations with US companies: challenges and opportunities”, International Small Business Journal, Vol. 14 No. 4, pp. 45-54. Kimmel, M.J., Pruitt, D.G., Magenau, J.M., Konar-Goldband, E. and Carnevale, P.J.D. (1980), “Effects of trust, aspiration,

and gender on negotiation tactics”, Journal of Personality and Social Psychology, Vol. 38 No. 1, pp. 9-22. Lewicki, R.J. (1983), “Lying and deception: a behavioral model”, in Bazerman, M.H. and Lewicki, R.J. (Eds), Negotiating in Organizations, Sage, Beverly Hills, CA. Lewicki, R.J. and Stark, N. (1996), “What is ethically appropriate in negotiations: an empirical examination of bargaining tactics”, Social Justice Research, Vol. 9 No. 1, pp. 69-95. Lewicki, R.J. and Robinson, R.J. (1998), “Ethical and unethical bargaining tactics: an empirical study”, Journal of Business Ethics, Vol. 17, pp. 665-82. Robinson, R.J., Lewicki, R.J. and Donahue, E.M. (2000), “Extending and testing a five factor model of ethical and unethical bargaining tactics: introducing the SINS scale”, Journal of Organizational Behavior, Vol. 21, pp. 649-64. Rotter, J.B. (1967), “A new scale for the measurement of interpersonal trust”, Journal of Applied Personality, Vol. 35 No. 4, pp. 651-65. Rubin, J.Z. and Brown, B.R. (1975), The Social Psychology of Bargaining and Negotiation, Academic Press, New York, NY. Sawyer, J. and Guetzkow, H. (1965), “Bargaining and negotiation in international relations”, in Kelman, H.C. (Ed.), International Behavior: A Social-psychological Analysis, Holt, Rinehart & Winston, New York, NY, pp. 464-520. Schelling, T. (1960), The Strategy of Conflict, Harvard University Press, Cambridge. Sowinski, L. (2000), “Maquiladoras: pending changes on the horizon”, World Trade, September, pp. 88-92. Volkema, R.J. (1998), “A comparison of perceptions of ethical negotiation behavior in Mexico and the United States”, The International Journal of Conflict Management, Vol. 9 No. 3, pp. 218-33. Volkema, R.J. (1999), “Ethicality in negotiations: analysis of perceptual differences between Brazil and the United States”, Journal of Business Research, Vol. 45 No. 1, pp. 59-67. Wall, J.A. Jr (1985), Negotiation: Theory and Practice, Scott, Foresman & Co., Glenview, IL. Walton, R.E. and McKersie, R.B. (1965), A Behavioral Theory of Labor Negotiation, McGraw-Hill, New York, NY.

404

An executive summary for managers and executives can be found at the end of this issue.

Coordinating B2B cross-border supply chains: the case of the organic coffee industry

1. Introduction

Danny Pimentel Claro and Priscila Borin de Oliveira Claro The authors Danny Pimentel Claro is based at the University of Sa¨ PauloPensa/Foundation Institute of Management, Sa¨ Paulo, Brazil. Priscila Borin de Oliveira Claro is based at the Federal University of Lavras, Minas Gerais, Brazil.

Keywords Coffee, Supply chain management, Trust, Organic foods, Brazil, The Netherlands

Abstract The recent interest in and increasing demand for healthy, social and environmentally sustainable products, particularly in developed countries, have fostered the presence of organic coffee supermarket shelves of such countries. Proposes two models of B2B relationships for the Brazilian supply of organic coffee to international markets, more specifically, The Netherlands. For this proposition, compares two possible organizations of the supply chain wherein B2B relationships are based not only on contracts but more importantly on the informal safeguards of mutual trust, long-term orientation and joint actions. For the two proposed chains, a cross-border integrator is included to support the coordination of the business relationship. Emphasis is placed on coordination to increase overall efficiency of the supply chain through reduction of internal and transaction costs.

Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · pp. 405-414 q Emerald Group Publishing Limited · ISSN 0885-8624 DOI 10.1108/08858620410556345

Business-to-business (B2B) relationships are valuable long-term assets of a company. It is necessary to invest in such relationships and to manage this investment to ensure their repeat business. Getting a customer or a supplier to come back over and over again is a challenge for businesses that operate in a competitive environment. These B2B relationships are even more important in agri- and food industries with slim profit margins and a dynamic business environment that is continuously shaken by rapid changes in consumer wishes, technology and international trades. We focus our study on the organic coffee industry. The recent interest and increasing demand for healthy, social and environmentally sound products, particularly in developed countries, have fostered the presence of organic coffee on the shelves of supermarkets in these countries. The global retail value of organic coffee is approximately USD223 million (FIBL and Naturland, 2002) and this retail value has demonstrated a steady 20 per cent annual growth rates in the last few years. In Europe, where organic food has a market share of 2-3 per cent, organic coffee accounts for 0.5 per cent of total coffee sales. Market share is highest in The Netherlands (more than 1 per cent), due to the high interest of consumers in organic food and the ready availability of organic coffee in supermarkets and other outlets. While consumer statistics appear to show a promising picture, the organic coffee trade is yet to be properly organized. The trade is based on market transactions and closely follows the price fluctuations of conventional coffee (Elzakker, 2001). The nature of the organic coffee trade requires the establishment of long-term B2B relationships to better coordinate the transactions in the industry. Our study investigates options for alternative inter-organizational arrangements to achieve better coordination. We propose two models of B2B relationships for the Brazilian supply of organic coffee to The authors gratefully acknowledge useful comments from Sietze Vellema, Sebastien Deneux, Joost Snels Linda Admiraal. This project was conducted at Wageningen University and supported by a grant from the Program of cooperation between North and South-WUR, The Netherlands.

405

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

international markets, with emphasis on The Netherlands. We compare two possible organizations of supply chain wherein B2B relationships are based not only on contracts but more importantly on the informal safeguards of mutual trust and shared long-term orientation. While one proposed chain model elaborates on the redesign of the supply chain for organic green coffee beans, the other elaborates on a roasting company located in the producing country. For both the chains, a cross-border integrator is included to support the coordination of the business relationship. Much emphasis is placed on coordination, particularly to increase overall efficiency of the supply chain through reduction of internal and transaction costs. We conclude by making an analysis of the entry strategy modes and the impact of each proposed chain to the overall efficiency. We conducted a series of interviews to gather valuable information, which allowed us to elaborate on the models of B2B relationships. We followed the methods of case study development suggested by Eisenhardt (1989) and Barton (1990). The holistic perspective on real life events with all of their rich and meaningful characteristics intact allowed us to explore the complexity of relationships. We conducted over 40 interviews and visited several company facilities both in Brazil and in The Netherlands. The interviews focused on managers and decision makers of organic coffee growers (associations and cooperatives), non governmental organizations (NGOs), processing companies, roasting companies, exporters, importers, certification bodies, supermarkets and retail outlets specializing in organic products. The majority of the individuals interviewed are either recognized leaders or key participants in the ongoing effort to promote sustainable organic coffee.

coordination. Coordination, in turn, comprises of the safeguarding and enforcement mechanisms. The influencing factors and the coordination mechanism are described below. (1) Influencing factors: . Frequency refers to the number of times partners transact with each other (Williamson, 1996). The higher the frequency with which companies transact with each other, the more sophisticated a coordination mechanism has to be (e.g. elaborate contracts, trust and long-term orientation) . Asset specificity (AS) of a transaction is when one partner of a transaction has invested resources specific to that exchange that has little or no value in alternative use (Hobbs, 1996; Williamson, 1996). Higher site, physical and human specificity require a more sophisticated coordination mechanism (e.g. elaborate contracts, trust and long-term orientation). . Product flow expresses quantities and fluctuations in quantities and prices (Stern et al., 1996). Larger the quantities and the lower price predictability in the transactions implies the need for a more sophisticated coordination mechanism (e.g. elaborate contracts, trust and longterm orientation). . Information flow describes the quality of information in terms of accuracy, adequacy, completeness, credibility and timeliness (Mohr and Speckman, 1994). The lower the quality of the information, the more sophisticated the need for a coordination mechanism (e.g. elaborate contracts, trust and long-term orientation). (2) Coordination mechanisms: . Enforcement refers to intervention and regulation particularly in cases of conflicts and disputes. Enforcement can be arranged either by private order (e.g. joint problem solving) or a third party (e.g. court of law) (Williamson, 1996). . Safeguards are mechanisms to protect against the risk of opportunism and uncertainty in the business relationship can be formal such as a contract), informal such as trust between the parties or hybrid such as a combination of contract and trust (Bradach and Eccles, 1989). The indicators of trust are personal contacts, commitment, reputation and tolerance (Doney and Cannon, 1997). Another safeguard is longterm orientation, which is the desire of firms toward future interaction, because there are gains and benefits of such a continuity (Ganesan, 1994).

2. Conceptual elements of coordination The foundation for coordination of B2B relationships can be found in the marketing channels literature (Stern et al., 1996). Previous research draws on several conceptual elements of relationships to explain the coordination mechanism established by companies (Rindfleish and Heide, 1997). The extant research has found that it is necessary to go beyond the elements of a discrete transaction and focus on building both collaborative and long-term B2B relationships between trading partners. Based on previous empirical studies (Wilson, 1995; Claro et al., 2003), we focus on transaction frequency, asset specificity, product flow and information flow as the factors that influence

406

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

3. The organic coffee industry at a glance

important elements to foster the hybrid forms of coordination. Companies are encouraged to trust counterparts because it carries the certificate of an acknowledged certification body. Fourth, companies that produce organic coffee have to make some investments in specific assets that have little or no use outside the production of organic coffee. Without such investments, producers face difficulties to in moving to an organic production method reaching acceptable levels of post-harvesting treatments. The roasting companies and the traders face also operational difficulties to avoid contamination of the organic product. For instance, roasting companies need a special processing line to handle, roast and pack organic product, simply because the organic coffee cannot be mixed with the conventional one. Some roasting plants concentrate the processing of organic coffee in the week that follows the cleaning of pipes and machines. This has to be cautiously programmed with inventory levels, since cleaning takes place once a month. Fifth, companies supplying and buying organic coffee are looking for direct and stable relationships (Gresser and Tickell, 2002). Contracts can initially assure longevity, but the issue is to guarantee a specified quality of the coffee throughout the chain of producers, processing plants and roasting companies. Producers may have to deal with the production risks due to climate and natural conditions that are beyond their control. Processing plants have to be able to select and sort coffee beans thoroughly. Roasting companies must store, roast, grind and pack products in a particular way order to keep the organic attributes. However, contracts can only handle some aspects of all transactions in this value chain. As the current situation of the organic coffee industry shows, there must be informal safeguards and self-enforcing agreements to effectively coordinate the relationships between these companies. An examination of the above characteristics of the industry leads to the emergence of certain bottlenecks that indicate the potential risk of opportunism and uncertainties. Thus, relationships between companies in the industry can be based on the informal safeguards (e.g. longterm orientation and trust) that enable the positive behavior of human beings to prevail over selfseeking behavior. They are central to coordination between independent companies in the chain and they may provide the basis for joint planning and joint problem solving. Previous research has pointed out that trust, long-term orientation and joint actions are developed through the sharing of information, the frequency with which companies interact, the investment in assets to better integrate

What type of coordination might reduce the risk of opportunism and uncertainties in the trade of organic coffee? To answer this question we examined a number of particular characteristics of the organic coffee industry. We identified five such characteristics: (1) a premium for quality; (2) a limited number of companies dealing with organic coffee; (3) a certification body that plays an important role in the coordination of the chain; (4) a need for investments; and (5) a need for coordination to reduce transaction costs. These five issues are elaborated below. First, consumers are willing to pay for a product that is perceived to add value in terms of food safety, healthy attributes and environmental sustainability. The growing demand for healthy and environmentally sound products has fostered the production and trade of organic products. This demand has allowed all companies in the organic coffee industry to receive a premium price for the coffee both at the farm gate level and in the international trade market. The premium is tied to the quality of the coffee and can reach up to 35 per cent of the green prices, according to the quality of the coffee (Elzakker, 2001). There is a wide array of quality concepts, which range from physical characteristics (e.g. origin, varieties, color and size) to sensory characteristics (e.g. body and aroma). Thus, both the organic attributes of the product itself as well as the investments in the production system are important to achieve high quality. Second, a very limited number of traders and roasting companies can gain access to this market. Only companies that are capable of coordinating the relationship with producers by means of sharing plans and solving problems together as well as setting long-term contracts can gain access. This implies that the coordination of collaborative relationships with producers is more than just buying well. Third, without complying with requirements of organic production, producers and roasting companies can not be certified. The explicit role of a certification body is to guarantee the organic production and processing method. The certification of companies often takes 18 months. Producers usually group together in order to divide fixed costs among the group. Although there are costs to adopt the organic method, the certification bodies certainly allow for traceability and increasing transparency in the chain. Such traceability and transparency function as

407

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

activities and through time in which the counterpart has proven to be reliable in fulfilling transactions (Doney and Cannon, 1997). A reduction in the number of stages in the chain, which increases the frequency of transactions and encounters between companies, may affect the level of trust, long-term orientation and joint actions and consequently the coordination (see Table I). In the following sections, we discuss how two types of chain configurations might be able to both alleviate uncertainty and opportunism by increasing trust, long-term orientation and joint actions in the relationships of the organic coffee industry. First, we propose a chain of Brazilian green husk coffee (dried to about 11 per cent of humidity) that is supplied to the European market, more specifically The Netherlands. Second, we discuss the chain that focus on the supply of Brazilian roasted and packed coffee to the European market.

(i.e. organic coffee and high quality). Based on this premium price, companies can invest in their facilities and knowledge, which further promote the coordination mechanism. Our discussion concentrates on the most critical relationship in the chain, namely the cross-border relationship between producers and buyers oversea, e.g. importer or roasting company. By increasing the coordination of this relationship, the entire supply chain can benefit from the efficiency gains. This chain has a certification body for agriculture production and processing that embraces organic and fair trade principles. The national certification body is accredited by a European certification body. The national certification body follows the International Foundation for Organic Agriculture (IFOAM) requirements integrated with CODEX (Basic Standards for Alimentarious Commission of FAO) requirements (the third version of IFOAM) and ISO 65 (general requirements for bodies operating product certification systems). Both Brazilian and European labels (e.g BCS) for organic and fair trade issues are working in a combined effort to encourage the better practices and quality of organic products. Producers also follow the national standard (number 6 and 7 of the Brazilian Ministry of Agriculture), regarding the rules for organic production in Brazil. These prescribe in detail the guidelines for organic production with regard to soil, water, biodiversity, plant disease (pest management), and type of raw material accepted. Producers are required to strictly follow labor legislation regarding discrimination, pregnancy

4. The green coffee chain The proposed model for an organic green coffee chain supports Brazilian producers to access the international market. The proposed green coffee chain model is depicted in Figure 1. This model encourages trust and long-term orientation in the relationship and consequently, long-term investments and planning. The impact of trust and long-term orientation in the chain can allow for fair distribution of the premium price that is charged for the attributes of the product Table I Dimension of coordination and bottlenecks in the organic coffee industry Conceptual elements of the B2B relationship

Current situation for chain companies

Bottlenecks

Product flow

Export of green coffee Limited production of organic coffee

Certification Quality

Frequency

On yearly basis

The need for more contacts over the year, which supports longterm orientation

Information flow

Information exchange is limited to the transactions

The importance of information exchange is not acknowledged There is hardly any trust The information means is limited for some companies

Asset specificity

There is hardly any investment in assets specifically made for a counterpart Under certain conditions companies would be willing to make investments in assets

There is a concern with opportunism The investment means is limited for some companies

Safeguards

There are no formal contracts There are no informal safeguards

There is no trust and no long-term orientation The quality is utmost before contracts can be signed

Enforcement

Problems are mostly solved privately The certification body guarantees the organic nature of the product

The need for a third party is not identified There is a need for continuous contact to foster joint action

408

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

Figure 1 The model of a green coffee chain (PSP: processing service provider)

rights, child labor, minimum wage, employee safety and ethics. Although the certification seems to be in place, this does not mean that the transactions between producers and buyers are already efficient and coordinated. A change in the market-based mindset is essential for the close relationship between the buyer and producers. There is a rooted mind set in the international market with regard to market forces such as price, demand and supply. Most traders, exporters, importers and roasters are willing to extract the maximum profit out of a deal and consider their short term gains. However, a long-term orientation and close relationship will enable continuous supply throughout the years and reduce the instability of prices. It is a win-win situation where both buyer and producers gain with the deal and competent companies are able to participate in the marketplace. Cooperatives can play a role in managing these transactions, but not all producers belong to the same cooperative or association. Therefore, it seems to be relevant to consider a possible coordinating role for the cross-border integrator (CBI). This entity (i.e. person or organization) mediates production, processing and trade activities. The CBI is a representative (e.g. a pointed member of the associations, cooperatives,

or NGO, or even a coffee trader) who is capable of undertaking the task of managing the cross-border business relationship between the producers and the buyer overseas. The financial remuneration of the CBI depends on its composition, status (e.g. consultant or trader) and origin (trade house, member of the association, cooperative, NGO or independent consultancy company). An alternative financial arrangement for the CBI can be based on commissions or fixed wages. A task force formed by members of the association and invited related people (e.g. researchers, representative of NGO’s and buyers) can appoint the CBI. The integrator has to overcome barriers such as language, different legal environments, and cultural differences as well as simplify the negotiation process. Consolidating and placing the bargaining power of the numerous producers into the hands of one entity can simplify the negotiation process. Previous research on cross-border negotiation has proved that negotiation success is more likely when the number of participants in the negotiation is small (Sebenius, 2002). Since the CBI bargains on behalf of the producers, the centralized negotiation can improve agility and transparency. Managing this cross-border relationship involves frequent contacts between the parties,

409

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

which can reinforce hybrid coordination based on the formal safeguards of a contract and the informal safeguard of trust. Personal contacts between integrator and buyers permit fluid communication and information flows. Visits and face-to-face contacts are emphasized and it is essential for the purchasing agent, salesperson, integrator, and buyer overseas to visit each other regularly. This confers a positive climate that supports the definition of mutual interests and commitment that further promotes trust. The integrator can help to develop the necessary longterm orientation. A contract or letter of intent may be used between the transactional parties. However, it is expected that such a formal safeguard may serve more as “a public mark on an ongoing relationship” rather than as a measure of future guaranteed interactions. Therefore, the proposed coordination relies more on self-enforcing mechanism rather than on the influence of a third party, such as a court of law, and it increases the speed of transactions while reducing the transaction costs. Joint planning and joint problemsolving are two additional dimensions of collaboration in the business relationship. While joint planning is a proactive measure in nature, joint problem solving is mostly an ad hoc activity. By joint planning, it is expected that the CBI and the buyer overseas come together to compose a detailed plan about future contingencies and consequential duties and responsibilities related to the relationships. This detailed plan allows mutual expectations to be established and cooperative efforts to be specified. An important issue to consider during the elaboration of this plan is the long-term orientation of this proposed chain and its impact on coordination. Joint problem solving refers to the capacity to handle productively any disagreement and other contingencies. Producers and buyers are linked in order to manage an environment that is more turbulent than each can cope with individually. Through joint problem solving, mutually satisfactory solutions are reached and this consequently increases the success of the longterm relationship success. A processing service provider (PSP) plays a special role in the above activity. This provider processes the coffee to be exported. The processes includes the removal of the coffee fruit peel, drying it to 11 per cent of humidity, removal of the seed peel, grading the coffee (screener), and proofing the drink type (cupping test). The PSP assures the uniformity and quality of the product lots that are shipped out. For the success of the relationship with the overseas buyers producers have to

guarantee not only the organic production origin but also the uniformity and quality of the coffee beans product. The decision to outsource the processing plant to a PSP or invest in a plant to attend the producers must be looked at carefully. Rather than outsourcing the processing plant, one solution to the problem with the quality in the post-harvest stage is to make investments in a processing plant. The producer associations may have access to financial sources to purchase the necessary equipment and machinery, which can process the coffee to be supplied. The functional aspects of the proposed model for the green coffee chain are summarized in Table II.

5. The roasted coffee chain The second chain proposed in this article focuses on the supply of Brazilian roasted coffee to the international market. The model of this chain is depicted in Figure 2. Brazil is the only coffee producing country that has exported conventional roasted coffee to The Netherlands. The quantity is rather modest (45 ton) and accounts for 0.2 per cent of the Dutch imports of roasted coffee (van den Dungen and Eikelboom, 1997). In this model, we consider a national roasting company linked to a buyer overseas (e.g. importer and retailer) in The Netherlands. The model of a chain for roasted coffee allows for the transfer of technology related knowledge, the kind of physical investments necessary, and the management of the access of value added products to international markets. The roasting and packaging is carried out in the country of origin of the coffee, which ensures the quality and organic certification. One of the main threats of this chain lies in the import tariffs. The import tariffs on roasted coffee are 12 per cent, whereas the import taxes for green coffee from Brazil is 1.6 per cent (van den Dungen and Eikelboom, 1997). Venturing into the trade of roasted, packed organic coffee is a challenge. The marketing skills and experience with international exports may allow the roasting company to roast and pack products in accordance with international standards. Due the large number of coffee species, varieties and production sites (regarding type of soil and altitude) found in Brazil, the coffee can be blended to suit the tastes of European consumers. The roaster needs to determine the blend and type of coffee that is more appropriate to the targeted end consumers. This must be done according to the required aroma, roasting point and flavor. The coordination of the relationship between producers and roaster, and between roaster and

410

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

Table II Functional aspects of the proposed chain of green coffee PSP

CBI

Participant identity

Processing service provider

Participant responsibility

Select, prepare for export, and taste (cupping test)

An independent entity (e.g. member of the association, or NGO, or a coffee trader) Overcome barriers of language, different law settings, cultural differences, and simplify the negotiation process

Formal safeguards Informal safeguards

A contract or a letter of intent Trust Long-term orientation Joint planning Joint problem solving

Joint actions

Figure 2 Sustainable chain for roasted coffee (PSP: processing service provider)

buyers overseas is based on formal and informal safeguards. In the proposed chain, a formal contract may be signed by the transactional parties, but a contract alone cannot effectively coordinate the relationship. The contracts are expected to be combined with the informal safeguards. Thus, the coordination relies on selfenforcing mechanisms rather than on the influence of a third party. Consequently there is an increase in transaction speed and a reduction in transaction costs. The cross-border integrator (CBI) should coordinate the interface between producer and roaster in the same way as in the green coffee chain, particularly because the composition of the producer associations remains the same. The CBI may have a direct relationship with the buyers overseas in order to monitor the roaster’s decisions and moreover to facilitate information flows and collaboration between the companies. Even though the services offered by the processing service provider (PSP) can be carried out by the roasting plant or a cooperative, there is a need to clearly identify an appropriate PSP. A task force

formed by members of the association and invited related people may have the freedom to assign an appropriate PSP. As can be seen in the model for the roasted coffee chain, there is a number of similar functional characteristics as discussed in the model for green coffee chain. However, some characteristics should be highlighted. First, the roasting plant appoints two key persons, namely salesperson and purchasing person. While the salesperson deals with the buyer overseas, the purchasing person deals with the producers. The CBI creates the interface between purchasing person and the producer. The CBI also ensures the quality of the work done by the outsourced PSP. The relationship between the roasting company and the buyer overseas does not depend only on the formal contract but primarily depend on the nature and resilience of the relationship between the two parties. Trust, which is an important informal safeguard, is developed on the basis of personal contacts and confidence in performance. In such a

411

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

close relationship fluid communication and information flows are essential for implementing long-lasting relationships. The purchasing person of the roasting company is in charge of managing the relationship with the CBI as the representative of the producers. This agent works jointly with the integrator in order to guarantee both the conditions of the transactions with the buyer overseas and the quality of the product. Exchange of knowledge must happen between the purchaser and the integrator as well as the producers. Although contracts must be written down, the close relationship is essential to develop the necessary trust among the participants. Considering the crucial tasks of the salesperson and the purchasing person, it is important that the two must be in complete harmony of thinking and committed to the accomplishment of the work. Collaboration between the parties is certainly expected to occur in the joint planning and joint problem solving activities. Frequent visits and face-to-face contacts encourage transparency of interests and commitment. It is essential for the purchasing person, salesperson, integrator, buyer overseas to be visiting each other. Although the producers are certified to produce organic coffee, there is still a certification cost involved. The market guides the decision about the label, and consequently it will be up to the buyer to accept the existing label or request a new label. The need to substitute the market-based mindset is essential for the close relationship between the buyer and producers. The use of a CBI can encourage companies to engage in long-term relationships, because it enables continuous supply and reduce the risk of opportunism. It is a win-win situation where the entire chain can benefit from the deal (see Table III).

to coordinate cross-border supply chains. The reason for this lies in the observation that the current design of the transactions in the organic coffee industry may gain in efficiency by basing the coordination on trust, long-term orientation and collaborative joint actions. We observed in the industry that the relationship between producers and buyers usually resembles the design of market transactions. Moreover, the issue of certification can also increase trust and coordination between the parties involved. We argue that some form of concrete organizational action is needed to coordinate the relationship. Table IV depicts the elements of the coordination in the proposed chains, which allows a clear comparison of our proposed models with the current situation. The difference between the model for green coffee and for roasted coffee can be explained by the entry strategy modes that allow gains in the access to international markets (Stern et al., 1996). Following the analysis of entry strategies, the factors that deserve attention are dependence, control, country uncertainty, transaction costs and added value (for a description of the factors, see Table V). Table VI shows a comparison of the proposed chain outcomes and the current coffee chain. In the proposed chains, dependence and control are expected to increase when compared to the current coffee chain. We expect that country uncertainty will moderately affect the green coffee chain because the buyers overseas are responsible for the sales in their own home country. On the contrary, country uncertainty can affect the roasted coffee chain, since the roasting company faces an international market. With regard to transaction costs, green coffee is expected to exhibit lower costs than the costs of the roasted coffee chain, which are expected to be moderate and are largely dependent on the actions of the cross-border integrator. We also expect that the locally added value proposed by the roasted coffee chain will play a major role in the product. The locally added value for the green coffee chain

5. Concluding remarks In this article, we elaborated on two possible models for building long-term B2B relationships Table III Functional aspects of the proposed chain of roasted coffee PSP

CBI

Roaster

Participant identity

Processing service provider

Roasting plant of organic coffee beans

Participant responsibility

Select, sort, and taste

An independent entity (e.g. member of the association, cooperative or NGO, or a coffee trader) Interface among producers and roaster; and monitor the interface between roasters and buyer overseas. All the responsibilities remain but the roaster exporting personnel can facilitate A contract or a letter of intent Trust Long-term orientation Joint planning Joint problem solving

Formal safeguards Informal safeguards Joint actions

412

Grind, roast and pack organic coffee; can take over the exporting activity and the main contact with the buyer overseas

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

Table IV Elements of the coordination and the proposed chains Elements of the coordination

Product flow

Frequency

Information flow

Asset specificity

Safeguards

Enforcement

Current coffee chain

Market

Very low

Very low

Low

Market

Proposed models (Green coffee and roasted coffee)

Integration

Moderate, with close contacts

Intensified

Investments in assets to increase coordination

Price and market forces Trust and long term orientation

Self-enforcing agreements (joint actions)

Table V Analysis of the entry strategy to international markets Factors

Definition

Dependence

The extent to which producers will be dependent on the downstream chain companies (e.g. PSP, CBI, roaster, retailers) The extent to which the producers can monitor current and future actions The factor inherent in cross-border relationships, which includes physical and cultural distances, and law settings Generally refers to the costs of negotiation, enforcing and monitoring the transaction between producers and buyer overseas The extent to which the commodity product is transformed into a product for end consumers

Control Country uncertainty Transaction cost Added value

Table VI Comparison of proposed chain outcomes and the current coffee chain Outcomes of the proposed chains

Dependence

Control

Country uncertainty

Transaction cost

Added value

Green coffee chain Roasted coffee chain

Increases Increases

Increases Increases

Moderate High

Low Moderate

Moderate High

is expected to be moderate but definitely greater than the current coffee chain. The production and processing of high quality coffee is as dependent on the willingness of buyers overseas to focus on long-term orientation as it is on the adding a premium to the product. The conditions for the success of the product lie in the hands of both the producers and the buyers. Coordinating the cross-border relationship is not only a complex task but also needs time. The willingness of participants of the organic coffee industry to establish a high level of commitment that any implementation would very likely lead to success.

References Barton, D.L. (1990), “A dual methodology for case studies: synergistic use of longitudinal single site with replicated multiple sites”, Organization Science, Vol. 1 No. 3, pp. 248-65. Bradach, J.L. and Eccles, R.G. (1989), “Price, authority and trust”, Annual Review of Sociology, Vol. 15, pp. 97-118. Claro, D.P., Hagelaar, R. and Omta, O. (2003), “The determinants of relational governance and performance: how to manage business relationships?”, Industrial Marketing and Management, Vol. 32 No. 8, pp. 703-16.

Doney, P.M. and Cannon, J.P. (1997), “An examination of the nature of trust in buyer-seller relationships”, Journal of Marketing, Vol. 61, pp. 35-51. Eisenhardt, K.M. (1989), “Building theories from case study research”, Academy of Management Review, Vol. 14 No. 4, pp. 532-50. Elzakker, B. (2001), “Organic coffee”, unpublished, Agro Eco, Bennekom. FIBL and Naturland (2002), “The organic market in Switzerland and the European Union – organic coffee, cocoa and tea, SIPPO, Zurich, available at: www.sippo.ch Ganesan, S. (1994), “Determinants of long-term orientation in buyer-seller relationships”, Journal of Marketing, Vol. 58 No. 2, pp. 1-19. Gresser, C. and Tickell, S. (2002), Mugged: Poverty in your Coffee Cup, Oxfam International: Oxfam, Oxford, 57 pp. Hobbs, J.E. (1996), “A transaction cost approach to supply chain management”, Supply Chain Management, Vol. 1 No. 2, pp. 15-27. Mohr, J.J. and Speckman, R. (1994), “Characteristics of partnership success: partnership attributes, communication behavior, and conflict resolution techniques”, Strategic Management Journal, Vol. 15 No. 2, pp. 135-52. Rindfleish, A. and Heide, J.B. (1997), “Transaction cost analysis: past, present and future applications”, Journal of Marketing, Vol. 61, October, pp. 30-54. Sebenius, J.K. (2002), “The hidden challenge of cross-border negotiations”, Harvard Business Review, March, pp. 76-85. Stern, L.W., El-Ansary, A. and Coughlan, A. (1996), Marketing Channels, 5th ed., Prentice-Hall, Upper Saddle River, NJ.

413

Coordinating B2B cross-border supply chains

Journal of Business & Industrial Marketing

Danny Pimentel Claro and Priscila Borin de Oliveira Claro

Volume 19 · Number 6 · 2004 · 405-414

van den Dungen, E.M.C. and Eikelboom, D.J. (1997), Coffee, A Survey of The Netherlands and Other Major Markets in the European Union, CBI, Rotterdam. Williamson, O.E. (1996), The Mechanism of Governance, Oxford University Press, New York, NY. Wilson, D.T. (1995), “An integrated model of buyer-seller relationships”, Journal of the Academy of Marketing Science, Vol. 23 No. 4, pp. 335-45.

Korpela, J., Lehmunvaara, A. and Tuominen, M. (2001), “An analytic approach to supply chain development”, International Journal of Production Economics, Vol. 71, pp. 145-55. Lambert, D.M., Cooper, M.C. and Pagh, J.D. (1998), “Supply chain management: implementation issues and research opportunities”, The International Journal of Logistics Management, Vol. 9 No. 2, pp. 1-19. Lambert, D.M., Emmelhainz, M.A. and Gardner, J.T. (1996), “Developing and implementing supply chain partnerships”, The International Journal of Logistics Management, Vol. 7 No. 2, pp. 1-17. Li, D. and O’Brien, C. (1999), “Integrated decision modelling on supply chain efficiency”, International Journal of Production Economics, Vol. 59, pp. 47-157. Palmer, C.M. (1996), “Practical problems in building effective supply chain alliances”, Proceedings of the 2nd International Conference on Chain Management in Agri and Food Business, Wageningen Agricultural University, The Netherlands, pp. 223-33. Parker, G.G. and Anderson, E.G. (2000), Supply Chain Integration: Putting Humpty Dumpty Back Together Again: New Direction in Supply-chain Management, American Management Association, New York, NY. Rabobank Nederland (2001), Agrarische Zaken de kleur van, Samenwerking. Remenyi, D., Williams, B., Money, A. and Swartz, E. (1998), Doing Research in Business Management: An Introduction to Process and Method, Sage Publications, Newbury Park, CA, pp. 158-71. Rice, P.D. and McLean, J. (1999), “Sustainable coffee at crossroads”, prepared for the Consumer’s Choice Council, 193 pp. Saes, M.S.M. and Nunes, R. (1999), “O Desempenho das MPEs na Industrı´a de Torrefa6a˜o e Moagem de Cafe´”, unpublished. Shwedel, K. (2000), “The Brazilian coffee business”, Rabobank, unpublished. Trienekens, J.H. (1999), “Management of processes in chains, a research framework”, Phd thesis, Wageningen University, Wageningen. van de Kasteele, A. and Zeldenrust, I. (2000), “Controlling the coffee supply chain?”, Food world R&C and SOMO, unpublished. van der Vorst, J.G.A.J. (2001), “Effective food supply chains”, Phd thesis, Wageningen University, Wageningen. Villa, A. (2001), “Introducing some supply chain management problems”, International Journal of Production Economics, Vol. 73, pp. 1-4.

Further reading Anderson, D.L., Britt, F.E. and Donovan, J.F. (1997), “The seven principals of supply chain management”, available at: www.Manufacturing.net/magazine/logistics/1997/scmr/ 11princ.htm Barney, J. and Hesterly, W. (1999), “Organizational economics: understanding the relationship between organisations and economic analysis”, in Clegg, S.R. and Hardy, C. (Eds), Studying Organization: Theory & Method, Sage Publications, London, pp. 109-41. Brown, S.J. (1999), “A look into the organic coffee market”, Tea and Coffee Journal, December, pp. 47-52. Farina, E.M.M.Q. and Saes, M.S.M. (1998), “Private interest associations, coordination and competitiveness: a case from Brazilian coffee agribusiness”, unpublished. Ganeshan, R. and Harrison, T.P. (2000), An introduction to supply chain management, Department of Management Science and Information Systems, Penn State University. Giovannucci, D. (2001), “Sustainable coffee survey of the North American specialty coffee industry”, unpublished. Giovannuci, D. (2002), “Building agri-supply chains: issues and guidelines”, unpublished. Hattam, C. (2002), “Organic agriculture and sustainable agriculture and rural development”, available at: www.fao.org/organicag/ao_sard.htm Hulthin, K., Dubois, A. and Gudde, L.E. (2000), Developments in distribution networks, Department of Industrial Marketing, Chalmers University of Technology, Go¨teborg. ICO (International Coffee Organisation) (n.d.), Available at: www.ICO.org Kaihara, T. (2001), “Supply chain management with market economics”, International Journal of Production Economics, Vol. 73, pp. 5-14. Kemp, R. (n.d.), “Managing interdependence for joint venture success: an empirical study of Dutch international joint ventures”, PhD thesis, Groningen.

414

An executive summary for managers and executives can be found at the end of this issue.

Supplier-manufacturer relationships In the Brazilian auto industry: an exploration of distinctive elements

Introduction

Celso Cla´udio de Hildebrand e Grisi and ´ urea Helena Puga Ribeiro A

The authors Celso Cla´udio de Hildebrand e Grisi is a Professor at the Faculdade de Economia, Administrac¸a˜o e Contabilidade, University of Sa˜o Paulo, Sa˜o Paulo, Brazil. A´urea Helena Puga Ribeiro is a Professor of Marketing at the Fundac¸a˜o Dom Cabral, Belo Horizonte, Brazil.

Keywords Automotive industry, Relationship marketing, Supplier relations, Brazil

Abstract This study aims to identify the presence of commitment, cooperation and interdependence, in the relations established between suppliers and automobile manufacturers as described in the extant relationship marketing theory, Case studies of the three biggest Brazilian automobile manufacturers were carried out, depicting the existing relations, the routines in these relations and the standards governing such relations.

Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · pp. 415-420 q Emerald Group Publishing Limited · ISSN 0885-8624 DOI 10.1108/08858620410556354

The concept of relationship marketing has been the focus of substantial research efforts since its appearance in the work of Berry (1983 cited in Berry et al., 1995). Since that time, marketing researchers have made efforts to describe techniques, formulate concepts, measure results, study cases, identify directions and feature the growth tendencies of relationship building activities by marketers. Relationship marketing is a me´lange of concepts. Accordingly Coote (1994) identified the contributions from interactive network theories of quality management, services marketing and relationship economy as constituting the theoretical body of relationship marketing. Among these theoretical bodies, the interactive network approach has assumed an important role in the structuring of relationship marketing theory as can be seen from the extant research (Cravens and Piercy, 1994; Gummerson, 1987, 1994; McKenna, 1993; Morgan and Hunt, 1994, 1995; Webster, 1992). The interactive network approach to relationship marketing refers to the strengthening of relations among organizations by increasing competitiveness along the chains and creating and delivering value to the market through the formation of cooperative relationships among independent companies. Within this paradigm of cooperation, the concepts of commitment, cooperation and interdependence are deemed to be essential to relationship marketing. Although the concepts presented and discussed in the relationship marketing literature seem to have clear meaning, they reflect a lack of accurate operating elements. Efforts made in this direction have failed to provide the concepts with sufficiently accurate and indicative operating elements. This is an important gap in the literature that needs to be addressed by research in order to provide a richer understanding of relationship marketing concepts. Our research aims to fill this void in the current relationship marketing literature. As an initial step towards this goal we carried out an exploratory study of the three largest Brazilian automobile manufacturers with the purpose of identifying the existence of the relationship marketing concepts of commitment, cooperation and interdependence between these manufacturers and their suppliers. Accordingly the following research questions guide our exploratory effort:

415

.

.

.

.

.

Supplier-manufacturer relationships

Journal of Business & Industrial Marketing

Celso Cla´udio de Hildebrand e Grisi and A´urea Helena Puga Ribeiro

Volume 19 · Number 6 · 2004 · 415-420

What is the relationship level developed between automobile manufacturers and their suppliers concerning cooperation and integration? Are the research findings sufficiently representative of typical routines and procedures performed by both the parties in order to strengthen their relationship? Are there elements in the routines and procedures of these relationships that characterize commitment, cooperation and interdependency behaviors? Are there characteristic reasons for the dissolution of these relationships? Do the reasons defined to determine this dissolution concern aspects of commitment, cooperation or interdependency?

We first present a brief background and history of relationships between manufacturers and their suppliers in the Brazilian automobile industry. We then present an overview of the procedures and the respondents used for the study. In the next section we present the results of the study. We conclude by presenting managerial and theoretical implications of the research.

Automobile manufacturer-supplier relationships in Brazil The relationship between automobile manufacturers and automobile parts suppliers in Brazil has been clearly influenced by important events in the dynamic world automotive scenario. Research carried out by Rampazzo (1998) shows that large domestic or regional groups of automobile parts manufacturers are becoming worldwide groups mainly as a result of the growth of US automobile manufacturers in Europe and Asia. Another reason for this growth is the operation of European automobile manufacturers in search of larger shares in the so-called emerging markets. According to Rampazzo (1998), such accelerated growth caused a strong movement of mergers and acquisitions that changed the country’s scenario of industrial suppliers and started a denationalization process in the industry. Domestically, the policies adopted by governments affected the industry’s structure and performance in the region. The economic opening processes have reduced tariffs in South America, while the use of non-tariff barriers in the other economic blocks has grown (Santos and Gonc¸alves, 2001). Such events have caused a new cycle of investments in Brazil, with the purpose of fostering the technological upgrading of products and processes. This has changed the relations between

automobile manufacturers and their suppliers. The investments of the automobile-manufacturing complex have followed the logic of activityrestructuring while always observing the plant specialization trend. Automobile manufacturers have reorganized their purchase processes. One of the aims of such reorganization is centralization and the joint development of parts, which ascribes a strategic role to suppliers who are in charge of product engineering. Such codesign practices enable automobile manufacturers to ensure the supply of vehicle parts to the market irrespective of their being manufactured in Brazil or abroad. Second, reorganization aims at reducing the costs incurred in research and development, tools and other items of similar nature, through the economic scale created by such purchases by focusing on a few, and sometimes on just one supplier (SINDIPEC ¸ AS, 2001). Consequently such restructuring has brought about a change in the relations between suppliers and automobile manufacturers. This change is primarily marked by the evolution of manufacturers’ selection criteria and new parameters to determine whether to increase or terminate such relations. This restructuring of relations between automobile manufacturers and their suppliers provides a rationale for investigating the evolving nature of the these relationships and the presence of relationship marketing concepts. The growth of negotiations and the strengthening and organizing of relationships, aims to increase competitiveness by means of establishing stronger bonds and cooperation between independent companies. In the following sections we describe the methodology and the major findings from a exploratory investigation of the current relationships and distinctive elements that characterize commitment, cooperation and interdependence between automobile manufacturers and their suppliers in Brazil.

Methodology Given the exploratory nature of the study, the research utilizes a method of structured interviews with key informants. The depth interviews, focused on the relationship characteristics of the automobile manufacturers and their suppliers. The key informants for the study were 12 managers whose responsibilities in the manufacturers’ organizational structures were the key to commercial procurement of automobile parts. Such key informants have sufficient knowledge of the phenomenon being studied and are appropriately positioned to shed light on the relationships under consideration. The research

416

Supplier-manufacturer relationships

Journal of Business & Industrial Marketing

Celso Cla´udio de Hildebrand e Grisi and A´urea Helena Puga Ribeiro

Volume 19 · Number 6 · 2004 · 415-420

settings were three major automobile manufacturers operating in Brazil. In the year 2000, they represented about 70 per cent of the domestic production and almost all the export of light automobiles performed by Brazil (ANFAVEA, 2000).

relationships is therefore a formal one and is developed with the purpose of identifying problems and providing the necessary solutions to these problems found. The relationships between the suppliers and manufacturers are marked by sophisticated coordination procedures and both parties to the relationship exhibit an increasing amount of interdependence. Purchase and repurchase procedures are subject to permanent routines and standards. Thus, all the purchases are programmed on a monthly basis. However, every week, the automobile manufacturer updates the information on the production of vehicles so as to allow for the necessary adjustments to be performed by the suppliers. Quotas are agreed on from time to time along with the required aftersales services, product warranty, and help for specific problems. Suppliers are fully responsible for technical assistance issues. The most often mentioned types of partnerships and interdependencies are found at the financial, production, R&D, and marketing levels. Shared investments in tools (50 per cent each) are common. Less usual, but not rare, is the sharing of expenses concerning the development of new processes and technologies. Any other financial support is rare, although there are efforts to put together parties interested in similar technologies or forming occasional joint ventures. At the production and R&D level, technical cooperation with the automobile manufacturers’ non-domestic units is common. At the marketing level, cooperative advertising and other efforts especially in the launching of new models, are traditionally seen. The interviewed managers further stated that as a result of the growth of the integration of the management, production, distribution and research and development systems, cooperation between suppliers and manufacturers has become much closer. The sharing of activities and the high levels of commitment requires regular and joint evaluations in order to check the defined relationships, so as to preserve an attitude of trust between the firms. It is customary for the automobile manufacturer to encourage its suppliers towards technological advances, regarding products, processes, and the modernization of their machinery. Whenever this appears relevant to the maintenance of their supply policies – favoring the reduction of supply costs, the guarantee of supply, the improvement of quality or the development and improvement of the product – the automobile manufacturers support or suggest initiatives to their suppliers. They finance additional investments, advance amounts corresponding to future purchases, supply or finance machinery, encourage association with other suppliers, and they make

Findings The interviews highlighted some interesting facts. First, throughout all of the companies and the interviewees, there was a common desire to continue with current development of suppliers and a concomitant development of facilitating organizational structures. Second, the responses showed a considerable evolution of relationships between manufacturer and supplier with formal evaluation structures, an increase in coordination, and the growth of cooperation among the parties. Finally, the respondents reported the development of various specific reasons for the dissolution of these relationships. The general trend of the three automobile manufacturers is to preserve the supplier development policy, thereby avoiding vertical integration of the production function. However, outsourced production replaces in-house production only when the cost and quality are equivalent to those of in-house production. This marketing process between suppliers and manufacturers involves a relatively large set of organizational structures on the part of both parties. In the case of automobile manufacturers, the decision is always taken by a committee named “make or buy” that is made up of representatives from the fields of finance, personnel, manufacture, procurement, product engineering and quality engineering. In almost all cases, the essential factors to establish and continue the relationship are defined by the procurement and the quality engineering departments. Some of the desirable factors that are looked for in a supplier are quality and type of technical equipment, reputation and prestige of the brand. Relationships between the manufacturers and their suppliers have evolved from the initial relationship establishment phase which is marked by the setting up of long-term agreements between parties. Such relationships are now exceptions and are not accepted as a form of business collaboration any more. The interviewed automobile manufacturers excluded firms from being suppliers if they were unable to integrate their processes with the manufacturers’ requirements. Relationships exhibit greater cooperation implying business practices that require a high level of information and value exchange in order to support their implementation. The evaluation process of these

417

Supplier-manufacturer relationships

Journal of Business & Industrial Marketing

Celso Cla´udio de Hildebrand e Grisi and A´urea Helena Puga Ribeiro

Volume 19 · Number 6 · 2004 · 415-420

available, to a certain extent, their research centers, or bring corporations having relevant technologies in developed countries closer. The reasons for the dissolution of the relationships between the suppliers and automobile manufacturers were varied. Price is an important consideration with regards to price level and payment conditions or the noncompliance with or changes to the agreed prices. Quality is another factor with respect to quality of the products and noncompliance, even if occasional, with the technical specifications that have been already certified. Fulfillment of delivery terms is vital since it helps to prevent delays and aids to check the delivery of rejected and not accepted batches. Finally, technological laggardness or decrease in technology investment levels is a crucial element that determines the decision to continue or dissolve the relationship.

procedures and standards, organize their structures, attribute specific functions to each supplier, define the interactions and the way of evaluating them. All of this is oriented towards encouraging the growth of their relations with suppliers. This is in accordance with prior research that suggests that the evolution of relations between suppliers and manufacturers has occurred at three different levels of cooperation and integration (Crosby, 1990; Lubben, 1989). First-level relations are the initial phase when the product projects have part of their content delegated to suppliers. These projects produced a high level of confidence between the parties leading to the establishment of long-term agreements. New productive and administrative techniques such as statistic process control, analysis of failure, manner and effect, quality circles, just-in-time, full preventive maintenance and the outlining of experiments supported the resulting confidence. The technological progress and the accumulated experience allow a higher level of integration between suppliers and manufacturers and leads to the establishment of second-level relations. In this level, suppliers are not only able to meet the needs of customers concerning their product requirements but also establish a high level of R&D, and are faster than the market with regards to highly reliable products, services and innovations. Turnkey or full-services product and service packages are negotiated. Manufacturers only specify the performance expectation and efficacy of their products and services, fully delegating the development and implementation to suppliers, with minimum quality control. Finally the relationship between the manufacturers and suppliers progress to the next level which is also known as third level relations. Here the firms start experiencing a high level of mutual confidence and strive for excellence, within total quality concepts, on a continuous basis. They have an intelligent vision of the future of their businesses, and make long-term plans for the evolution of their products and services. They focus on alliances, which enables them to expand their markets and preserve their competitiveness. Strategies that consider suppliers to be an integral part of the productive process are discussed and defined. The evolution of the relationships between suppliers and manufacturers marks the presence of relationship marketing elements for two reasons. It shows the presence of negotiations which put the purchase system of the manufacturer and the sale system of the supplier in interface with each one of them consisting of several individuals and organizational structures. Moreover it confirms the strengthening of relations among organizations and the resulting organization of relations as a

Discussion The central tenet of this article is to identify the existence of relationship marketing elements that characterize commitment, cooperation and interdependence behavior in relation to Brazilian automobile manufacturers and their suppliers. The results of our exploratory study reinforce this theme. Some important conclusions that have implications for both managers and academics can be drawn from this research. Commitment is central in relationship marketing theory. Mutual commitment is essential to the maintaining of long-term relationships (Berry and Parasuraman, 1991). Malley and Tayman (1997) have reviewed the most important definitions on the term “commitment”, with the purpose of finding cohesion among them. They find that, in the various existing conceptualizations, the expression implies a component of attitude – the idea of a wish to continue the relationship (Moorman et al., 1994) or a sense of interacting (Storbaka et al., 1994). Various models have been proposed, identifying the variables that precede commitment. Morgan and Hunt (1994), for instance, have identified the cost of ending the relationship, the benefits of the relationship, shared values and trust and its antecedent variables of open communication and the absence of opportunistic behavior. Brazilian automobile manufacturers try to reach a certain level of relationship with their suppliers. This level is marked by commitment, cooperation and interdependence in the supplier-manufacturer relations. The fundamental goal of the make or buy committees is the development of suppliers and they act deliberately to prevent the vertical integration of production. They develop

418

Supplier-manufacturer relationships

Journal of Business & Industrial Marketing

Celso Cla´udio de Hildebrand e Grisi and A´urea Helena Puga Ribeiro

Volume 19 · Number 6 · 2004 · 415-420

network, the purpose of which is to enhance competitiveness throughout the networks. This aids in creating and providing value to the market by means of relations of cooperation among independent companies. Collaborative behavior is the basis for obtaining competitive advantages (Morgan and Hunt, 1994). Such behavior emphasizes the paradoxical nature of relationship marketing: to be an effective competitor, one has to be a reliable cooperator. According to these authors, cooperation is a consequence of the commitment and trust present in the relationship. The relationship between automobile manufacturers and their suppliers thereby exhibit the relational element of commitment in consonance with the theoretical underpinnings of relationship marketing. There is a set of routines and procedures that preside over these relations and these are established by consensus between suppliers and manufacturers. Such procedures and standards are relevant for the characterization of the presence of relationship marketing, since it demands an intense sharing of information and values, the absence of which entails the undoing of the business relation. These procedures characterize the interdependence of the manufacturer and supplier on one another. Interdependence between organizations occurs whenever the parties involved in the relationship are actually connected to each other, in such a way that the performance of one company depends on the performance of the other. Business network relations require a relation of mutualism (“win-win” type) within a context of a “mutual value generating system” (Wehrly and Ju¨ttner, 1994). This mutual value generating system is “a system of interdependent players that has its total value increased by the value generating interactive process and competes with other value generating systems in the competitive system in which they take part”. Hakansson and Snehota (1995) propose some connection forms that affect the companies’ developments. It is among these that interdependence appears and they may take shape through the aspects of technology, knowledge, social relations and administrative systems and routines. . Technology – the relationships may be regarded as links showing an existing technology. The technical connections between different relationships in a company are generally very strong. . Knowledge – in these relationships, one company’s knowledge is faced with another company’s knowledge, and new knowledge is born. As the new knowledge belongs to both parties, this means that both parties are connected thereby.

.

.

Social relations – the social bonds arising between the two companies are important to provide mutual trust among people. Administrative systems and routines – much of what occurs in relationships is administrative by nature. A series of administrative activities in the form of information processing or control is required to render behavior coordination among the different parties easier. Thus, administrative systems create bonds among companies.

With regards to interdependence, it was identified that mutualism is the kind of relation pursued by the parties. Therefore, the theoretical assumptions of relationship marketing are present, in these relations, in the organization of the structures involved, in the establishment of processes compatible with the evaluation criteria of the established relations, and in the development of personnel whose values, attitudes, skills and knowledge are compatible with the relationship required. Cooperation is a central tenet of networked organizations (Cravens and Piercy, 1994; Sheth, 1994 cited in Cravens and Piercy (1994)). Relationship marketing involves the creation and distribution of value through cooperation (Sheth, 1994 cited in Cravens and Piercy (1994)). Cooperation means situations in which the parties work together with a view to reaching mutual objectives (Morgan and Hunt, 1994). Neilson and Wilson (1994), in an effort of analysis involving a series of definitions, have built a quite similar concept, affirming that “cooperation means a company working with another, aiming at obtaining mutual benefits”. These authors suggest that certain dimensions are implicit in the concept of cooperation. These dimensions are the sharing of information and resources, joint actions, harmony and flexibility. Such cooperation is also exhibited in the study of methods and routines of the automobile manufacturers and their suppliers. The variables that characterize cooperation were found in their relationships. The traits identified with cooperation were the sharing of resources and information (R&D, production and marketing), joint actions (R&D, quality control, certifications and tests), harmony (warranty and assistance) and flexibility (prices, compliance with schedules and production reprogramming). Automobile manufacturers and suppliers plan and perform actions that may confer competitive advantages regarding price, technology and services on the corporate network. The factors that determine the dissolution of supply relationships are related to breach of commitment, of cooperation or of interdependency: quality, price, technology and

419

Supplier-manufacturer relationships

Journal of Business & Industrial Marketing

Celso Cla´udio de Hildebrand e Grisi and A´urea Helena Puga Ribeiro

Volume 19 · Number 6 · 2004 · 415-420

delivery schedule compliance. All these variables affect the competitiveness of the network, damage mutual relations, disturb harmony, reduce the flexibility of the network, jeopardize the sharing of information and resources and prevent the efficacy of common actions. The description of these procedures is consonant with the prior research on relationship marketing. Brazilian automobile manufacturers and their suppliers value relationships. They wish to maintain it and try hard to do so. Towards the development of meaningful business relationships, they share resources and mutually make efforts.

Gummerson, E. (1987), “The new marketing-developing long term interactive relationships”, Long Range Planning, Vol. 20 No. 4, pp. 10-20. Hakanson, H. and Snehota, I. (1995), Developing Relationships in Business Networks, Routledge, London. Hakanson, H. and Snehota, I. (1982), International Marketing and Purchasing of Industrial Goods: An Interaction Approach, John Wiley & Sons, Chichester. Lubben, R. (1989), Just-in-Time: Uma Estrate´gia Avanc¸ada de Produc¸a˜o, McGraw-Hill, Sa˜o Paulo. McKenna, R. (1993), Marketing de Relacionamento: Estrate´gias Bem suce. Moorman, C., Zaltman, G. and Deshpande, R. (1994), “Relationships between providers and users of market research: the dynamics of trust within and between organizations”, Journal of Marketing Research, Vol. 24, August, pp. 314-28. Morgan, R. and Hunt, S.D. (1994), “The commitment-trust theory of relationship marketing”, Journal of Marketing, Vol. 58, July, pp. 20-38. Morgan, R. and Hunt, S.D. (1995), “Relationship marketing in the era of network competition”, Marketing Management, Vol. 3 No. 1, pp. 19-27. Neilson, C.C. and Wilson, E.J. (1994), “Interorganizational cooperation in buyer-seller relationships”, paper presented at the Second Research Conference on Relationship Marketing: Theory, Methods, And Applications, Atlanta, GA, 11-13 June. O’Malley, L. and Tynan, C.(1997), “A reappraisal of the relationship marketing constructs of commitment and trust”, New and Evolving Paradigms: The Emerging Future of Marketing, Dublin, Conference Proceedings, American Marketing Association, Chicago, IL, pp. 486-503. Rampazzo, F.R. (1998), “Contribuic¸o˜es ao Estudo dos Impactos da Globalizac¸a˜o na Competitividade da Empresa Nacional: Um Estudo de Casos Sobre as Estrate´gias de Marketing Adotadas por Empresas Fabricantes de Autopec¸as”, dissertac¸a˜o de mestrado, Faculdade de Economia, Administrac¸a˜o e Contabilidade da Universidade de Sa˜o Paulo. Santos, A.M.M. and Gonc¸alves, J.R. (2001) x, “Evoluc¸a˜o do come´rcio exterior do complexo automotivo”, Revista do Banco Nacional de Desenvolvimento Econoˆmico e Social, Rio de Janeiro, 13, (Marc¸o), pp. 205-218. SINDIPEC¸AS – Sindicato Nacional da Indu´stria de Componentes para Veı´culos Automotores (2001), Desempenho do Setor Autopec¸as, Sa˜o Paulo. Storbacka, K., Strandvik, T. and Gronroos, C.(1994), “Managing customer relationships for profit: the dynamics of relationship quality”, International Journal of Service, Vol. 8 No. 5, pp. 21-38. Wehli, H.P. and Ju¨tner, U. (1994), “Relationship marketing in value systems”, Second Research Conference on Relationship Marketing: Theory, Methods and Applications, Research Conference Proceedings, CRM Roberto Goizueta Business School Emory, Section I, Atlanta, GA. Webster, F.E. Jr (1992), “The changing role of marketing in the corporation”, Journal of Marketing, Vol. 56, October, pp. 1-17.

Conclusion The changing nature of the Brazilian automobile manufacturing sector and the evolving supplier decisions brings about an interest in the nature of the relationships between the manufacturers and the suppliers. These relationships have changed over recent years as the purchasing patterns have become more focused on limited suppliers and longer term relationships. These changing purchasing patterns were the rationale for this study which aims to identify relational marketing concepts that are evident in the buyer-supplier dyads. In particular, we looked for the presence of commitment, cooperation and interdependence, as described in the extant literature and theory on relationship marketing. This exploratory study of three biggest Brazilian automobile manufacturers finds that the existing relations, the routines and the governing standards of the relations show very high levels of relational elements and a pattern of consistent enhancement and strengthening among the exchange partners.

References ANFAVEA (2000), “Anua´rio Estatı´stico”, Associac¸a˜o Nacional dos Fabricantes de Veı´culos Automotores, Sa˜o Paulo. Berry, L. et al. (1995), “Relationship marketing of services – growing interest, emerging perspectives”, Journal of the Academy of Marketing Science, Vol. 23, Fall, pp. 236-45. Berry, L.L. and Parasuraman, A. (1991), Marketing Services, The Free Press, New York, NY. Coote, L. (1994), “Implementation of relationship marketing in an accounting practice”, paper presented at the Second Research Conference on Relationship Marketing: Theory, Methods, and Applications, Atlanta, GA, 11-13 June. Cravens, D.W. and Piercy, N.F. (1994), “Relationship marketing and collaborative network in service organizations”, International Journal of Service Industry Management, Vol. 5 No. 5, pp. 39-53. Crosby, P. (1990), Qualidade falando se´rio, McGraw-Hill, Sa˜o Paulo and New York, NY.

Further reading Storbacka, K., Strandvik, T. and Gro¨nroos, C. (1994), “Managing customer relationship for profit: the dynamics of relationship quality”, International Journal of Service Industry Management, Vol. 5 No. 5, pp. 21-38.

420

Executive summary and implications for managers and executives

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 421-426

How Latin American firms enter the US market

Executive summary and implications for managers and executives This summary has been provided to allow managers and executives a rapid appreciation of the content of this issue. Those with a particular interest in the topics covered may then read the articles in toto to take advantage of the more comprehensive description of the research undertaken and the results to get the full benefit of the material present

Vasquez-Parraga et al. examine the financial, marketing and managerial strategies that Latin American companies use to enter US markets, remain there and exit from US markets. The study reveals that Latin American firms tend to prefer partnerships – acquisitions, joint ventures and strategic alliances – as the entry mode. This is mainly because partnerships lessen the risks involved in entering a new market and speed the process of acquiring the resources or assets needed to compete in the USA. The firms tend, in the initial stages, to choose partners in US states such as Texas and California, which are geographically and culturally close, with large Hispanic populations.

Latin American investment in the USA

Strategies for maintaining a presence in the USA

Latin American companies traditionally have invested in the USA, but not as heavily as their counterparts from Europe, Asia and Canada. Although Latin American investments are only 4.5 per cent of all foreign direct investment in the USA, Latin American firms’ US investment is growing by 18.5 per cent a year. The growth is particularly marked in the petroleum industry (194 per cent a year), retailing (137 per cent), insurance (118 per cent), wholesale trade and property (each 87 per cent). Latin American assets represent 16.4 per cent of all foreign assets in the USA. This is partly because some Latin American companies have been established in the USA for many years and have acquired assets throughout this time, so they outstrip the assets of other foreign firms with a shorter history in the US marketplace. Moreover, Latin American firms in the USA seem to benefit from increased efficiency, as their output is growing faster than the corresponding investment. The subsidiaries of Latin American companies in the USA seem mainly to fulfil the role of trade intermediaries between the USA and the home country, with the emphasis on US imports rather than US exports. This is particularly the case for the Caribbean countries, whereas Latin American exports play a more significant role for the more distant south American companies. These trends are in line with foreign direct investment directed to developed countries, where investors fundamentally seek markets and assets in order to gain economies of scale, technological innovation, organizational learning and strategic assets from countries that offer complementary capabilities.

To maintain their presence in US markets, Latin American companies investing in the USA tend to: . focus on the quality of the product or service they offer, or combine low prices with high quality products or services; . perform market research before and after entering US markets; . make minor modifications to their products or services as they enter US markets; . use external channels to distribute their products; and . prefer promotional methods, such as personal selling and public relations, to advertising. Compared to US affiliates of companies from other continents, Latin American companies perform better than those from Europe, Africa and the Middle East in the exports-to-sales ratio. Only Asian firms have a better ratio. Latin American companies are also better performers than those from Europe and Africa in the imports-to-sales ratio, but they perform worse than the Asian and Middle Eastern firms. Latin American companies do better than firms from all other continents in the ratio of research and development to sales. They perform worse than European and African companies, but better than the Asian and Middle Eastern firms, in the ratio of net income to sales and net income to assets.

Why Latin American companies pull out from the USA Latin American companies that leave US markets have either failed to achieve their marketing

421

Executive summary and implications for managers and executives

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 421-426

objectives or have become discouraged by cultural differences, legal obstacles, political concerns or economic downturn. Occasionally, consolidation was also a factor in the decision to leave. Exiting seems to be a recurrent strategy among Latin American companies investing in the USA. In 1996, for example, there were 1,088 affiliates of Latin American companies doing business in the USA, but the following year the number had plummeted to 632.

Using online marketplaces for competitive advantage In the Internet age, of course, firms no longer need to be physically present in a marketplace in order to do business there. Both business-toconsumer and business-to-business transactions are possible over the Internet, although the latter market is estimated to be six times larger than the former. The promise of business-to-business e-commerce initially led to an explosion in the number of e-marketplaces, as firms adopted a “launch and learn” strategy. This phase was followed by tremendous consolidation in these marketplaces, in Latin America and throughout the world, because of a cash crisis brought about by continuing losses and a decline in venture capital. Despite this setback, the importance of business-to-business e-commerce is growing again. One estimate puts the current worldwide value of the business-to-business e-commerce at $8.5 trillion. In Latin America, the value of business-tobusiness e-commerce is estimated at more than $58 billion, or 88 per cent of the overall value of electronic commerce in the region. Against this background, Latin American firms simply cannot ignore the competitive advantages of including the Internet in their strategies. Generally speaking, smaller Latin American firms are in the early stages of the use of the Internet, while use in larger firms has evolved to a high level of transactions. Rohm et al. highlight the variety of decision models that small and medium-size companies can employ to integrate the Internet into their business decisions and so remain competitive.

A model of online marketplaces Business-to-business e-commerce can be classified according to buying behaviour. There are two main ways of achieving this.

The first distinguishes between what products and inputs businesses buy and how they buy them. Operating inputs are the goods that are not directly used in the product or production process. Often called maintenance, repair and operation (MRO) goods, they include office supplies, spare parts, airline tickets and services that are used by different industries. As a result, they tend to be more generalist and can be procured from “horizontal” marketplaces that can serve a wide variety of industries. Manufacturing inputs are the raw materials and components that can directly go into the product or production process. Since these goods vary across industries, they are bought from industry-specific, or “vertical”, suppliers. The second classification differentiates between: . strategic or contract sourcing, which involves long-term written agreements to purchase specified products, with agreed terms and quality, for an extended period; and . spot purchasing, which involves the purchase of goods based on immediate needs in larger marketplaces that involve many suppliers. Using the distinctions between the kinds of input bought (manufacturing versus operating), the way in which these inputs are procured (systematic sourcing versus spot sourcing) and the scope of the markets (horizontal versus vertical), online marketplaces can be classified into: . MRO hubs (or e-procurement marketplaces) – horizontal markets that connect hundreds of buyers and sellers through independently owned intermediaries for the long-term purchasing of MRO or indirect goods. E-procurement is perhaps the most widespread type of business-to-business net marketplace in Latin America. . Yield managers (or e-distributors) – horizontal marketplaces that offer industrial customers a single source from which to order indirect goods on an as-needed, spot basis. Because of the vast cultural, economic and political differences across Latin American markets, the development of e-distributors serving these markets may be an important step towards leveraging business resources and partnership opportunities in the region. . Exchanges – vertical markets that enable purchasing managers to make spot purchases of required manufacturing inputs. . Catalogue hubs (or industry consortia) – vertical markets that enable buyers to purchase direct inputs of both goods and services from a limited set of invited participants on a long-term, contractual basis.

422

Executive summary and implications for managers and executives

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 421-426

The value-chain portfolio The value chain is a model that describes a series of value-adding activities connecting a company’s supply side (comprising raw materials, inbound logistics and production processes) with its demand side (comprised of outbound logistics, marketing and sales). Online marketplaces provide firms with the opportunity to create value by improving supply-chain effectiveness through new technologies. Using the right combination of business-to-business marketplaces in the value chain can help firms to gain significant value and be a source of competitive advantage.

IT capabilities and supply-chain power While the value-chain portfolio might be one way of exploring the possibilities of business-tobusiness e-commerce, firms can look to their own capabilities before deciding on using business-tobusiness e-commerce as a strategy to gain competitive advantage. Does the firm have the necessary IT capabilities to establish an online presence and stay competitive? And does the company have sufficient power in the supply chain? In certain industries, organizations have the IT capabilities to develop an electronic marketplace of their own. However, firms that have the required IT capabilities but not the supply-chain power may benefit from joining an existing marketplace. Firms that have the supply-chain power in the offline environment but not the necessary IT skills may decide to establish an online presence by building some sort of portal. And firms with little or no power in the supply chain and insufficient IT capability may decide to use intermediaries to gain online visibility.

The relational or transactional nature of the business exchange A final model that can help Latin American small and medium-size companies to decide their Internet strategy is based on the relational or transactional nature of the business exchange. The model proposes three Web-efficiency factors: (1) Dynamic pricing – which enables firms constantly to update their prices according to market conditions. (2) Increased reach – e-marketplaces enable firms to be available to customers they may not previously have been able to reach.

(3) Information sharing – which enables members of a commodity chain to anticipate upstream or downstream contingencies as well as changes to procurement lots, delivery times and specifications sooner, rather than later, and enables members to adjust their operations more dynamically. These three efficiencies must be matched to the context or nature of the exchange relationship. Relational exchanges are ongoing, long-term relationships with high levels of interaction and communication. Transactional exchanges, in contrast, tend to be “one-shot” deals where there is no expectation of a continued relationship. Using dynamic pricing in relational exchanges may, for example, lead to failure because it lowers customer service, has downward pressure on relationship quality and may raise channel resistance. In a transaction context, in contrast, dynamic pricing may increase customer service, reduce channel resistance and increase both co-operation and relationship quality.

Development of the Argentine economy Companies’ development of an Internet strategy takes place against the background of the economic conditions of the country in which they operate. Argentina enacted economic and political reforms such as privatization, deregulation and democratic elections in the early 1990s. These helped to stabilize the economy and promote economic growth and international trade. In 1992, Argentina became a founder member of MERCOSUR, which is now the world’s thirdlargest trading block that also includes Brazil, Paraguay and Uruguay as well as two associate members, Chile and Bolivia. Direct foreign investment in Argentina rose from $2.6 billion in 1990 to $19.7 billion in 1997. By 1998, only 35 per cent of Argentina’s largest 200 firms remained locally owned. Financial crises in Mexico, Brazil and Russia at the end of the decade cut the value of Argentine exports sharply and prompted economic crisis in the country in 2001-2002. This slowed the rate of foreign investment in Argentina. Nevertheless, the multinationals that had invested in Argentina in the mid-1990 s modified both the level of competition and the degree of sophistication of the demand in business markets. Argentina now has a mixture of multinational firms with considerable knowledge of state-of-theart management, new emerging local firms that are adopting sophisticated marketing practices, and local firms with little marketing experience.

423

Executive summary and implications for managers and executives

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 421-426

A framework to compare marketing in Argentina, New Zealand and the USA Pels et al. compare the marketing practices of business-to-business firms in Argentina, an emerging economy, with those of companies in two developed economies – the USA and New Zealand. The authors use a framework that distinguishes between four aspects of marketing practice: (1) Transactional marketing – which focuses on the exchange process between customers and suppliers and is centred on discrete economic transactions. (2) Database marketing – which involves both economic and information exchange. Relationships do not generally involve ongoing interpersonal communication and interaction between individuals, but some attempt to “personalize” the relationship, through the use of technology, is made. (3) Interaction marketing – which implies face-toface interaction within the relationship. (4) Network marketing – which focuses on multiple, networked relationships between firms.

Differences in marketing in Argentina, New Zealand and the USA While over 70 per cent of the firms in the USA and New Zealand were rated medium to high on the transaction marketing and database marketing indices, Argentina had only 50 per cent for transaction marketing and 40 per cent for database marketing. For interaction marketing and network marketing, however, the results between the three countries were more similar. The USA appears to lead the way in network marketing, New Zealand uses more transaction marketing than the others, and Argentina is highest in interaction marketing but low in database marketing. In most cases, of course, combinations of marketing are practised across firms. For all countries, database marketing is strongly associated with transaction marketing and interaction marketing with network marketing. But while US and New Zealand firms have strong associations between database marketing and interaction marketing, this is absent in Argentina. Business-to-business firms in Argentina tend to have a more personalized (interaction marketing) approach, with low use of technology (database marketing) to enhance these relationships. This could be because Latin Americans “need” face-toface contact, or because of under-investment in telecommunications in Argentina.

Firms that use all four approaches to marketing – transactional, database, interaction and network – are pluralistic. Companies that focus on interaction and network marketing fall into the relationship and network group. And companies that are using a very moderate approach to marketing are named the low marketing group. The pluralistic group in Argentina has more foreign-owned firms. The relationship and network group has more local ownership, a variety in size, and older firms. The low marketing group has more local ownership and firms of smaller size. Multinational corporations, represented by the pluralistic group, are helping to bring about an international managerial approach, characterised by a high level of market orientation, multiple uses of performance measurements, the sophisticated application of information technology, and the use of different marketing tools. These firms are directly responsive to the forces of globalization, international competition and more sophisticated customer demand. Firms in the relationship and network group also appear to perform well. They, too, have a high level of market orientation. There appears to be more than one way to do things right in Argentina, where the business-to-business marketplace is becoming increasingly complex. But firms in the low marketing group are generally not performing well. Some of the firms in this cluster are losing sales. The research therefore confirms that paying too little attention to the marketplace is a dangerous strategy, particularly as the marketplace becomes more competitive and buyers mature.

The role of trust in business-to-business negotiations in Mexico Just as there are various approaches to marketing, so there are also different tactics that can be used in negotiations. Elahee and Brooks focus on the role of trust in business-to-business negotiations. Specifically, they compare the level of trust that Mexican negotiators have in foreign opponents with that of Mexican opponents. The authors investigate the behaviours that Mexican negotiators are likely to display in initial meetings with both foreign and Mexican opponents, and compare cross-cultural and intra-cultural negotiations from the Mexican negotiators’ perspective.

Six negotiating tactics in action Elahee and Brooks label traditional competitive bargaining and tacit bargaining – in which

424

Executive summary and implications for managers and executives

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 421-426

messages are passed between the negotiators in the form of hints, signs and obscure imitations – as generally acceptable tactics. In contrast, they classify four other negotiating tactics – making false promises, misrepresenting one’s position, attacking the opponent’s network and gathering information inappropriately – as dubious tactics. The authors’ research reveals that trust plays an important part in the ethical behaviour of negotiators during the negotiation process. Specifically, trust is negatively related to all six categories of negotiating tactics. In addition, the degree of negative correlation between trust and the two generally acceptable negotiating tactics is less that between trust and the four dubious tactics. Elahee and Brooks confirm that negotiators place more trust in an opponent from their own country than they place in a foreign opponent. This is probably because two negotiators from the same country are more likely to be able to predict one another’s behaviours and are more likely to share common values. Finally, the authors demonstrate that Mexican negotiators are more likely to bargain harder, and engage in more of all six negotiating tactics, when dealing with a foreign opponent than when dealing with a Mexican opponent.

Increasing numbers of people in developed countries seek out healthy, social and environmentally sustainable products. Against this background, the global retail value of organic coffee is around $223 million and is growing at around 20 per cent a year. But the trade is not yet properly organized. It is essentially based on a series of discrete market transactions and closely follows the price fluctuations of conventional coffee. Most traders, exporters, importers and roasters are willing to extract the maximum profit out of a deal and consider only their short-term gains.

The need for greater co-ordination of transactions Claro and Claro argue that long-term business-tobusiness relationships are needed to improve the co-ordination of transactions in the industry. Better co-ordination would help to reduce internal and transaction costs and make the supply chain less uncertain, less opportunistic and more efficient. It would help to ensure a continuous supply of organic coffee in bad years as well as good, and reduce price instability. Says the author: “It is a win-win situation where both buyers and producers gain and competent companies are able to participate in the marketplace.”

The importance of personal relationships The authors conclude that it is important for negotiators to try to build some form of relationship with their counterparts, “especially when the counterparts come from collectivist, strong-uncertainty-avoidance, large-powerdistance and high-context countries such as Mexico”. These efforts to build trust should not simply be between business firms, but also between the people representing the firms. This is because business relationships in Mexico tend to be highly personalized, many having developed through generations. Even though the results indicate that Mexican negotiators are likely to be hard bargainers when negotiating with foreigners, negotiators from abroad should be aware that many Mexican people genuinely try to please foreigners and may, out of politeness, make promises that they cannot keep.

Two models of business-to-business relationships The authors puts forward two models of businessto-business relationships for the Brazilian supply of organic coffee to international markets, and specifically The Netherlands. One model is for organic green coffee beans and the other for coffee beans roasted in the producing country. Both models aim to increase the scope for trusting and long-term relationships. For the two proposed supply chains, a cross-border integrator is included. This would be a person or organization able to support the co-ordination of the crossborder business relationship. Such arrangements would not be easy to set up, and would take time to become established. All parties involved would have to be committed to the new arrangements to make them a success.

Organic coffee industry in Brazil Trust is also a central concern of the article by Claro and Claro that, in the context of the organic coffee industry in Brazil, examines ways of achieving better co-ordination of cross-border supply chains.

Business-to-business relationships in the Brazilian automobile industry Much more developed business-to-business relationships exist in the Brazilian automobile

425

Executive summary and implications for managers and executives

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 421-426

industry, as Claudio de Hildebrand e Grisi and Puga Ribeiro demonstrate through their study of the country’s three biggest automobile manufacturers. The relationships between manufacturers and suppliers have become closer over recent years as purchasing patterns have become more focused on limited suppliers and long-term links. The research reveals a common desire to continue this trend – although outsourced production is used only when cost and quality are equivalent to those of in-house production.

“Make or buy” committees The automobile manufacturers have “make or buy” committees made up of representatives from finance, personnel, manufacturing, procurement, product engineering and quality engineering. In almost all cases, the key factors affecting whether to establish or continue a supply relationship are defined by the procurement and quality engineering departments. Among the desirable factors that manufacturers look for in a supplier are the quality and type of technical equipment, company reputation and the prestige of the brand. Suppliers need to be able to integrate their processes with the manufacturers’ requirements. There is also a common desire between manufacturers and suppliers to develop organizational structures that will make closer cooperation easier in the future. Formal evaluation processes aim to identify problems and provide the necessary solutions. Sophisticated procedures exist to co-ordinate production, and there are usually agreements on after-sales service, product warranty and help with specific technical issues.

Shared investments Shared investment in tools is common. There is also some sharing of expenses concerning the development of new processes and technologies. It is customary for the manufacturer to encourage its suppliers towards technological advances regarding products, processes and the modernization of machinery. Manufacturers sometimes finance additional investments, advance amounts corresponding to future purchases, supply or finance machinery, encourage association with other suppliers, make their research centres available or bring corporations with relevant technologies in developed countries closer. At the marketing level, it is usual to see co-operative advertising and other effort, especially when new vehicle models are launched.

The reasons for the dissolution of relationships There are various reasons for the dissolution of relationships between manufacturers and suppliers. Price and payment conditions are often important, as are lapses in quality or failure to fulfil delivery terms. Finally, the supplier’s failure to keep up with the latest technology can be a factor. All these variables affect the competitiveness of the network, damage mutual relations, disturb harmony, reduce the flexibility of the network, jeopardize the sharing of information and resources and hinder the effectiveness of co-operation. (A pre´cis of the articles in the special issue entitled “Business-to-business marketing in Latin America”. Supplied by marketing consultants for Emerald.)

426

Internet currency

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 427-428

Internet currency Edited by Dennis A. Pitta University of Baltimore What happens to a Web site when the corporation is in shambles? In previous issues of the Journal of Business & Industrial Marketing, we have covered business-tobusiness (B2B) sites that focus on e-commerce. Others focus on corporate image creation by providing information. B2B companies are often invisible to consumers and often only recognized by business customers in their industry and some sites are designed to convey relevant information to those business customers. In almost every case, the Web site’s mission is to promote the growth or success of the firm. It is rare that a Web site is devoted to supplying information about a firm in financial difficulties. In 2001, Netmarketing rated the Enron Corporation Web site as the best energy and power company Web site in its list of the 200 best B2B Web sites. That year, Enron was a highflying company whose success was based mostly on the fraudulent accounting supplied to Wall Street and shareholders. After the news broke and the scandal made headlines across the world, the company and its shareholding employees suffered catastrophic losses. Several of the corporate executives and their spouses faced indictments and the prospect of trial for serious wrongdoing. At best the company’s prospects were dismal. This leads to an assumption that the company would face liquidation and would have to cut costs significantly to delay its demise. Some pundits predicted that Enron would disappear from cyberspace as well as Wall Street. However, taking a lesson from advertisers during hard times, Enron chose to maintain its Web site and use it as a communication vehicle. In a similar vein, WorldCom Inc., the telecommunication giant boasted the best Web site in the telecommunications list of the 200 best B2B Web sites. In 2001, Netmarketing described WorldCom’s Web site as, “Artfully laid out site with great online tools, including account management, bandwidth simulator and a page that sets up conference calls online.” WorldCom Inc. and Enron Corp. share a similar background, namely accounting issues and the same auditor, Arthur Andersen. News sources even started asking the question, “What’s an

accounting scandal these days without Arthur Andersen?” In fact, Arthur Andersen was convicted of obstruction of justice related to its work for Enron. The similarities tend to end there. Enron is in very difficult financial shape and is expected to be reorganized under the Chapter 11 bankruptcy regulations. That means that assets will be sold to satisfy creditors but the objective is to maintain the life of the corporation. In contrast, WorldCom Inc. has consented to several Securities and Exchange Commission requirements in connection to its past accounting irregularities. It has fired Arthur Andersen and engaged a new external auditor and is moving to change is financial position. The company has also changed its name in an effort to distance itself from the accounting issues. It now trades under the name, MCI Corporation. It is instructive to examine the resulting Web presence of each of the firms as a case study in reacting to catastrophe. Enron Corporation [http://www.enron.com/corp/] WorldCom Inc [http://www.worldcom.com] [http://www.mci.com] Before the accounting scandal, the Enron Web site had the look and feel of a typical B2B site. It had links to products and services, company contact information, as well as the typical public relations press releases. After the scandal, the site was thoroughly redesigned. Now the opening page states clearly, “Enron is in the midst of restructuring various businesses for distribution as ongoing companies to its creditors and liquidating its remaining operations”. Enron Web site features The Web site opening page is relatively simple. It contains four basic panels: (1) Latest News; (2) About Enron; (3) Bankruptcy Info; and a (4) search function. During the weeks we visited the site, the Latest News panel featured 12 different news items. Most referred to continuing efforts to sell assets and restructure. Several focused on legal initiatives of interest to shareholders and employees. They contained legal documents available online in complete detail. One of them contains a link to the online repository of bankruptcy filings and information pertaining to the Enron filing. The link is to e-Law.com, “an Internet company that serves the legal community by monitoring court cases, dockets, and the electronic filing and service of the documents associated with litigation activity.” The e-Law.com Web site holds the

427

Internet currency

Journal of Business & Industrial Marketing Volume 19 · Number 6 · 2004 · 427-428

bankruptcy documents for numerous firms in the midst of a bankruptcy proceeding. Coincidently, the site also features links to the WorldCom, Inc. bankruptcy case. The “About Enron” panel contains links to “News and Pressroom”, “Enron’s Global Assets”, “Jobs at Enron”, “Investor Relations”, and “Contacts”. Links lead to specific, most often legally mandated, material. The jobs link actually features a short list of available jobs and a search function. The third panel, “Bankruptcy Info”, offers extensive links to legal information, documents and notices. Overall, the Enron Web site reflects the dire fortunes of a once successful company. There is little of the content one would expect of an ongoing firm with prospects of success. There are, for instance, no product or service related links, and customer or investor service links are limited and not interactive. Enron provides an unhappy example of the use of an online presence to tidy up details before a company dies. WorldCom (MCI) Web site features If one did not know that MCI once traded under the name WorldCom, one would have a difficult time gleaning that information from the MCI Web site. We entered the WorldCom URL and immediately were conducted to the MCI homepage. Like many B2B Web sites, the homepage has three major links: “Consumer”, “Small to Medium Business”, and “Enterprise”. Each of the major links discuss and detail the range of services available to each customer group and present the picture of a vibrant company with market proven products. There are also links to videos featuring the corporation’s new top leadership. They address the positive aspects of the company’s future and discuss the past accounting indiscretions in a frank manner and seek to assure viewers that the systems that allowed the problems in the past have been corrected. To aid in this impression management effort there is a supporting link: “Company Values”. It states:

MCI serves our customers with integrity and an unwavering commitment to the highest ethical standards and service. MCI is dedicated to adhering to the most stringent and transparent standards for financial reporting and disclosure, and we have taken a number of steps to be a role model for corporate governance. Creating an environment of transparency in the conduct of business is the highest priority for MCI.

Links within the “Company Values” page contain a number of Adobe Acrobat documents detailing the internal code of ethics and commitment to ethics. MCI has taken significant steps to overcome the perception of fraudulent behavior and put it in the past.

Lessons learned It may be that the underlying severities of the two companies’ financial problems determined the differences in their Web sites. In one case, Enron suffered a truly catastrophic failure that hurt numerous shareholders, doomed the company, and triggered an avalanche of lawsuits and regulatory actions. In the other, WorldCom’s actions were significant but quantitatively less damaging to the corporation. MCI’s successor Web site addresses the past behavior but puts the best face on the company’s current and future prospects. Thus, Enron’s Web site shouts that the company is on life support and MCI’s soothes that all is well and prospects are rosy. That difference may warn us of the limitations of a company’s online face. MCI’s seems like an airbrushed portrait, with the blemishes of reality removed.

Reader requests Please forward all requests to review innovative Internet sites to: Dr Dennis Pitta, University of Baltimore, 1420 North Charles Street, Baltimore, MD 21201-5779, USA. Alternatively, please send e-mail to: [email protected] for prompt attention.

428