Chapter 8: Aligning marketing and sourcing strategies for competitive advantage in the food industry – Delivering Performance in Food Supply Chains

8

Aligning marketing and sourcing strategies for competitive advantage in the food industry

D. Chicksand,     Warwick University, UK

A. Cox,     Newpoint Consulting, UK and University of San Diego, USA

Abstract:

In a period of considerable change and uncertainty in food supply chains and markets this chapter demonstrates how the alignment of marketing and sourcing strategies can provide far-sighted firms with an effective way of coping with increased levels of competition. The experience of Pioneer Foodservice (a meat wholesaler in the UK) highlights the potential rewards for companies wishing to develop branded products in the food industry. This chapter also shows the way in which sustainable competitive advantages can be achieved through the alignment of marketing and sourcing strategies.

Key words

competitive advantage

marketing

branding

sourcing

food service

8.1 Introduction

The world economy has seen a remarkable transformation as a result of increased globalisation. Although the global distribution of food is not a new phenomenon (Hirst and Thompson, 1996) the recent pace of change is unprecedented. Owing to technological advances in transporting, preserving and storing products, combined with the effective flow of information, production chains can now span long distance and are increasingly controlled by a few large-scale transnational corporations. Apart from technological advances, a number of other factors have contributed towards the acceleration of global trade: trade and financial market liberalisation, encouragement of foreign direct investment (FDI) and improved intellectual property and consumer protection laws (Farina, 2001; Murdoch et al., 2000; Ramsey, 2003). These factors have created conditions that have increased global competition in many sectors, including the food industry.

The last two decades have also seen a period of considerable change and upheaval in domestic markets and supply chains. The UK farming and food industry, in particular, has had to cope with a number of unprecedented structural changes that have an enormous impact. These include:

• Common Agriculture Policy (CAP) reforms

• consumer concerns over the quality and safety of UK beef products as a result of outbreaks of livestock diseases (including foot and mouth disease (FMD) and bovine spongiform encephalopathy (BSE))

• a long-term decline in consumer demand for red meat, with a preference for alternative proteins (chicken) and healthier foot options

• a radical change in consumer preferences, both in the way we eat (in favour of convenience food choices) and what we eat (an increasing interest in GM free foods and organic products)

• the concentration of market power in the hands of a small number of multiple food retailers (there is a significantly greater concentration of market power in multiple retailers in the UK than in many other counties)

• increased foreign competition and finally

• embargoes on British beef exports owing to restrictions put in place after the outbreak of BSE and FMD (Hingley and Lindgreen, 2002; Taylor and Simons, 2004; Hingley, 2005; Cox et al., 2006a; 2006b).

These challenges have contributed towards a general decline in the numbers of primary producers and in many cases production levels, in particular, within the red meat, pig and dairy industries. For example, the number of pig farm holdings fell from 17,100 in 2000 to 10,000 by 2007 (Competition Commission, 2008, pp. A9 (5)-1–A9 (5)-2), whilst the number of dairy farms has also declined considerably from 35,000 in 1995 to less than 20,000 in 2006 (Competition Commission, 2008, pp. A9 (3)-1). Furthermore, there is evidence that for many producers it is not possible to compete internationally. According to BPEX (2005), the rapid growth in imports has contributed to the decline in UK pig production. British producers cannot compete with cheaper imports (Competition Commission, 2008, pp. A9 (5)-1). This is also evident when we consider that imports of beef and veal, for example, grew by 69.2% between 1996 and 2005, whilst exports fell by 82.5% over the same period (Competition Commission, 2008, pp. A9 (4)-9).

Faced with these unparalleled challenges it is now widely accepted that the UK industry needs to develop strategies to address these acute problems. The next section focuses on the response from UK Government, industry and academics.

8.2 Literature review and discussion of marketing and sourcing strategies

In response to the crisis facing the UK food industry there have been a number of government policy documents, including: the England Rural Development Programme: 2000–2006 (MAFF, 2001); the Curry Report (Curry, 2002); The Strategy for Sustainable Farming and Food (DEFRA, 2002) and The Sustainable Farming and Food Strategy: Forward Look 2006 (DEFRA, 2006). Although these policy documents focus on broad issues relating to UK agriculture as a whole, there has been a clear message: farmers need to implement diversification strategies to appropriate greater value from the supply chain as a whole, add value to food and collaborate to eliminate waste and inefficiency.

There has also been considerable advice from industry bodies and academics suggesting how food chain participants might adapt to the structural changes occurring within their industries. Advice for UK beef industry participants has largely been focused upon how to improve sustainability, competitiveness and profitability. The literature focusing on improvement strategies for food supply chains in the UK is extensive, with the following key texts:

• horizontal collaboration (Hind, 1997; Hendrickson et al., 2001; Curry, 2002; DEFRA, 2002; EFFP, 2004; Cox et al., 2005),

• value chain analysis (lean thinking) (Curry, 2002; FCC and RMIF, 2003; Simons et al., 2003; Francis, 2004; Cox and Chicksand, 2005c; Simons and Zokaei, 2005);

• vertical integration, collaboration and coordination (Shaw and Gibbs, 1995; Palmer, 1996; Fearne, 1998; Van Der Vorst et al., 1998; Katz and Boland, 2000; Curry, 2002; Hornibrook and Fearne, 2003; Fearne et al., 2004; Cox et al., 2006a); and,

• establishing alternative supply chains including farm shop, export channels and food service supply chains (Curry, 2002; Cox et al., 2006b).

Overall, there has been a considerable emphasis on the need for collaborative lean techniques for waste elimination and a focus on the importance of adding value to food (which can be achieved through the development of brands). Each of these opportunities for UK farming and food is discussed here.

8.3 Creating sustainable business success: the development of effective marketing strategies

The realisation that businesses need to find ways of engineering sustainable competitive advantages has been central to the debate about what strategies UK food chain participants should adopt. There are several factors in the creation of sustainable business success, but choosing the right product and/or service and marketing it (supported by a strong brand) to a target market is a key component of business success (Cox and Chicksand, 2007b). In part, sustainable business success requires companies to align their branding, marketing and sales, and pricing strategies to differentiate themselves from their competitors.

8.3.1 How can brands help develop sustainable business success?

To understand why differentiating products and/or services from others is increasingly important in an ever more competitive global environment, it is first necessary to define a brand. The following definition provides an insight into the concept: ‘. . . brand names convey the image of a product or service and refer to a name, term, symbol, sign, or design used by a firm to differentiate its offering from those of its competitors’ (Czinkota and Ronkainen, 1995). A branding strategy may also be the combination of a product, brand name, packaging, symbols, themes and images (Vrontis, 1998).

Many writers believe that brands have now become an integral part of both the consumer’s choice and organisational strategies and that competition is no longer at a core-product level, because consumers buy brands rather than products. This means that competition is no longer based upon the tangible quality or service attributes of a product, but on less tangible added attributes that the brand represents (Doyle, 1994; Simoes and Dibb, 2001; Vrontis, 1998). A consumer’s choice of preferred brand is becoming a reflection of who they are. So much so, that according to some ‘. . . people choose brands in the same way as they choose friends’ (Levitt, 1986).

Brands are becoming increasingly important in all consumer markets. Faced with a growing choice of products and with added concerns over animal welfare and food safety, customers are increasingly relying upon the ‘quality signalling’ of brands in food supply chains and markets (Shocker et al., 1994; Simoes and Dibb, 2001; Cox et al., 2007a). To adapt to these changing dynamics, organisations have created their own distinctive features to differentiate themselves positively in the eyes of the consumer (Simoes and Dibb, 2001). There are a number of important commercial benefits that can arise for businesses from the development of brands (see Table 8.1 below).

Table 8.1

The importance of brand definition

8.3.2 Branding in the UK beef industry

In the UK beef industry in particular, there has been considerable interest in developing product development and marketing strategies to defend British-grown produce. The Curry Commission (2002) called for the establishment and promotion of branded premium beef products arguing that: ‘. . . with rising real incomes and consumers’ interest in variety and choice increasing, there will be opportunities here that English farmers can seize’ (Curry, 2002).

Ever since Smith’s (1956) pilot study into product differentiation as an alternative marketing strategy, there has been considerable debate about the development of branding strategies in the food industry (Koehn, 1999; Loughlin, 1999; Beverland, 2001; Hingley and Lindgreen, 2002; Ramsey, 2003; USDA, 2003; Zylbersztajn and Filho, 2003). There has, however, been far less academic debate about the need to develop branded beef products in the UK beef supply chain (Cox and Chicksand, 2005a, 2007a; Cox et al., 2006a, 2007a,b). Although considerable effort has been made by EBLEX (English Beef and Lamb Executive, 2005) to promote English beef and lamb, the pace of implementation of branding strategies in the UK beef industry is far behind that of international competitors. For example, in the USA, seven of the top 10 breeds of cattle have considered a branded programme (USDA, 2003).

A recent UK ‘Beef Industry Summit’ highlighted that although many in the British beef industry recognise the need for change, this will not happen overnight. This is because the CAP subsidy system has meant that British beef has tended to be a commodity, with very few brands being developed and little differentiation in the sector (Porter, 2006). The Pioneer Food-service ‘Lakeland Premium Branded Beef Case’, which is discussed in some detail here shows, however, that UK consumers value the attributes (quality, safety and traceability) associated with branded products and are willing to pay more for this.

8.3.3 Developing a successful differentiation strategy in the global beef industry

The benefits that arise from branding occur because of concerns about food safety are leading consumers in developed countries to exercise more caution when buying and/or demanding ‘quality’ products (Murdoch et al., 2000). The quality-signalling role of brands, or country of origin labelling (or a combination of both), is being increasingly exploited by retailers, processors and producers, as consumers are encouraged to pay a premium in return for a guarantee of perceived quality (Sans et al., 2005).

The use of brand names is well developed in other protein sectors, such as poultry (for example, Bernard Matthews in the UK and Perdue, Tyson, Hudson and Butterball in the USA). Although beef brands have started to make advances in the USA beef industry (Katz and Boland, 2000), this has not typically been the case in the UK beef industry. With increased competition in the USA retail market, Safeway’s and King Sooper’s beef brands are increasingly important in the fight for customers. In 2001, King Sooper’s introduced its ‘Cattleman’s Collection’ private labels, to be followed by Safeway’s ‘Ranchers Reserve Angus Beef’ and Albertsons ‘AngusPride’, a national brand. Boulder-based Wild Oats Markets recently added to the competition by introducing its new branded line of natural angus steaks. The ‘Ranchers’ and ‘Cattlemans’, brands are based upon a promise of eating quality and are both USDA ‘select’ and the next grade ‘choice’ lines (Denver Post, 2003).

Argentinean beef producers have long understood the need to develop brands or trademarks to differentiate their products. Prinex was created in the 1990s by a group of Buenos Aires farmers to signal their production of the highest quality beef. The Prinex business strategy was based upon market differentiation and segmentation using the ‘Novillo Pampeano’ trademark, basing the brand upon known origin and quality. Today the company exports over 1000 tonnes per annum, especially to Europe, Chile, Brazil and ex-Soviet countries. The entrance of the brand into the most select customer market segments (ABC1) in developed countries was key to its success. This has enabled them to obtain higher prices, with a 20% premium in final prices over the average selling price. In Spain, Prinex has been able to sell at 45% above the price of their other Argentinean competitors. Two other examples are the ‘Carne Angus Certificada’ (a trademark of the American Angus Association, with offices in Argentina) set up to supply traceable and quality beef to the USA, and the setting up of the Consorcio Pampas del Salado, an association of farmers in the provinces of Argentina, which has developed an origin and quality assurance protocol (Ordonez et al., 2004).

Another example is the recent success of Brazilian beef as a brand. The brand has helped Brazil to increase exports and to become the world’s leading export country (in terms of volume), despite recent foot & mouth disease outbreaks. The aggressive marketing effort of ABIEC (Association of Brazilian Processors and Exporters) is central to its success. Through a comprehensive promotion programme, approved by the National Export Promotion Agency (APEX), it has developed a successful brand – ‘Brazilian Beef’. The brand is targeted worldwide, but with a heavy emphasis on the EU, where 60% of Brazilian beef is destined. The brand focuses on the natural ‘healthy’ grass-fed environment in which Brazilian beef is reared, as opposed to grain-fed beef. Brazil recognised the need, not only to increase quantity of sales, but also to increase the quality and value of sales. Speciality and niche markets are seen as future target markets for Brazilian beef and could pose a real threat to many indigenous beef producers in the UK and elsewhere (Steiger, 2006).

8.4 Creating sustainable business success: the development of effective sourcing strategies

The need to develop an effective branding and marketing strategy to differentiate food products is self-evident. What may not be as well understood, however, is the need to align this with an effective supply chain sourcing strategy.

There have been a number of strategies suggested to create a robust and sustainable farming and food industry. At the heart of much of the work in this field has been the concept of lean thinking. This needs to be considered in some detail, as the development of ‘lean’ integrated value chains is viewed by many people within the farming and food industry as the best way forward (Curry, 2002; BPEX, 2002). Lean and collaborative thinking has also been the theoretical driver underpinning much of the work of UK bodies, such as the Food Chain Centre (FCC), the English Food and Farm Partnership (EFFP) and various industry forums, such as the Red Meat Industry Forum (RMIF), set up as a result of the Curry Report (2002). Strategies that focus upon increased supply chain collaboration as a means of delivering waste reduction and improved efficiency are, therefore, viewed as one of the primary means of defending producers from cheap meat suppliers (Zokaei and Simons, 2006).

Lean thinking has received considerable attention as an approach for companies to adopt to achieve sustainable competitive advantage in the beef supply chain. This approach, by eradicating waste and inefficiency throughout the supply chain, seeks to find ways to deliver exceptional value to end customers (Womack and Jones, 1996; Hines et al., 2000). The FCC piloted the concept of lean thinking in the food industry and examined 33 chains from farm to fork. In partnership with the Cardiff Business School and using a value chain analysis (VCA) tool, the analysis involved engaging businesses within the food chain to encourage collaboration and to identify where cost and value are added. The FCC concluded that on average 20% of the cost in the food chain added no value (DEFRA, 2007a). In cooperation with others, the RMIF has also applied the lean thinking approach to complete nine VCAs of the 33 that FCC delivered, covering a mix of species (beef, lamb and pork), different distribution channels (retail and catering) and sizes of business (FCC and RMIF, 2003; DEFRA, 2007a). The VCA work was successful in highlighting significant opportunities for improving both operational and strategic efficiency in agricultural supply chains (Taylor, 2006; Zokaei and Simons, 2006). However, advocates of ‘lean thinking’ have also acknowledged that attempts to establish collaborative intra-company teams to generate ‘win–win’ integrated supply chain improvement have been less successful (Simons et al., 2003; Fearne, 2005; DEFRA, 2007b).

One key reason, it can be argued, for the partial success of adopting of lean principles and vertical collaboration in many agri-supply chains has been the difficulty of achieving the desired levels of trust between participants in the chain (Fearne, 2005). The traditional way of life and thinking of producers is often a powerful barrier to achieving effective supply chain management in sectors of the beef industry (Simons et al., 2003; Fearne, 2005). Recent research has, therefore, advocated the need to address issues of mistrust in the red meat industry, through fundamentally changing the ‘trading mentality’ by adopting contractual commitments to source specific volumes, establishing agreements as to price / cost policies and adopting agreements for benefit sharing (Taylor, 2006).

Although this is sound advice, as some writers have started to acknowledge, the historical lack of trust between supply chain participants has much to do with the imbalance of power between the multiple retailers and the processors and farmers, a power imbalance which ‘lean thinking’ does not sufficiently acknowledge. The abuse of power by multiple retailers has led to reoccurring pressures on supplier prices and profits, with the continual threat of switching sources if suppliers do not comply (Hingley, 2005; Taylor, 2006; Competition Commission, 2008). It comes as little surprise, therefore, that this lack of trust discourages investment and acts as a real barrier to supply chain cooperation (Fearne, 2005).

Furthermore, although there has been some analysis of the commercial benefits (reportedly 2–3% potential savings at each stage of the red meat value chain), there has been insufficient focus on the potential operational pitfalls and difficulties that occur when implementing a lean approach (Zokaei and Simons, 2006). It has been argued that the adoption of a sourcing strategy will not improve profitability for those putting it into operation unless the strategy can generate power resources that improve the upstream and/or downstream power and leverage position of a firm within a supply chain (Cox et al., 2003, 2004a,b). It can also be argued that in the UK beef supply chain, the adoption of lean strategies can result in a high level of dependency on buyers and to low or declining levels of profitability.

A further possible explanation for the partial success of introducing lean thinking, in particular within the UK beef industry, is the unique nature of supply and demand that characterises this industry. The nature of supply and demand within the UK beef industry is not always commensurate with the structural properties that are required to allow long-term lean collaborative approaches to operate effectively. It is, therefore, essential to emphasise that the characteristics (production processes, supply and demand, etc) of the beef industry are quite different from process-based industries (such as the automotive), in which lean thinking was pioneered (Cox and Chicksand, 2004, 2005b).

It can be argued, therefore, given the different markets and supply chain circumstances operating in beef supply chains, that ‘agilean’ or a more responsive/agile approach may be more appropriate than lean. Recent research, based on a more robust understanding of the supply and demand and power and leverage characteristics of the UK beef industry, shows that there is a need for firms to understand how to select the most appropriate upstream and downstream supply chain management strategies, rather than copying a lean approach pioneered in a very different supply and demand and power and leverage environment (Cox and Chicksand, 2005d).

8.5 Creating sustainable business success: aligning brand and marketing strategies with sourcing strategies

Until recently, there has been very limited academic research focusing on the need to align marketing and sourcing strategies. There has also been very little attention given to the downstream risks to a brand from an inadequate assessment of the appropriateness of an organisation’s upstream sourcing strategy. The case of Nike clearly demonstrates this issue. The development of the Nike brand and its phenomenal growth in the last 20 years is one of the most successful cases of product differentiation in modern business. But in the late 1990s, this growth came to an abrupt end. In order to support its differentiation strategy, Nike invested heavily in marketing and new product development. As a result, Nike became the most famous sports brand and in 1997 controlled over one-third of the global athlete footwear market, greater than the sum of its four major competitors – Reebok, Adidas, Fila and Converse – put together. Yet, in 1999, Nike, the largest and most famous sporting goods producer in the world, reported an 8% decline in revenue across the USA, Asia Pacific and Latin American markets. Several reasons were given for this poor performance, including the retirement of Michael Jordan and a shortened regular NBA season. Nike attempted to solve these problems by heavily investing in innovative designs, by aggressive marketing and by reducing operational costs. Despite its aggressive approach, revenue did not grow and by the end of 2000 Nike had to rethink its strategy (Locke, 2003).

Historically Nike had taken advantage of global sourcing opportunities to reduce costs by outsourcing production and relocating plants to Korea and Taiwan in the 1980s, and then to China, Indonesia and Vietnam in the 1990s. By 2006, Nike’s products were manufactured by over half a million workers in 700 offshore plants in 51 countries, although the company has only 22,658 staff on its own pay roll. Nike’s sourcing strategy was initially successful in obtaining high quality products at continuously reduced cost and this supported growing profitability as market share increased (Nike Inc, 2005).

This pressure to reduce costs was continuously passed onto suppliers but Nike failed to understand that this might result in the exploitation of the employees of its suppliers and the long-term implications for its own brand and market share when this exploitation was realised. The first Anti-Nike organisation – ‘Boycott Nike’ – was established in 1996 and since then Nike has been challenged by many human rights groups for its use of sweatshops in southeast Asian countries. Stories of Nike’s underpaid workers in Indonesia, child labour in Cambodia and Pakistan, poor working conditions in China and labour abuse in Vietnam have been reported globally (BBC News, 2000, 2001, 2002). Nike’s worldwide image was tarnished and forced them to ensure that their suppliers did not abuse and exploit their employees.

There is no doubt that the decline in sales in the late 1990s was a direct result of a misaligned sourcing strategy in relation to the company’s avowed brand image. While Nike has certainly cleaned up its sourcing act since then and has continued to retain a major share of the global market for its products, this case clearly demonstrates the risks that a misaligned sourcing strategy can create for reputation, revenue and profitability (Locke, 2003; Cox and Chicksand, 2006).

With this in mind, the remainder of this chapter explains, through case material, how a food producer created a differentiated branded premium beef product and aligned it with its sourcing strategy. The findings from the case study suggest a need for firms in the food industry to align their upstream sourcing strategies, so as to support often more developed downstream marketing strategies.

8.6 Pioneer Foodservice case: developing a premium branded beef product

8.6.1 Methodology

The case material in this chapter reports on some of the findings from a study sponsored by the Engineering and Physical Science Research Council, North West Development Agency, North West Food Alliance and the Red Meat Industry Forum in the UK. Previous work within the industry has suggested several options for restructuring the industry, but it can be argued that previous work has lacked a robust methodology for understanding the unique supply and demand, and power and leverage, characteristics of the industry. As a result it had been difficult to provide clear guidance on the appropriateness of alternative marketing (banded and non-branded) and sourcing (proactive and reactive) strategies.

To rectify this gap a power regimes methodology was used to analyse UK beef supply chains and, through understanding supply and demand characteristics, gain a better understanding of the power and leverage dynamics within them. Extensive interviews were carried out with participants at key stages of the supply chain, reported in this chapter, using a power-positioning tool (Cox, 2004a, 2004b, 2004c). After constructing a standard questionnaire and collecting responses, content analysis was used to analyse the data collected. The power matrix is the analytical tool used to understand the appropriateness of particular upstream and downstream supply chain strategies. The matrix is constructed based on three primary variables (with sub-variables behind these as indicated in Fig. 8.1), the presence or absence of which, for the buyer or supplier, forms the basis for the standard questionnaire discussed earlier.

Fig. 8.1 The power matrix. © Robertson Cox Ltd, 2000 all rights reserved (from Cox, 2001, p 14).

The three primary variables analysed are the relative utility and the relative scarcity of the resources that are exchanged between the two parties and the information advantages that arise in exchange transactions for buyers and suppliers (Cox et al., 2000; Cox, 2001; Cox et al., 2002). Each party within a transactional exchange can be located in one of four basic power positions: buyer dominance (>), interdependence (=), independence (0) and supplier dominance (<). What is important to understand is that buyers and suppliers should not only understand and manage the current power circumstance, but also use relationships in the future to create new power circumstances that provide for a more congenial leverage position for them to maximise their often divergent economic objectives (Cox et al., 2004a,b).

Knowing the current power and leverage circumstances in dyadic (buyer and supplier) relationships is the first step. It is also important to understand that buyers have four major operational sourcing options that they can choose from when they work with suppliers to achieve continuous improvements in value for money. Buyers can act reactively or proactively, when they develop relationships with suppliers. Buyers must also decide whether they have the capability and resources to undertake first-tier relationship management or work throughout the supply chain with suppliers from the first tier through all tiers down to raw-material suppliers (Cox et al., 2003, 2004a,b).

As Fig. 8.2 demonstrates, there are four sourcing options available for buyers to manage their suppliers and supply chains: supplier selection, supplier development, supply chain sourcing and supply chain management (Cox et al., 2003). Buyers and suppliers must also think carefully about their internal capabilities and external power circumstances when they decide which sourcing option is the most appropriate for them to adopt (Cox et al., 2003, 2004a,b). Knowing these variables then allows the analyst to understand the appropriateness of particular sourcing approaches and power circumstances, as indicated in Table 8.2. This methodology was used to assist in the selection of upstream and downstream strategies for the focal firm in the specific red meat supply chain analysed here.

Table 8.2

Appropriateness in sourcing strategies, power circumstances and relationship management

Sourcing approach Power and leverage circumstance Appropriate relationship management styles
Supplier selection BUYER DOMINANCE (>) Buyer Adversarial Arm’s-Length / Supplier Non-Adversarial Arm’s-Length
INDEPENDENCE (0) Buyer and Supplier Adversarial Arm’s-Length
INTERDEPENDENCE (=) Buyer and Supplier Non-Adversarial Arm’s-Length
SUPPLIER DOMINANCE (<) Buyer Non-Adversarial Arm’s-Length / Supplier Adversarial Arm’s-Length
Supply chain sourcing BUYER DOMINANCE (>) Buyer Adversarial Arm’s-Length / Supplier Non-Adversarial Arm’s-Length
INDEPENDENCE (0) Buyer and Supplier Adversarial Arm’s-Length
INTERDEPENDENCE (=) Buyer and Supplier Non-Adversarial Arm’s-Length
SUPPLIER DOMINANCE (<) Buyer Non-Adversarial Arm’s-Length / Supplier Adversarial Arm’s-Length
Supplier development BUYER DOMINANCE (>) Buyer Adversarial Collaboration / Supplier Non-Adversarial Collaboration
INDEPENDENCE (0) Not Applicable
INTERDEPENDENCE (=) Buyer and Supplier Non-Adversarial Collaboration
SUPPLIER DOMINANCE (<) Buyer Non-Adversarial Collaboration / Supplier Adversarial Collaboration
Supply chain management BUYER DOMINANCE (>) Buyer Adversarial Collaboration / Supplier Non-Adversarial Collaboration
INDEPENDENCE (0) Not Applicable
INTERDEPENDENCE (=) Buyer and Supplier Non-Adversarial Collaboration
SUPPLIER DOMINANCE (<) Buyer Non-Adversarial Collaboration / Supplier Adversarial Collaboration

Source: © Robertson Cox Ltd, 2003 all rights reserved (from Cox, 2004c, p 355.)

Fig. 8.2 Four sourcing options for buyers (from Cox et al., 2003, p 5).

8.6.2 The case: developing the brand and an aligned sourcing strategy

Pioneer Foodservice is a medium-sized beef processor and catering butcher, based in the Lakeland area of the North of England. Prior to 2000, Pioneer was just one of a large number of catering butchers in the Lakeland area producing undifferentiated raw and semi-prepared beef products for both catering and retail sales. In 2000 Pioneer created an alliance with a livestock auctioneer (Harrison & Hetherington, H&H) and an abattoir (Bowland Food), to consider differentiating their products, so as to increase their share of the catering service market and to make higher commercial returns.

As Barry Garret (2006) from Pioneer Foodservice stated: ‘. . . we [the three companies] believed that there must be a better way to manage our beef supply chain. We needed to differentiate our products to achieve a higher share of the catering service market and to gain better returns for all involved’. The initial idea was to improve service and quality levels and brand premium beef products. They soon discovered that this required not only considerable managerial effort and financial investment, but also very different expertise than they currently possessed.

The firms involved realised that they did not possess the internal capability to cope with all aspects of the restructuring of the supply chain. They decided, therefore, that the best way to progress was through vertical collaboration. In order to achieve this they needed to work together and share the risks and responsibilities generated from the collaborative approach. Within this new supply chain framework, Harrison & Hetherington was responsible for sourcing beef of a superior ‘standard’ specification from farm-assured producers in CA (Cumbria) and LA (Lancashire) postcode areas, either through the auction ring or direct from the farm. Bowland Food took ownership of the animals, provided a slaughtering and primary processing service, delivering primal cuts to Pioneer. Pioneer Foodservice would then further process these primal cuts to customer specifications and deliver the final branded beef product to the customer. Pioneer was to also play a central role in developing and selling the brand within the regional catering service market by improving service, product quality and creating brand recognition.

Pioneer was immediately faced with several dilemmas; should they develop a national brand or a local brand and what should be the basis of differentiation for their beef brand? A further question was whether to build the brand through existing sales channels (sales to restaurants, pubs and public services) or to develop and target the retail route? After much deliberation, it was decided that the costs and risks associated with trying to launch a national brand were too great and that as a regional company it was better to build on their local and regional presence. Therefore, it seemed that the most effective branding strategy would be to develop a brand associated with the region, which prided itself on full traceability of high quality, extensively reared beef, originating in the CA and LA post-code areas. Therein the ‘Lakeland Beef’ brand was born.

It was also decided that Pioneer would initially heavily promote the brand with existing customers, as it was felt that returns would be more favourable if restaurant and other catering customers were targeted in preference to developing relationships in the more competitive retail sector. A further decision was also made to pursue a single branding strategy over sub-branding or multi-branding for all their beef products, targeted at their diverse portfolio of customers. This was a potential risk as they would be targeting very different customers with the same brand, from up-market restaurants at one end of the spectrum to price-sensitive school meals contracts with the local LEAs at the other. Nevertheless, it was felt that different quality and priced cuts of beef products could be successfully targeted at different customers under a single ‘Lakeland Beef’ brand. The ‘Lakeland Beef’ brand was officially launched in 2002.

Having made decisions about the branding approach, Pioneer and its partners also had to consider the most appropriate sourcing strategy. They initially selected a reactive supply chain sourcing approach (see Fig. 8.2 and Table 8.2). The sourcing approach had moved beyond simple supplier selection, in that the focal company ‘Pioneer’ was concerned with relationships beyond its first-tier supplier. This contrasts from the way they previously managed their non-branded beef supply chain (supplier selection). However, it is important to highlight that none of the organisations made specific dedicated investments and all parties could easily switch from the newly developed ‘Lakeland’ supply chain, as the brand was not at the time a major contributor to these businesses. As Fig. 8.3 shows, the ‘Lakeland’ power regime was best described as independent, with the power resources slightly favouring the supplier, moving the relationship towards supplier dominance.

Fig. 8.3 Original ‘Lakeland Beef’ supply chain.

A further two years of promotion significantly increased the recognition of the ‘Lakeland Beef’ brand within North West of England. This enabled Pioneer to differentiate its products from other catering butchers in the region. The brand also gave Pioneer’s existing business clients (a majority of whom were restaurants and independent contracted caterers) a way of differentiating and enhancing their own businesses (through directly promoting the ‘Lakeland Beef’ brand at the point of sale). New routes to market, such as schools, hospitals and Pioneer’s own restaurant/steakhouse also developed. The ‘Lakeland’ business continued to progress and as many as 100 carcasses were bought and sold each week.

The successful development of the brand enabled Pioneer to pass some extra value back to its upstream partners, Bowland, H&H and the farmers (a 1–2p per kilo premium). However, this growth in demand led Pioneer to become more concerned with securing a sustainable source of high quality CA/LA animal supply. In order to achieve this, Pioneer was eager to acquire H&H’s know-how in sourcing the right quality beef. Although the premium was a gesture of goodwill to its partners, it was also a means of securing a quality beef supply (where there are inherent shifts in the power resources (0/>/=/<) between the farmers and their customers, primarily owing to periods of supply scarcity, see Fig. 8.3).

However, from late 2003 onwards the relationship between Pioneer and Bowland faltered. A number of factors contributed towards the deterioration of trust in the relationship. One key issue was the traceability and quality of the products, key determinants for the success of the ‘Lakeland’ brand. Given the existing supply chain structure, Bowland owned the carcass and sold primal cuts to Pioneer to be further portioned. Without owning the carcass, Pioneer was unable to ensure that they were receiving the desired levels of quality and traceability.

In 2004, Pioneer ended its relationship with Bowland Foods and changed the way they worked with their partners. The decision was made by Pioneer to work even more closely with its supply chain partners and, therefore, what was needed were partners who would be keen to invest in and be part of the long-term development of the brand. The idea was for Pioneer to source quality locally produced animals either directly from farmers or through the auctions, with the help of their procurement partners, H&H. Rose County became the new slaughter and primary processor for the brand.

Rose County is one of the largest and most technically advanced abattoirs in the UK and Ireland and has the capability to source livestock directly from local beef farmers. Rose County was also supplying beef products to leading multiple retailers (MR) in the UK and an internal customer (its sister company Dungannon Meats, a large Irish secondary meat processor and packer). Pioneer also made the decision to take ownership of the cattle and move the relationship to one of contract kill for the ‘Lakeland’ brand (based on fixed charges of £55 per head, plus 25p per kilo for carcass weight, plus removal costs of offal, less the value of by-products, i.e. skin, bone etc). Part of the reason for choosing a large abattoir with MR contracts was the fact that Rose County would be able to solve Pioneer’s potential carcass balancing problem (because they owned the carcass) by buying back unwanted cuts. The relationship with Pioneer was seen as desirable to Rose County as the ‘Lakeland’ brand could potentially become a more significant account in the future.

To reduce their reliance upon H&H, and to reduce the risk of supply shortages, Pioneer is now able to draw upon Rose County’s direct sourcing capability (see Fig. 8.4) for the ‘Lakeland’ brand.

Fig. 8.4 Evolved ‘Lakeland Beef’ supply chain.

After a long process of supply chain restructuring by using a supplier development approach (see Fig. 8.2), Pioneer became the central party in the ‘Lakeland’ power regime. However, it is important to emphasise that this supply chain restructuring process did not alter the power position within the evolved supply chain in favour of Pioneer. ‘Lakeland’ beef still did not account for a significant part of Rose County’s, or H&H’s, business. As Fig. 8.4 shows, the ‘Lakeland’ power regime was still characterised as independent, with the power resources slightly favouring the suppliers, moving the relationship towards supplier dominance.

8.6.3 Need for a proactive sourcing strategy

By 2006, the brand had taken a much larger share of the catering service market in the North West of England and this enabled Pioneer to earn much higher returns than had been achieved from selling undifferentiated processed and raw meat products. Pioneer was now in a position to take the brand national and make much higher returns from sales with a differentiated product offering, delivering to their customers a superior product and service. By targeting high value end customers (i.e. discerning restaurateurs) who are willing to pay a premium for the high quality ‘Lakeland Beef’ brand, Pioneer have been able to ‘grow the pie’ for all involved. Farmers who supply into this chain receive a premium – that is higher farmgate prices for supplying what the end customer wants. By working together more closely, the end consumer gets the right quality meat, as information about their needs is fed through the whole supply chain back to the farmers.

With the brand’s continuing success, there was now a need for Pioneer and its partners to develop a more proactive sourcing strategy, so as to align with Pioneer’s proactive marketing strategy. With increased success, Pioneer had become focused on securing quality animals at the right price, however, as Fig. 8.4 emphasises, they were at the behest of their suppliers (Rose County and H&H) with very little control over the primary producers (characterised by shifting power circumstances). It is important to highlight that although UK primary cattle supplies, especially highly quality beast production, continue to fall, market demand for high quality beef has continued to grow (Harvey, 2004; Sinclair, 2004; Cox and Chicksand, 2005b, 2005c; Cox et al., 2006b).

Therefore, securing high quality primary beef supply was uncertain for Pioneer. It was crucial for Pioneer to understand that under the new Pioneer-led ‘Lakeland’ supply chain structure (see Fig. 8.4) current procurement partners have potentially less incentive for developing the brand and market expansion. It is, therefore, possible that in the event of a supply shortage, the suppliers would either not prioritise ‘Lakeland’ demands (in favour of larger customers), or secure supply at the best available price (owing to the commission structure). Therefore, it can be argued that both H&H and Rose County could potentially be in a supplier dominant position in the future.

Furthermore, if ‘Lakeland’ sales continued to grow, there might be a possibility that neither H&H nor Rose County would be capable of sourcing the right quality and quantity of CA/LA animals for Pioneer, owing to Common Agricultural Policy (CAP) reforms which may encourage more producers to leave the market or (in an increasingly competitive market) reduce the incentive to produce beef. Therefore, the only action that can reduce the inherent uncertainty in supply is to have direct contractual relationships with producers, thereby also reducing Pioneers’ reliance upon the procurement role of H&H and Rose County (see Fig. 8.5). This can be achieved either by insourcing the procurement role of H&H/Rose County, thereby cutting out the currently outsourced procurement function, or by changing H&H/Rose County’s procurement role to ‘management’ of Pioneers’ direct producer relationships.

Fig. 8.5 Proactively restructuring the ‘Lakeland Beef’ supply chain.

Whichever management structure Pioneer opted for, the adoption of a supply chain management approach to establish direct interdependent, non-adversarial collaborative relationships (see Fig. 8.5) with primary animal suppliers would reduce Pioneer’s inherent supply risk. Having direct contracts gives beef producers some security of demand at ‘fair’ prices, in return for a guarantee of a consistent primary cattle supply for Pioneer. Direct relationships also reduce Rose County’s power resources within the ‘Lakeland’ supply chain and this moves the relationship towards independence (see Fig. 8.5). Direct relationships with producers also supports a truly proactive sourcing approach and enables Pioneer to influence primary producers’ practices (i.e. breeding programmes, feeding and finishing regimes), to ensure that the animals meet Pioneer’s high standards for the brand.

Direct contractual relationships also provide Pioneer with savings, through the elimination of sourcing commission, reductions in transaction costs and potential savings in logistics costs. These savings could be shared, although not necessarily equally, between Pioneer and the contracted beef producers. Consequently, Pioneer could secure cheaper beef prices by direct relationships. What’s more, direct relationships would also be a great marketing story to sell, thereby backing up the brand value.

It is, however, important to understand the sunk and switching costs and operational risks associated with direct relationships. It is clear that the issue of supply security affects governance structures and ultimately power positions between buyers and sellers. Therefore, Pioneer may have to consider guaranteeing a considerable premium to entice beef producers initially to enter into a long-term relationship, as the full impact of CAP reforms still remains unknown. Pioneer will also have to take the risk of guaranteeing to buy a specified number of animals and will need to have the ability to solve the fluctuations in balancing demand and supply.

8.7 Conclusion and discussion

This case raises several issues. The first is that of the sustainability of the ‘Lakeland Brand’ and its ability to move from a successful regional to a nationally, or even internationally, recognised brand. The problem with brands is, of course, the potential ease with which they can be replicated. Once a brand has been replicated it loses its ability to gain a premium price for the product/service. If everyone has it, or can have it, then it becomes of less value to the purchaser. Thus, the ability to defend the brand against replication becomes critical. This means there are things that must be done if a brand-led strategy is pursued.

As Fig. 8.6 highlights brand creation can come from two sources – unique competence or associational. Unique competence can be in the form of unique location, quality or delivery; or a combination of these (i.e. Ritz Hotel (unique locations and quality) / Rolls Royce (unique quality) / Amazon (unique delivery), etc). Brand can also arise from association with the success of others, because people want to associate themselves with success or value the endorsement of a high profile individual they esteem (Nike and Michael Jordan/Tiger Woods or Ralph Lauren shirts/or Gucci handbags/Jamie Oliver steaks). ‘I am successful because I can afford expensive things.’

Fig. 8.6 Brand vulnerability and risk analysis. © Robertson Cox Ltd, 2000, all rights reserved.

The four boxes in Fig. 8.6 explain how this might work. If you have a unique competence that is not easy to replicate you must be careful to defend unique IPR and processes and systems – competence branding. In food this might be a unique recipe for a food product.

Relational branding means the need to maintain the association/ relationship and deny it to others. This is like the Lakeland case with their limited number of suppliers, but would also apply to having, for instance, Nigella Lawson or Jamie Oliver under a long-term contract that others could not easily replicate.

Agility branding means that since others can easily replicate your competence you must constantly strive to find a new competence. This could mean constantly striving for new food products, like the sweets and breakfast cereal manufacturers who constantly seek to bring new ideas/recipes to market.

First mover branding is similar but applies to the first mover opportunities that might come from spotting trends and new fads (i.e. understanding how endorsement from celebrities such as David Beckham might give short-term kudos to a particular product or service). In food, for David Beckham, it could be chocolate footballs.

The Pioneer Foodservice case highlighted the potential to add value and ring fence an acceptable return for all supply chain partners (including farmers) through brand differentiation. Whether this ‘local brand’ can be successful at a national or international level, or maintain its position in the North West with a plethora of ‘local’ and national beef brands entering the market (The ‘Well Hung Beef Company’, based in South Devon, ‘Cumbrian Fellbred’, based in Milnthorpe, Cumbria and the ‘Certified Angus Beef’ brand, to name a few) remains, however, to be seen. When developing a successful brand there are a number of factors that need to be considered. The brand risk and vulnerability analysis tool described here can be used to help organisations to think strategically about brand development and protect the considerable investment made in developing and promoting a brand.

The second important issue raised by this case is the importance of linking a firms’ marketing strategy with its sourcing strategy. Understanding the appropriateness of a sourcing strategy can only be achieved by following a systematic approach. This requires an understanding of the power positions throughout the supply chain, an understanding of all of the strategic and operational options available in the chain and then the selection of the most appropriate option available to improve the power and leverage position. In the ‘Lakeland Beef’ brand case, Pioneer selected different sourcing options at different stages of its marketing campaign (see Fig. 8.7). This is because an organisation’s internal capability, external power circumstances and market performance are subject to change. Appropriateness is about having an iterative mind-set, adapting to change and fully understanding the shifting circumstances in which a business operates.

Fig. 8.7 Pioneer’s appropriate sourcing option selection.

It is also important that business managers have a clear understanding of the strategies and theories that have originated and evolved in very different industries before adopting them into their own business practice. Current supply chain theories rarely consider security of primary material supply as a major risk to a firm’s marketing activities and overall competitive strategy. This is mainly because most of these theories were developed from studies of successful cases in manufacturing assembly supply chains, such as the automobile, computing and the garment industries (Ohno, 1988; Bovel and Martha, 2000; Christopher, 2000; Christopher and Towill, 2000; Mason-Jones et al., 2000; Power, 2005). Sub-components used in these industries are typically industrial commodities and their production can usually be standardised in terms of quality, quantity and fabrication time. Manufacturing in these industries can also be more readily adjusted by using substitutes, or by changing machines and processing methods to avoid temporary supply shortages. The lack of raw material and natural resources such as metal, wood and oil is not often a significant issue in these industries over the long term.

However, unlike manufacturing industries, dispersed primary beef production requires a long fabrication time (minimum of 24 months) and complex disassembling and reassembling processing. Structural changes within the UK beef industry also reduce the long-term sustainability of high quality beef farming businesses. Therefore, without considering a proactive sourcing strategy, firms in the UK beef industry, like Pioneer, will be exposed to unacceptably high levels of business risk in the future. With this in mind, marketing strategies must go hand-in-hand with the establishment of appropriate sourcing strategies in industries with a potentially unsustainable and unsecured upstream supply chain.

The need for effective alignment of marketing and sales, and procurement and supply chain strategies, is clear if brand strategies are to be sustained and competitive advantage achieved. The key learning point for companies, therefore, is the need to understand how to link strategy and operational delivery across product and/or service brand development, as well as within internal and external supply chain execution. Our research has shown that successful companies adopt a 5-step approach to alignment:

1. mandated cross-functional involvement of strategy, marketing and sales, R&D, operations and procurement and logistics functions in business strategy, brand and product/service development and execution;

2. company-wide strategic source planning to link customer and brand differentiation strategies with internal operations and external supply chain execution strategies over time;

3. rigorous and robust segmentation of all internal and external sourcing requirements that have an impact on brand differentiation, with brand differentiation opportunity analysis across all categories of spending;

4. rigorous and robust segmentation of all internal and external sourcing requirements, with brand dilution risk and vulnerability analysis across all categories of spending;

5. development of an internal and external opportunity and supply chain vulnerability early warning system to capture brand differentiation opportunities and to forestall brand dilution risks.

These five steps are necessary because success requires, not only that the strategy and marketing functions work with R&D, operations, procurement and logistics functions to create a brand identity, but also their delivery. In a world of increasing risk and uncertainty, monitoring the external and internal opportunities and threats is clearly a continuous rather than one-off process. Only those organisations that can institutionalise continuous cross-functional implementation of a linked brand and internal and external sourcing strategy are likely to be successful in the future.

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