The Routledge Companion to Coopetition Strategies

Vertical coopetition in buyer–supplier relations

Miriam Wilhelm

Introduction

The concept of coopetition has evolved in a distinct, rapidly growing stream of research that can occur within organizations (Luo et al., 2006; Tsai, 2002) or between firms (Chen, 2008; Yami et al., 2010). Most research to date has focused on the inter-organizational level, particularly horizontal coopetition, that evolves when two (or more) rivals cooperate (e.g. Bengtsson & Kock, 2000; Fernandez et al., 2014; Gnyawali & Park, 2011; Ritala, 2012). There is common agreement, however, that the concept of coopetition can be fruitfully applied to vertical relationships as well (Castaldo et al., 2010). Thus, researchers have recently started to focus on the internal tensions that evolve in interorganizational collaborations where the parties involved, such as a buyer and a supplier or seller, are not direct competitors by definition. Such a condition has been termed “vertical coopetition” (Lacoste, 2012; 2014).

Our understanding of vertical coopetition, as it arises in supply chains and networks, is still limited and research has only recently started to analyze how buying firms develop opposing types of relationships with their suppliers (e.g., Kim et al., 2013; Lechner et al., 2016; Wilhelm, 2011; Zerbini & Castaldo, 2007). Vertical coopetition can be said to differ from horizontal coopetition, as vertical relations often emerge out of a mutual interest to interact and are generally more stable than horizontal relations (Bengtsson & Kock, 2000; Zerbini & Castaldo, 2007). In principle, there are two conceivable scenarios that lead to vertical coopetition: (1) based on direct competition; (2) based on indirect competition between a buyer and a supplier.

(1) In some cases suppliers can become direct competitors in the buyer’s market, which usually involves the vertical integration of downstream activities (Dowling et al., 1996; Lechner et al., 2016). For example, in the automotive industry this has occurred most prominently when system suppliers—often triggered by increased outsourcing by carmakers—take over the development and manufacturing of technologically sophisticated automotive parts that used to be the core competence of the carmakers, and start to compete with the in-house capacities of their customer. Sometimes this can involve the assembly of the whole car, especially in the case of the production of niche models. For example, system integrators like Magna and Pininfarina regularly compete with carmakers who can either decide to manufacture niche models in-house or to outsource them to system integrators. This can even culminate in threats of acquisition (Pathak et al., 2014) as the spectacular case of Magna’s almost-takeover of Chrysler in 2007 demonstrated (Wernle & Barkholz, 2007).

While this scenario could also be seen as a transition towards horizontal coopetition (as buyer and supplier compete on the same stage of the value chain now), the supplier often continues to deliver different components to the buyer, leading to a mixing of different logics and dynamics (see also Pellegrin-Boucher et al., 2013). Moreover, this horizontal form of competition in buyer–supplier relations is often temporary (i.e., the duration of a vehicle model project), and the buying firm can decide for the “make”-option again in the new vehicle model cycle. For example, the German carmaker Volkswagen regularly asks external suppliers to compete against its 100%-affiliated factories that are producing strategic parts such as transmissions, engines, and seats; for some models the in-house option is chosen, for others, the parts are outsourced.

(2) In the second scenario, buyer and seller collaborate but compete over shares of value creation and capturing. Relations are thus “multiplex,” as they represent more than just a single feature (Zerbini & Castaldo, 2007: 944) and constitute a “new hybrid form of supplier relationship, which combines cooperation and price-competitive transactions” (Lacoste, 2012: 649). As this constellation is more prevalent in practice, it will be the focus of the following sections. Competition in vertical buyer–supplier relations is of a more indirect nature and evolves as a result of the embeddedness of such relations in a wider supplier network (Oliver, 2004; Wu et al., 2010). The tensions caused by this form of indirect competition can nevertheless be fierce.

Keeping to the example of the automotive industry, carmakers’ ongoing vertical disintegration of activities has resulted in the formation of long-term collaborative relationships, at least with first-tier suppliers and some service providers who are providing technologically complex modules and systems (e.g., Dyer & Nobeoka, 2000; Sako, 2004). At the same time, the embeddedness of these dyadic relations in the context of supplier networks creates “tension and contradiction” (Sydow & Windeler, 1998: 280) due to parallel horizontal competition between suppliers in the network. Suppliers with similar technological competences regularly compete for the development and production of a specific part for the same project when the carmaker follows a dual or parallel sourcing strategy (Richardson, 1993; Wu & Choi, 2005). Moreover, the presence of “out-suppliers” (Robinson et al., 1967), i.e., suppliers that could potentially get an R&D and delivery contract, may further fuels competitive tensions. The respective existence of latent ties (Mariotti & Delbridge, 2012) can strengthen the power position of the buyer firm and increase its ability to capture a higher share of the value.

Coopetition in supply chain management

While a collaborative paradigm is still prevalent in the supply chain management literature today (Chen & Paulraj, 2004; Terpend & Krause, 2015), recently scholars have started to embrace the idea that the parallel existence of competition and cooperation must not necessarily be detrimental to the buyer–supplier relationship but can actually be desirable (Klein et al., 2007; Nair et al., 2011). Moreover, there is a growing recognition that relations that are “too cozy” can bring out “dark sides” such as the risk of increased supplier opportunism (Villena et al., 2011).

Coopetition in supply chain management has predominantly been analyzed from a structural perspective (Choi & Wu, 2009; Pathak et al., 2014). From such a perspective, cooperation is understood as the direct link between two companies, whereas the absence of a link between two companies suggests competition when at least one of the three conditions are met: (1) the two firms can supply a product of equivalent functionality; (2) the firms require similar scarce resources or input; or (3) the two firms have overlapping and complementary technology such that learning and value appropriation incentives exist (Pathak et al., 2014: 255). Competition between two suppliers is likely to affect relations that these suppliers have with the buyer as well. Thus, a structural perspective sharpens our understanding of competitive tensions in a buyer–supplier dyad that results from its embeddedness in a larger network with multiple and overlapping relational linkages (Wilhelm, 2011; Pathak et al. 2014).

A further characteristic of supplier networks in the automotive industry—and inter-organizational networks more generally—is that one or more actors are typically able to exert more power over other network members due to their network centrality (Wasserman & Faust, 1994), organizational size (and concomitant resource control), and/or their ability to bridge structural holes (Burt, 1995). This “hub firm” role can be ascribed to the buying firm or original equipment manufacturer that “sets up the [supply] network, and takes a pro-active attitude in the care of it” (Jarillo, 1988: 32). A network led by a hub firm in this way is often referred to as a “strategic network” (e.g., Gulati et al., 2000; Jarillo, 1988; Sydow & Windeler, 1998). Due to its proximity to the end consumer, the hub firm has more power to determine market strategy and choose network partners than other network members. The repeated exchanges between a buying firm and various suppliers result in relatively stable relations that set the boundaries of the network, although the nature of each dyadic relation may, over time, change along the continuum of cooperation and competition (Sydow & Windeler, 1998).

Research in supply chain management has often highlighted the important role of these buying firms (Monczka et al., 1998; Pathak et al., 2014; Petersen et al., 2005; Richardson, 1993). Buyers—particularly in the automotive industry—exert influence on the selection and interaction of their immediate suppliers and, thereby, influence not only the direct link they have to selected suppliers, but also the indirect links to two or even more competing suppliers (Wilhelm, 2011; Wu et al., 2010). This does not mean that suppliers are completely without power and merely react to their customers’ demands. Particularly mega-suppliers like Bosch or Denso, but also those component suppliers with strong technological capabilities, can play out their power positions by demanding higher prices for their stand-alone innovations, take advantage of the diminishing ability of carmakers to evaluate the real development and manufacturing costs for purchasing parts, or withdraw from the price-cutting game when they perceive the pressure as becoming too strong. Suppliers can also decide to initiate horizontal collaborations with each other in order to better serve their customer’s request for global delivery of parts or share costs in R&D. At the same time, the horizontal cooperation between suppliers can help them to strengthen their bargaining position vis-à-vis their customer. In order to better understand how these actions can change the dynamics and outcomes of vertical coopetition, we argue for the need to expand our methodological scope and analyze the triadic relation between a buyer and two competing suppliers.

The triadic nature of vertical coopetition

Whereas buyer–supplier relations are typically conceptualized as dyadic relations, they are usually embedded in supply networks, which are more comprehensive, incorporating sets of individual and connected supply chains with links among them (Sturgeon et al., 2008).

Researchers have pointed to the importance of looking at the interactions between dyads that are embedded in the same network (Wu & Choi, 2005). Some have shown that a dyadic relational link between a buyer and a supplier operates differently when the buyer maintains additional dyadic relations to competing suppliers. In its most simplified form, the parallel dyadic relations a buying firm maintains with two suppliers can be depicted as a triad. Figure 35.1 illustrates different triadic constellations between a buyer and two suppliers that result in different forms of vertical coopetition.

Triad ABC (vertical coopetition with balanced competition)

Competition between supplier B and C, which typically results from overlapping product markets that these suppliers are active in, will affect relations between buying firm A and supplier B (and A and C, respectively). In this constellation, the buying firm interacts with each individual supplier independently and “serves as a router of information exchange between suppliers” (Choi et al., 2002: 122). Depending on the degree of resulting competition, the resulting A–B relationship will either be “balanced” (cooperation and competition are represented to equal degrees), predominantly competitive, or predominantly cooperative. While this constellation bears the highest potential of balanced coopetition, the realization of this potential depends on the ability of the buying firm A to manage each relationship with supplier B and C and with potential suppliers on the market (i.e., “out-suppliers”). For example, the buying firm could decide to strategically reveal cost or product-related information of supplier B to supplier C in order to stimulate competition between them. The active creation and encouragement of interdependencies between two suppliers, termed a “triadic sourcing strategy,” can help buying firms to “nurture and benefit from cooperation and competition between two suppliers with partially overlapping capabilities” (Dubois & Fredriksson, 2008: 176). An over-stimulation of competition, however, could discourage suppliers from investing in improvement activities as they fear diminishing returns of efforts (Li & Wan, 2017).

Figure 35.1Triadic constellations between buying firm A and suppliers B, C, D, and E

Triad ACD (vertical coopetition with reduced competition)

If supplier C and D form a cooperative relationship, this can potentially harm the degree of competition in the network. Buying firms are often wary of the horizontal cooperation between their suppliers, as they fear the loss of bargaining power vis-à-vis their suppliers. In fact, cooperative relationships between suppliers can often stray into collusive practices. For instance, in several industries, such as airlines and steel, price increases and decreases occur in tandem (Choi et al., 2002: 122). Thus, formally supplier C and D are competitors (as they operate in the same product market) who have chosen to reduce their competitive actions vis-à-vis the buyer. In exceptional cases, however, induced cooperation between suppliers could lead to a higher degree of performance transparency among suppliers and, paradoxically, to a higher degree of network internal competition. This requires, however, the strong network governance from a skillful and powerful buying firm, as illustrated by the case of Toyota (see Wilhelm, 2011).

Triad ADE (cooperation with reduced competition)

Missing (cooperative or competitive) ties between supplier D and E indicate a monopolist position of supplier E. In this case, there is a lack of competition in the network leading to a situation where a supplier could dictate prices. In the automotive industry, the lack of alternative supply sources can occur for specific parts but is often only temporary, as carmakers are usually eager to develop alternative sources. For example, Toyota invested in the seat supplier Trim Masters to introduce competition to its existing seat supplier Johnson Control, keeping them motivated to improve and reduce costs (Liker, 2004). Later on, Toyota merged three of its group companies to form the new Toyota Boshoku, creating the fourth-largest global seat and interior supplier. However, the lack of alternative sources does not always need to reflect the actual market situation but can also arise from over-embeddedness with suppliers. The case of Nissan’s near-bankruptcy at the end of the 1990s demonstrated that long-term, exclusive relations with suppliers can easily lead to inertia and a situation where market competitors are purposefully left outside the network, leading to detrimental performance consequences for the network (see also Stevens et al., 2015). This scenario clearly lacks competitive elements and is, technically speaking, not a type of vertical coopetition, but it is nevertheless included here to demonstrate the danger of a limited perspective that looks at each buyer–supplier dyad in isolation. Thus, even though the triadic perspective constitutes a simplification of the complexity of real-life supplier networks, it is a useful first step to think about the interrelationships between different dyadic relations that a buyer has with its suppliers and the resulting nature of vertical coopetition.

Vertical and horizontal coopetition in comparison

Whereas the above outlined the usefulness of a triadic perspective to better grasp the indirect nature of vertical coopetition, this section summarizes the distinct nature of the concept by contrasting it with horizontal coopetition (see Table 35.1).

Table 35.1Horizontal and vertical coopetition compared

	Horizontal Coopetition	Vertical Coopetition
Strategic orientation	“cooperate to compete”	“compete to cooperate”
Nature of competition	direct	direct and indirect
Methodological scope	dyadic	triadic
Power relations	more symmetrical, i.e., collaboration between “giants”	more asymmetrical, i.e., buying firm as “hub firm”
Central tension	fights over shares of knowledge appropriation, patenting	fights over the degree of vertical integration fights over shares of margins, price negotiations

An important difference between horizontal and vertical coopetition can be found in the strategic orientation of the cooperating firms. Whereas a main motive for rivals to cooperate is to strengthen their competitive position against other rivals (“cooperate to compete”), the strategic orientation for vertical coopetition can be better described as “compete to cooperate”: in order to qualify for a new project with their customer—and prove worthy as a collaboration partner—suppliers must compete against each other based on their ability to meet technical requirements, price targets, and quality performance. Moreover, competition between rivals will be of a more direct nature due to the overlap in product markets of the alliance partners, as opposed to a buyer and a supplier who are active at different stages of the value chain. Due to the embeddedness of the buyer–supplier dyad, competitive tensions arise from the indirect competition between suppliers, that can, however, be moderated by the active involvement of the buying firm (Wu et al., 2010). This also implies, however, that the buying firm has a higher ability to influence the dynamics within triadic constellations; and power asymmetries are more likely to be pronounced for vertical coopetition than for horizontal coopetition (e.g., Gnyawali & Park, 2011). Finally, although tensions between value creation and value sharing characterize both types of coopetition, the tension will surface in conflicts around shares of knowledge appropriation in the patent filing process (and sometimes unintended knowledge spillovers) between rivals, and the “fight over margins” between a buyer and a supplier.

Avenues for further research

This chapter applies recent discussion from the supply chain management literature on the phenomenon of vertical coopetition between a buyer and a supplier. While the current structural perspective in supply chain management, and the triadic level of analysis, has proved to be a valuable approach to analyze vertical coopetition, it also opens up several directions for further research.

First, our analysis of coopetition was restricted to the level of buying firms and their first-tier suppliers. Research in coopetition in supply networks indicates, however, that there can be “spillovers” for competitive tensions to the second-tier suppliers (Pathak et al., 2014). A single decision of a buyer to source from a particular supplier can lead to a cascading set of dissolutions of ties and the creation of structural holes. In this context, it would be interesting to extend the simplified depiction of vertical coopetition outlined here to embrace multiple tiers of the supply chain and analyze the coopetitive dynamics between tiers.

Future studies could also explore how the purposeful creation and closing of structural holes (e.g., Pathak et al., 2014; Wilhelm, 2011) creates different forms of competitive tensions. For example, a collaboration between two competing suppliers that was initiated by the buyer to exchange manufacturing knowledge would cause different competitive tensions based on performance differences (see also Wilhelm, 2011), rather than self-initiated R&D collaborations among suppliers that aim to strengthen their competitive positions vis-à-vis the buyer. Both forms of competition are likely to affect the buyer–supplier collaboration differently, calling for further, more systematic inquiries.

Finally, coopetition researchers have started to engage with the emerging paradox perspective from management studies (Schad et al., 2016; Smith et al., 2013) and have called for the understanding of coopetition through an explicit paradox lens (Bengtsson & Kock, 2014; Czakon & Fernandez, 2014). A paradox perspective with its focus on dynamics and processes might shed new light on how actors experience and respond to tensions that arise from structural coopetition. In this context, the importance of cognitive capabilities of individuals to respond to paradoxical tensions has been highlighted (Smith & Tushman, 2005) and named by Bengtsson et al. (2016) as “coopetition capabilities.” We argue that due to the different dynamics of vertical coopetition and the expected power asymmetries between a buyer and a supplier, the nature of paradoxical tensions might differ and so might a buyer’s and a supplier’s responses and their required coopetition capabilities (see Wilhelm & Sydow, 2018). A paradox perspective could thus fruitfully complement the structural view outlined here to further explore these issues.

Conclusion

Vertical coopetition can be directly related to the recent debate on the “dark side of buyer-supplier relations” (Anderson & Jap, 2005; Fang et al., 2011; Kim & Choi, 2015; Noordhoff et al., 2011), which challenges the overall positive view on collaboration with suppliers in supply chain management theory and practice. This perspective highlights the necessity of having both relational and transactional mechanisms (Liu et al., 2009) in order to generate value and overcome the relational inertia that inhibits partners’ capacity to meet changing market demands (Villena et al., 2011). This approach increasingly questions the cooperative–competitive dichotomy that is commonly used to describe buyer–supplier relationships (Sako & Helper, 1998; Wu & Choi, 2005). A more nuanced picture of the way cooperation and competition are intertwined in buyer–supplier relations could help to more adequately reflect the conflicting interests of buyers and suppliers. In this regard, the concept of vertical coopetition widens our perspective to understand buyer–supplier relations as triadic constellations and sensitizes managers of buying firms to the importance of not only managing dyadic relations with their suppliers but also urges them to think about the interrelationships between these relations in order to stimulate and adjust the desired degree of competition in the collaboration with suppliers.

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