Creating strategic change in procurement orientation

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European Journal of Purchasing and Supply Management Vol 1, No 3. pp. 149-160, 1994 Elsevier Scicncc Lid Printed in G r e a t Britain 11969-71)12/94 $10.1)(1 + 11.1111

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Creating strategic change in procurement orientation A strategy for improving competitiveness Shan Rajagopai and Kenneth N Bernard Department of Marketing, University of Strathclyde, 173 Cathedral Street, Stenhouse Building, Glasgow G40RQ, UK The changes in the business environment with technological breakthroughs and crumbling national barriers are pressuring firms to become more efficient and entrepreneurial in order to compete in globalized markets. To meet these pressures is no simple task. Far-sighted executives are responding by initiating wrenching revisions of their firm's competitive postures, internal controls and corporate cultures. All these changes are forcing top management to alter its expectations of its purchasing organization. No longer can firms create, design, launch, and provide viable products throughout their life cycles without regard to the supply aspects of the material and components that go into them. The paper proposes a model for achieving a purchasing orientation change strategy, and argues the need for the purchasing organization to be strategically oriented to improve the company's competitive posture in the marketplace. Keywords:

The competitiveness of the environment for business has increased greatly in the past decade. Globalization, technology developments, shortened product life cycles, and process technology advances have altered the ways in which companies compete. The ability to be strategically oriented, remaining focused on long-term objectives while being flexible enough to react quickly to these rapidly changing environmental forces, has become a key to corporate success (Hamel and Prahalad, 1989). This required strategic focus has necessitated major shifts in the traditional modes of operation of both organizations and the purchasing functions within them (Wriston, 1990). Only purchasing departments that provide a value-added service will be maintained in the firm (Kanter, 1989a). Currently new flexible organizational forms are evolving, with increasingly blurred functional and corporate boundaries. Network organizations are becoming commonplace; priority now lies in identifying the most efficient methods for supplying services and obtaining desired objectives (Miles, 1989). Some of the results have been the external purchases of services formerly provided within the firm, the development of joint ventures and

partnerships, and collaboration between customers and suppliers at all levels of the organization (Peters, 1988; Kanter, 1989b; Wriston, 1990). All these changes are altering the expectations of the purchasing organization. Global sourcing is becoming a necessity in many industries in order to remain cost-, price- and quality-competitive. Shortened product development cycles have necessitated purchasing participation in the design team. Innovations in the marketplace and technological product advances have increased the degree of outsourcing being performed with the objective of enhanced value. The introduction of quality programmes and just-in-time systems has enlarged the scope of purchasing, with added responsibility for supply management, managing inventories and evaluating, selecting and managing suppliers. With companies becoming potential suppliers, customers and competitors at the same time, the need for relationship management has become very important. Within the past decade, senior management has become more aware of the potential contribution to be made by purchasing to the competitive advantage and profitability of the firm (Cavinato, 1987). Cost containment has become a strategic tool 149

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150 for both procurement efficiency and marketing effectiveness (Rajagopal and Bernard, 1992). The purpose of this article is to identify the need for empowerment of strategic change within the purchasing function. In the process, the article attempts to conceptualize a framework of interacting forces that promote change in purchasing orientation towards improving the performance of the organization. Secondly, the paper proposes a model for enabling strategic purchasing orientation change. In the final analysis, the authors focus on the need for the purchasing function to be strategically oriented, to improve the company's competitive posture in the marketplace.

The need for empowerment to create changes to sustain competitiveness 'We need to change. We're in trouble. Business as usual is out,' claimed James A Belasco (1990). He argued that many companies are bound by earlier conditional constraints and successes. 'We've always done it this way' imposes a limit on an organization's progress, especially in circumstances of rapid environmental change. Several well-known companies can be cited as having become prisoners of their own success: for example, Xerox (Anon, 1987) and still more dramatically IBM (Carroll, 1993). In both instances, the companies spent lavishly on research and development, had proficient marketing organizations and dominated their markets, to the point where they appeared to refuse to take new competitors as serious threats, until they had actually lost significant market share. Another example is Courtaulds, the £3 billion plus UK textile manufacturer. When Sir Christopher Hogg arrived in 1980, the outlook was extremely poor for Courtaulds and the rest of the UK textile business. Managers were trapped in the vicious cycle of poor results, and more conservative management, which led to even poorer results. Hogg realized that he had to break the mould. Hogg reorganized Courtaulds into six business sectors. He insisted on meeting or beating the standards set by the best world-class competitors. Those operations that did not meet the test were closed or sold: hitherto unheard of in the UK textile business. The results: since 1982, Courtaulds pretax profit has risen an average of 37% per year (Kirkland, 1988). Previous success and past practices have tended to root US and European companies firmly to old habits. It has gradually become recognized that the old ways of doing business will not necessarily succeed in the future. Markets continually change. Customers continually change. Technology continually changes. Competitors continually change. Each change triggers the need to create flexibility to meet future challenges.

Leaders at any level in the organization face this need and the requirement to move quickly to develop a new strategic approach. This new strategic approach can contain three elements, according to Belasco (1990), management of which can help a company to determine the 'right' new directions: • • •

repositioned products/services to build a competitive advantage; talented people to execute the new strategies; and organizational resources that tightly focus on the new strategies.

Handscome and Norman (1989) identified significant marketing developments that have taken place, and which are taking place, that highlight the need to form strategic relationships and understandings with both key customers and suppliers. These major developments enforce change in companies' ways of doing business. (1)

(2) (3)

(4)

(5)

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The shortening of product life cycles, coupled with a significant specification upgrading, means that change in product design can only be harnessed by close customer/supplier strategic relations. The global development of marketing key product areas in which only the best international products are winners. A focus on the total quality of the product or service as a key international marketing priority. Here, Japan has understood this problem from the point of view of the product but, it is suggested, can in the longer term only remain successful by strategic integration of priorities and objectives with suppliers, as well as focusing on customers' needs. The increasing number of strategically minded customers who are looking for strategic relationships with suppliers who have the desire and capability to match their strategic interactions. Dealing with competitive pressures of overcapacity in Western industry. Individual countries such as the USA and the UK had to face these problems in the 1980s, but the emergence of the Single European Market in 1992 and continued global recession have ensured that this issue has been extended throughout the EU in the 1990s. Only the best-prepared and coordinated businesses will survive to prosper from this rationalization, and close customer-supplier strategic relationships will be crucial to both parties. The emergence of new trade blocks represents a challenge to many industries with global consciousness.

Drucker (1992) identified five important areas that he believes will bring far-reaching changes in the social and economic environment, and in the strategies and management of business:

Creating stratiegic change in procurement orientation

• • • • •

international economic integration and reciprocity (economical relations); alliances (both customer-supplier partnerships); radical restructure of corporate organizations (reshaping companies); governance of companies (challenge to management); rapid changes (international politics and policies).

Change can be implemented or enforced by various means. Interactions between internal forces (which are notionally controllable) and external forces (which may be much less controllable) play major roles in the evolution of competitive industry as well as of individual purchasing scenarios (Hakansson, 1983). Standing between customer and supplier marketplaces, individual firms have to recognize and manage the complex interrelationships simultaneously in both environments if they are to develop optimal strategies for short- and long-run benefits. As procurement develops into a strategically recognized function, it becomes capable of contributing to improvement in a company's performance proactively. Thus supply market forces and management can act as catalysts for the purchasing function to change in order to gain and exploit competitive advantage.

The role of supply market forces in the creation of strategic purchasing orientations The influence of supply markets on many aspects of change in today's commercial environment necessitates careful consideration by planners. No company is an island, and to achieve change we need to pay close attention to planned developments with key sources. The corporate R&D-driven financial problems faced by Rolls Royce as the result of its involvement with development of new technology engines for the Lockheed L1011 illustrate the interrelationships of change patterns in technological industries. Similar patterns may be observed in many other situations. The external competitive strength of a company may be considerably affected by its relationships with its supply sources, with their technological stability, with their financial stability and with their R&D, among other relationships. Thus, in attempting to analyse a company's performance, we should consider its strengths in establishing and developing these external relationships. These relationships may well have considerable bearing on the section of the product mix that the firm will produce. For example, ICI and Courtaulds man-made fibre developments were key factors in the planning of many clothing and carpet manufacturers in the UK in the early 1960s. Shell Chemicals and their developments had a similar effect on plastics bottle manufacturers (among others) at the same time (Farmer, 1972).

151 In their current planning, car manufacturers must take note of potential developments by outside sources regarding, for instance, the question of a battery-powered auto unit. Similarly, the oil companies must consider their source planning in a different light following the recent activities of the Gulf States. So too must power users (and governments) consider their fuel policies in the light of these happenings, quite apart from the ongoing processes of competition and technological evolution. A study by Farmer (1970) in the construction industry indicated that the product mix and the basic policy of a company was at least partially changed as a result of external stimulus from their raw material supply market. This company and many others like it reacted to change rather than planned to take advantage of it, and yet, in retrospect, there were many economic pointers in the supply market that suggested that a change would come about. Effective supply data generated as part of the company's corporate plan would have proved extremely beneficial. Increasingly aggressive global and domestic competition and improved mass communications are key forces that are initiating the need for reduced product development time (Gupta and Wilemon, 1990). The strategic implications of compressing time are clearly significant, and it becomes readily apparent that speed-to-market creates opportunities in market share, market leadership and profits (Vessey, 1990). For example, By introducing six all-new vehicles within 14 months, Toyota has captured a crushing 43% share of car sales in Japan. In the 1990 model year, it sold more than one million cars and trucks in the US for the first time - strengthening its position as number 4 to the hard pressed Big Three (Fortune, 1990). A study by Clark (1987) indicated that the Japanese could, on average, complete a new-car development project about 18 months faster than either their US or western European competitors, at a cost of about half a billion dollars in lost profits to the lagging firms. According to a McKinsey study, a product that was six months late to market would miss out on one-third of the potential profit over the product's lifetime (Schonberger, 1986). The above actions are only a few examples of many that point out a clear set of economic and operational reasons to reduce the time-to-market cycle. Mendez and Pearson (1992) identified clearly that, in a well-structured organization, a multidisciplinary team can reduce time-to-market and increase adaptability. They stated that purchasing personnel should be primarily responsible for providing advice on availability of materials and components, quality and costs, and also that the feasibility of outsourcing through the development of supply-side strategic alliances or partnerships should be considered if the synergistic effects increase service, lower cost or reduce risk.

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A framework of supply market forces affecting a change in purchasing orientation to improve performances The world market is progressively becoming more challenging for marketers, producers and their suppliers, with enhanced levels of availability of world-class, high-quality products at world-class low costs, in both relative and absolute terms. With purchased items accounting, in many companies, for 70% or more of total costs of manufactured goods, the strategic significance of the purchasing function has become recognized as a major determinant of both competitiveness in the market and corporate profitability (Baily and Farmer, 1990; Rajagopal and Bernard, 1992, 1993). Purchasing managers must therefore be proactive in the conduct of their activities, in order not just to make supplier choices but to ensure that the best available solutions are sought in the first instance. An everyday parallel is the distinction between curative and preventive medicine. It is the contention of this article that an expanded and more integrated framework can be developed to demonstrate and explain the interaction of forces that can give rise to the necessary changes in purchasing orientation. The framework reflects changes in the environment and in the purchasing function itself, and the need for improving performances that can sustain the overall competitive advantage of the firm through achievement in cost, containing improved quality (velocity or rapidity of response to market demands/opportunities) and technological superiority. The proposed framework, which graphically was developed from a 'forced collision' between models propounded by Burt (1991) and Knox and Denison

(1989), may not be all-inclusive, and does not purport to be managerially prescriptive. Rather, it is an initial attempt to isolate the interacting forces that can promote the emergence of a strategic approach to purchasing, and to analyse the operation of the linkages and interactions giving rise to a specific focus or to a change in focus of the strategies available. The origins of the model postulated lie in two separate fields: conceptually in the area of organizational development and change [for example, the work of Fombrun (1992) and Gersick (1991) among others]; empirically in opportunistic but structured observation of evolving practice in two major industries. These observations were made over a period of more than a year in the oil and electronics industries, and focused on changes in corporate orientation affecting perception of the role of the procurement function at departmental and corporate levels. The implicit hypothesis rests on the notion of departmental (or microlevel) interaction, which takes place in the proactive pursuit of purchasing effectiveness, commencing from the conclusions offered by Hakansson (1983). It is further proposed by several authors [for example, Ginsberg (1988), Greiner and Bhambri (1989), Gersick (1991), Fombrun (1992) among others] that development of effective departmental strategies depends upon the prior or contemporaneous existence of strategic interactions between functions at corporate (or macro) level. Figure 1 demonstrates the elements that may be perceived to be applicable to the evolution of a strategic approach to procurement at macro and micro levels. It is also suggested that de f a c t o - there exists an intermediate 'layer' of factors between the macro and micro environments,

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Creating stratiegic change in procurement orientation which may act either as facilitators in the dissemination of change, or as barriers to change. Such an approach is not conceptually new, therefore; the remainder of this discussion considers the application of the concepts of multilevel strategic focus development to the procurement function specifically. The aim of the discussion is to identify key factors that may be considered essential to the emergence of a strategic focus on procurement at the key levels of company activity. Figure 1 depicts the forces in the form of two concentric circles 'revolving' around a conventional decision-making model, having as its output a set of goals and objectives, expressed in terms identified by Burt (1991) as comprising the principal competitive drivers open to direct influence by the procurement function: cost, quality, velocity (or time to market) and technology (product and/or process). The outer ring of the model depicts what are perceived as the principal external forces that influence the determination of procurement objectives and thus impinge upon the strategies that may be adopted. Several of these external factors have been subject to change in recent years, and their impact upon procurement operations has been subject to consequential reappraisal. The inner core depicts the managerial functions of strategy derivation, implementation and control of outcomes, which depend upon the interactions between the external environmental factors and the intracorporate structures and processes, which may act as barriers or facilitators to the conduct of an effective procurement strategy. Between the outer ring and the inner operational core the authors identify a middle range of internal forces operating on the conduct of the purchasing process. Once again, it is possible to identify empirically changes in practice and emphasis that have arisen as the competitive environment has altered de facto, and to postulate ways in which strategically planned and implemented change might permit or facilitate acquisition of competitive edge by improving purchasing effectiveness. Analytically, the elements identified in the three rings may be seen as similar to the structural factors and process forces postulated by Knox and Denison (1989) in the context of intracorporate transfers of technology. Knox and Denison suggested the depiction of the transfer/adoption of new technologies in a matrix format wherein structural elements (which could perhaps be seen as impediments or barriers) - environmental, organizational and human/individual - are set against 'change' facilitators: information, authority and enthusiasm. The elements in the model shown in Figure 1 represent an expansion of Knox and Denison's ingredients, illustrating not only that change processes are complex, but also that the 'recipes' for effective change are flexible combina-

153 tions that, despite having common foundations, are also capable of being highly individualized.

The external forces The external elements may be identified and summarized as follows. Government~institutions. Governmental actions and interventions play major roles in the operation of most major national economies. This has become true in the purchasing area, where the government may attempt to enact social policy through public sector procurement legislation, in the UK for example. Supplier relationship. The way buyers now look at their suppliers may represent the biggest change in the purchasing function in the last decade. Suppliers are now looked upon as partners and not adversaries, and purchasing managers are now increasingly looked upon as managers of 'outside' manufacturing facilities (Hutt and Speh, 1992) Technology. Changing technology has had an impact on all functions in a firm, and certainly purchasing has felt this impact. This is particularly true in the area of information processing, where EDI and decision support systems have changed the way of doing work among many buyers. Changes in manufacturing and process technology and philosophy, such as JIT and flexible manufacturing systems, have also been influenced by purchasing strategy, and vice versa. Customers. Firms are focusing on the necessity to ensure that they satisfy customer needs. This has an impact on the purchasing function, as it relates to the cost of poor quality, and leads to an integration of customers into the design, production and supply system in order to optimize benefits deliverable. Competitors. It is important for purchasing to keep up to date on the movements and developments of competitors. New technological developments or product innovations of competitors must be matched and exceeded if the purchasing firm is to hold its position. Better still, competitive advantage should be sought proactively rather than being perceived as a defensive necessity. Economical social and psychological. The economic environment refers to the firm's business cycle, inflation, exchange rates and interest rates, which can generally affect both end and supply markets. Social and psychological forces relate to value systems, people's attitudes, and behavioural patterns. These forces can have a major influence on establishing supplier relationships and upon willingness or ability to forge new alliances or to change established patterns.

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Internal forces Within the organization, the forces impinging upon the purchasing function embrace the procedures, structures, strategies and culture that act as the essential channel between the external environment and the desired actions and outcomes. The main elements are identifiable as follows. Interdepartmental relations. Changes in manufacturing philosophies and customer demands have necessitated close relations between departments in a firm. For example, the institution of a JIT system requires much closer coordination between all departments, from sales to purchasing. Organizational structure. As corporations change their organizational structure to adapt to changes in their environment and their strategy, so too must the purchasing department change the way it is organized. Organizational strategy. When the strategy of the firm changes, so must the strategy of the purchasing function (and vice versa). Organizational policies and procedures. As changes occur in both the external and internal environments, so the policies and procedures that guide behaviour should alter in response to these changes. A good example of this in the purchasing area might be the changing relations between buyers and suppliers, or partnering, which requires mutually beneficial relationships with smaller numbers of suppliers. This change should result in a change in policy controlling how a company deals with its suppliers, such as longer-term contracts, less reliance on competitive bidding and so forth. Corporate culture. Organizational 'corporate culture' has received a great deal of attention recently in business periodicals. The term has been defined as 'interrelated set of beliefs, shared by most of an organization's members, about how people should behave at work and what tasks and goals are important' (Baker, 1980). While an organization's corporate culture can be derived from a company's development over a long period of time, the current emphasis of a company's top management may also go a long way in determining what things are important or stressed by the organization. A key element in the development of a corporate culture may be the backgrounds of key executives in the organization. The task for the purchasing manager m changing purchasing's role from one that focuses on tactics to one that emphasizes strategy entails understanding the corporate culture of the organization in which he or she works. For example, gearing purchasing's role to a cost reduction strategy with careful monitoring and control

S Rajagopal and K N Bernard may increase the chances of purchasing being viewed as a strategic corporate function.

Process mechanism. This refers to control mechanisms such as resource allocation systems, the evaluation system and the rewards and sanctions system. These can include an internal appraisal system, which can consist of a procurement audit, measurement of purchasing effectiveness and evaluation of purchasing performance. The managerial functions The inner core of the model embraces the overall outcomes of the interactions between the external and internal environments, with four components: purchasing strategy derivation; implementation; resulting outcomes; and (hopefully) a controlled, effective contribution to corporate strategy and competitive success. The successful implementation of a purchasing strategy will be reflected in the outcome. Hence the outcome of an effective purchasing strategy will satisfy the goals and objectives set by the procurement function. This in turn is compatible with the firm's overall goals and objectives, thus giving rise to improved performance and providing a source of differential advantage. The contribution of effective purchasing strategy to sustained competitive advantage can be achieved through cost, quality, velocity and technological breakthroughs because of the significant influence that suppliers have on these issues.

Change and challenge to gain opportunity for the future As discussed in the preceding sections, the world is very turbulent. As Gersick (1991) claims, to guide firms through chaos towards renewed competitiveness, managers are increasingly compelled to conceive and execute metamorphic transformation of their firm's strategic postures and internal features. To put this into the purchasing function context, it becomes essential for purchasing managers to identify the need to change towards a strategic orientation to contribute towards firms' competitiveness. Figure 2 proposes strategic purchase orientation change as a set of processes, as described by Ginsberg (1988) in the context of 'mechanical analogy' as 'movements that can result from an imbalance between forces that stimulate or retard change'. However, in reality, managers and employees experience these forces subjectively. They often succumb to individual biases that cloud their interpretation of events. The strategic directions on which firms embark therefore depend heavily on how managers think about their environments, about their firm's capabilities and about themselves. If particular managers

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select different strategic trajectories when faced with seemingly identical circumstances, evidently they must be interpreting those circumstances differently (Fombrun, 1992). Analytically, the model in Figure 2 proposes that strategic purchasing orientation change involves five distinct stages. During Stage 1, purchasing managers have to make sense of the environmental forces that surround their firms. They can actively search for information, through their suppliers and other sources, with which to represent the changing face of rivalry in their industries. They interpret how threats are likely to congeal, and organize these interpretations around probable scenarios. However, the firm's environments are difficult to interpret. For example, will technological changes facilitate or hamper the integration of communication and computers, and

thus can a company benefit from such a merger? Many questions about environmental impact are difficult to answer, primarily because they are cloudy and difficult to read. It is also interesting to note that they often operate in paradoxical, contradictory ways. For instance (Fombrun, 1992): • • •

efficiency versus innovation; competitiveness versus institutional effectiveness; globalization versus nationalism.

Take for example Whirlpool, the world's largest manufacturer of major domestic appliances. In the search for global economies of scale, the US-based company acquired Philips' European appliance business. Yet, uncertainties abound. It remains unclear whether the fragmented European market

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can be supplied in the long run from centralized manufacturing facilities like those in the USA. The company also has limited brand awareness abroad. Multiple national standards hamper the standardization of parts, and patriotic sentiments prevail (Anon, 1991a). So, seemingly simple changes in environments require considerable interpretation of how economic, social and political forces will or may combine. They remind us that, fundamentally, to conceive a strategic purchasing change is a deeply subjective process. Internally, however, firms' features create a degree of inertia and momentum that influences perceptions of change. Astute purchasing managers therefore should carefully decipher how their firm's internal environments are likely to impede a strategic purchasing re-orientation. Stage 2 involves assessing how these internal and external conditions affect a firm's strategic postures. Radically changing environments demand attention to the ways in which firms compete. For example, changes in technology and globalization of markets tend to increase rivalry and so demand efficiency. To keep up, the managers tend to contemplate changes in business, corporate and collective strategies. Purchasing managers must review their orientation to suit the change in the firm's strategic posture. In some firms, managers opt for conservative responses. They try to accommodate turbulence by making peripheral modifications that allow their firms to persist in oscillating about their historical paths of evolution. They deny that the system is broken, so they don't try to fix it. In some vanguard firms, however, purchasing managers also recognize that their internal systems are indeed beyond repair and require a complete overhaul. So they call for strategic change. A strategic change modifies both the speed and the path of a firm's trajectory through time and space: it involves a redeployment of the firm's resources to a new configuration and entails the rebuilding of corporate momentum in a new direction (Griener and Bhambri, 1989). Some managers with vision have read environments well. They have recognized the revolutionary circumstances their firms were facing and embarked on strategic changes. On a general basis there are three types of key strategic change: •

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towards regulators and competitors. The three modes of strategic change in an organization are also achievable through a reorientation of the purchasing function. At the business level the objective of strategy is to alter competitive advantage. Many firms seek to improve their competitive

position by aggressively investing in development of a more differentiated market presence. Some firms throw money behind the idea that they can improve their ability to compete through new product introductions. Some try to differentiate their products and services better by cutting costs or improving product quality. Others target their products and services more carefully at narrower market segments. From a purchasing perspective, business-level strategic change will put pressure on purchasing managers to think like executive management. They will have to examine what their companies are producing and selling and ask: 'What do we need, by product, to become more competitive: in generating more return on investment, more profit, more market share and more volume?' They have to consider how suppliers can contribute better to gain mutual competitive advantage in terms of quality, cost, delivery, technology, cycle time, responsiveness - as well as materials management factors of transportation and inventory. It is important for purchasing's focus to be on optimizing the use of information to gain a competitive advantage from the supplier. It can create business-level strategic net changes by collection, analysis, and application of information relevant to a business situation. For example, purchasing will have to determine the cost of producing a product, understand the costs involved in producing the product at their suppliers, and comprehend what can be done to change the product cost structure, especially driving out nonvalue-added cost. Further, purchasing as a function needs to provide for integration across other functions and also work with suppliers to provide a window on the commercial supply base in order to gain a source of differential advantage (Monczka, 1989). In corporate-level strategy, firms aim to extend their core capability. This can be observed where some firms have rapidly divested assets to reduce their exposure to environmental forces. This change has been predominant in successful corporations in Europe, who have pursued a strategy of cutting back marginal and unrelated business areas in order to concentrate more effectively on the core business. Ernest Saunders excised the 'nightmare jungle' of the 280 businesses within the Guinness Group to concentrate on the core business of brewing (Weir, 1992). Another more dramatic example is Honeywell, which since 1986 has systematically sold off its computer, semiconductor, and defence businesses and made acquisitions designed to consolidate its operations around its original business in automated controls. The restructuring has enabled increased global coordination of parts purchasing, marketing and distribution, giving it a strategic edge (Anon, 1991b). Since the mid-1980s there has been a pronounced evolution within core business strategy. The threat

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Creating stratiegic change in procurement orientation from Japan has obviously been highly significant in this evolution. Large companies, which are able to pursue efficiencies of scale, have had to adjust their perception of production realities by adding quality to low cost as competitive weapons. Introduction of new production technologies has permitted successful manufacturers to add flexibility to efficiency and quality. Although there are many different ways and correspondingly diverse technological underpinnings to this process, the route to success lies in driving costs down, being able to guarantee predictable high quality to the consumer and outpacing competition by speed of adjustment to changing customer requirements: flexible low-cost quality production. Bolwign and Kumpe (1991) identified the crucial change in the philosophy of manufacturing planning as being a recognition that quality and quality assurance are not costs of production but investments in the improvement of production. This internally driven change has been matched by a change in the nature of the product market, particularly for products such as colour television, video recorders, cameras, and even cars. Emphasis on internal efficiencies, rigorous attention to quality, continuous product updating, and the commercial imperative to stay close to the customer have combined to reinforce the pressure on companies to attend to their core business above all else. This has led to a vast increase in outsourcing. The major contribution of purchasing to core business strategy will come in the form of being able to be a key participant in the analysis, evaluation, and development and management of the supply base - and over time to establish some distinctive competence in that supply base vis-a-vis the competition. Corporate-level strategy change will focus on purchasing to develop distinctive core competency in their supply base to gain competitive advantage in their end market. Collective-level strategy focuses on the need to broaden networks of alliances. The strategy at the collective level involves developing network partners. Strategic alliances with rivals have proved increasingly vital to firms striving to maintain their competitiveness in industries such as telecommunications and financial services: sectors bombarded by bursts of technological innovation and deregulation. The recent agreement between Apple and IBM to share technology shocked the computer world (Anon, 1991c). It also highlighted the power of joint ventures and partnership as a vehicle for improving a firm's competitive postures without taxing scarce resources, and showed how increasingly competition is no longer simply between individual firms, but between networks of firms. Monczka (1989) identified that firms who plot long-term competitive strategies expect to be moving further and further upstream in responding to customer demands for quality, low cost, and to utilize new technology faster. This requires that

waste be driven out early in the design process, and that non-value-added cost in manufacturing be eliminated. The result is more value engineering at the design stage. To achieve greater awareness of value benefits between firms, formation of strategic alliances is growing in importance in strategic thinking as companies reach further into the 1990s. Such alliances take a number of forms, including joint ventures, technology-sharing agreements with supply firms, use of distribution channels on a shared basis, and a wide range of partnering agreements with prime suppliers. Stage 3 analyses and dissects the crucial roles in activating strategic purchasing orientation change. Planning a change is not enough: much is required to get there. It is suggested that strategic purchasing orientation change requires a new mindset, a new way of organizing. Resistance to change results because history and/or lack of market appreciation constrains the conduct of firms and institutions. To carry out change entails coming to grips with the emotional implications of living through revolutionary circumstances. Transformations that disrupt the established order invariably create uncertainty and threaten vested interests, and so may generate panic. Coping with the personal sentiments of employees is therefore one of the key challenges facing managers attempting to effect strategic change. To reinvent their firms, managers need to understand, identify, analyse and manipulate four key internal features: * * • •

resources and capabilities; organizational structure and control; organizational culture; top management commitment and conduct.

In analysing resources and capabilities, managers need to know whether resources were reallocated in ways that enhanced firms' competitive capabilities. In understanding organizational structure and control, it is fundamental for managers to know the underlying structural controls needed to support the new strategic direction. When analysing organizational culture, careful attention must be paid to the implications of the strategic change for the firm's internal culture. Finally, in analysing top management commitment and conduct, it is important to know whether the top managers show visionary leadership and an ability to mobilize employees as they seek to redefine their firm's strategic conduct. These four internal features tend to have an interactive link, which is depicted in Figure 3. The essence of the link is enhanced by top management commitment. In analysing resources and capabilities, firms thus need to involve themselves in reallocating resources to projects more likely to assist in coping with changing environments. Managers invest capital by purchasing equipment and hiring employees. The skills that workers brought to bear in creating

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Figure 3 Interactive links in activating strategic orientation change Source: Adapted from Fombrun (1992)

products and services create firm-wide availability of resources and capabilities, which managers then rely on to compete. The basic capabilities of even large companies like Exxon or Ford are built up from their core technological and human skills: the particular factories, offices and laboratories they own; their capital stock; the skills of their labour force; and their strengths in research, communication, transportation, purchasing and distribution. Insofar as firms' resources and capabilities provide them with an advantage in the marketplace, potential for performance exists. From a purchasing perspective, it is logical to suggest that the procurement function should develop its own capabilities before it can become a competitive weapon in the battle for markets. Purchasing managers need to understand the essential components of the chosen competitive strategy and set their orientation priorities accordingly. As the purchasing function gains expertise and experience, focusing on decision areas such as suppliers, personnel, and information, it may then begin to make positive contributions toward improving the firm's competitive effectiveness. Over time, the purchasing function can thus become an integral part of the firm's competitive success. Company managers and purchasing managers must surmount many obstacles based on traditions, attitudes and outdated behaviour patterns in order to reorientate the function at a strategic level. To realize this potential and to capitalize on their firms' capabilities, managers frequently will need to design an organizational structure and control systems for administering and coordinating the many transactions involved in putting out products and services. Most companies today continue to rely heavily on bureaucratic hierarchies to control activities. They also devise complex systems for systematically recruiting, evaluating and compensating employees; and administrative systems for monitor-

ing expenses, making decisions, and assigning tasks. When well crafted, these systems serve to channel interactions between employees and so produce good job performance (Galbraith, 1977; Tichy and Devanna, 1984, Fombrun, 1992). It should however be noted that this 'traditional' pattern, which rests on the principle that authority stems from the top of the company and that therefore responsibility can always be passed upwards, is under significant attack in organizations that have espoused the concept of lean production/lean management. The essence of the principle of leanness is not solely that of group or 'cellular' production operations, but also entails the acceptance of responsibility for initiating and implementing change at the lowest possible level in the company. Womack et al (1990, 1994) point out that this philosophy enhances operational flexibility, personnel involvement with the quality of the output and enhanced job satisfaction - but at the potential risk of increased levels of individual stress and perceived personal risk, as well as diminishing significantly the traditional importance of predictable ladders of promotional or career path development. Employees are also heavily influenced by many beliefs and norms that are part of their company's culture. Over time, employees acquire a shared understanding of a firm's competitors, their products, and strategies. A company-wide culture, often made evident in 'corporate credos' and codes of conduct, delimits the action deemed legitimate for everyone to pursue, including the social and ethical postures taken in dealing with clients, suppliers and other stakeholders. Like controls, cultures require people to act in ways consistent with shared beliefs and company norms about, say, punctuality, product quality, customer service, or social responsibility. Corporate culture has significant impact on changing purchasing's role from one that focuses on tactics to one that emphasizes strategy. Different corporate cultures will stress different values or beliefs about what is important for a particular company. For example, in a company with a manufacturing or production culture, the normal strategy is lower cost with a focus on internal efficiencies. A manufacturing-dominated company uses budgets extensively to monitor and control operations. As competition increases, cost cutting often becomes the most likely response by the company. Owing to purchasing's influence and, to some extent, control over costs, purchasing and manufacturing personnel may have much in common regarding operating efficiencies. Gearing purchasing's role to a cost-reduction strategy with careful monitoring and control may increase the profile of purchasing being viewed as a strategic corporate function. On the other hand, in technology- or R&D-driven companies, a research strategy is pushed with a focus on increasing product performance. The

159

Creating stratiegic change in procurement orientation

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Figure 4 Implementation of effective purchasing orientation change strategy

desire to have a 'new' or at least an 'improved' product may take precedence over other decisions. This type of company tends to make extensive use of product performance tests in order to meet the competition by improving the product offering. The purchasing department in this type of organization may be expected to be ever on the alert for new materials, components and parts, and hence sources of supply that may aid overall product performance improvement. A study and understanding of the company's corporate culture should enable purchasing personnel to respond and adapt to changes and emphasis in the company so as to be compatible with the overall strategy. In practical terms, and in the short run at least, management of such cultural issues takes place within the extant 'technological' context of the company: that is, its existing markets and core functions. In the longer term, changes to corporate culture may very well prove to be necessary precursors to change in technological and/or market environments. The top management's commitment and conduct reflect the strategies through which the firm competes. The firm's commitment and conduct can be constrained by underlying resource and capabilities, structure and control and corporate culture. For example, firms lacking R&D capability will find it difficult to pursue a strategy of market development or innovation that rests on significant departures from previous practice or familiar technology applications. Firms relying on low-wage labour tend to routinize production facilities and develop

authoritarian hierarchies, making it difficult for managers to motivate the commitment and involvement of employees. Finally, Stage 4 of the change process comprises selecting, implementing and evaluating an effective purchasing orientation change strategy. The set of effective change strategy steps can be depicted as in Figure 4. The diagram identifies the characteristics of selecting and implementing change. The characteristics of change are influenced by resources, time, effort and money, progressing from initial thoughts, to awareness and understanding the change. As the people begin to develop positive perception, then installation and institutionalizing the change can be accomplished. During the process of change, there are always elements of ignorance, confusion, too much bother (negative perception), no time and fear of outcome, which make change difficult. This is affected by external, extraneous factors like economic recession and unemployment, especially in countries like Britain where the fear of redun, dancy is currently potentially a crippling factor in the change process. Thus empowering a purchasing department to play its full strategic role in the survival, profitability and expansion of a business requires more than just an enlightened executive decision. Purchasing is a profession, but it is also a functional necessity, and its practitioners are fully occupied in the day-to-day problems and factors of placing orders and hastening deliveries. To make a change really effective, it is vital to allocate considerable resources and time to the needs of every-

160 one employed in the purchasing department. The strategic role of ‘farming’ and managing the external resources of the supplier base to identify new product developments and to work together to eliminate cost drivers can only work when opportunities are created and not squandered by ‘upstream’ decisions and commitments (Chadwick, 1992).

Conclusion Top management who undervalue purchasing in the scheme of today’s corporate and product strategy commit an error in sound business management. No longer can firms create, design, launch and provide viable products throughout their life cycles without regard to the supply aspects of the material and components that go into them. The cost, value and time contributions of supply elements are too great and, when they are ignored, are too much of a penalty for today’s firm. The conceptual frameworks and the company studies indicate that firms and departments such as purchasing need to be aware of internal and external interacting forces, at both micro (departmental) and macro (corporate) levels, which may trigger or retard processes of change. It is suggested that an incremental, planned approach be used for changing operations, management structures and evaluation systems. The findings derived from empirical observations of changes in composition and emphasis among the strategic players in the companies studied suggest a degree of consistency, which may possibly be generalizable. To date, little objective research in this area has been undertaken: such a need is evident in order to determine whether or where the limitations to the hypothesized model exist. Purchasing affects corporate and product strategies in many ways. In an increasing number of firms it is seen as adding value through creative product enhancement through supplier relationship management. As firms evolve toward finer-focused strategic orientation, it is imperative that purchasing support the overall system with corresponding management skills and approaches in acquisition and supply management.

Acknowledgements The authors wish to acknowledge the valuable contributions of Mr Tom Chadwick, Procurement Director, Edinburgh University, and Mr Kenneth Linn, Advisor to Scottish Enterprise

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