The importance of being a preferred customer in order achieve competitive advantages from the supply base

Topics: Management, Supply chain management, Supply chain Pages: 18 (5963 words) Published: October 13, 2013
University of Twente
School of Management and Governance
Chair of Technology Management
Prof. Dr. Holger Schiele

Term paper for the IBA Supply Management seminar
Quartile 3rd and 4th, 2010

Topic 3:

The importance of being a preferred customer in order achieve competitive advantages from the supply base

Number of pages/words: 15/ 6790
Bibliography program used: Endnote

Enschede, 24th of April, 2013

Table of Contents

1. The importance of being a preferred customer
In the past decade, a shift occurred from closed innovation to open innovation. With traditional closed innovation, organisations heavily invested in R&D to create innovation internally. The change started when small companies were challenging multinationals with new innovations developed through open innovation. It became clear that involving external parties had a positive effect on the innovation capabilities of firms, and open innovation became increasingly important.1 In an environment characterised by open innovation, the focus of innovation is moving out of the laboratory of a single, self-contained firm and into a network of collaborating partners. Suppliers play an increasing role in such a network.2 Developments in recent decades have emphasized supplier consolidation and supply base rationalisation.3 This has led to supply markets with a limited number of suppliers, shifting the power balance toward the suppliers. This makes traditional price-oriented purchasing strategies unsuccessful, especially when critical or scarce components are involved.4 Coupled with the movement towards open innovation and supplier involvement to strengthen a firm’s innovation capacity, a new frontier of rivalry is opened. Resulting from the open innovation paradigm, competitors who have access to the best suppliers will be the best performers, and this makes the impact of preferential treatment strategic in nature. “Preferred customer status” can be described as a situation in which a buying firm gets superior treatment over its competitors, which is reflected in preferential resource allocation, better service and better performance, among several other benefits5,6. The key to attaining preferred customer status at a supplier is to increase the buying firm’s attractiveness. Attractiveness is the result of motivating suppliers and accommodating their needs, which allows for more close collaboration.7 This is especially relevant for suppliers who are limited in availability or those that supply critical technology leading to competitive advantage of the buying firm. Today’s supply markets make strategic supply management increasingly important to ensure access to key suppliers and to secure future competitiveness by becoming a preferred customer of these key suppliers.8 The objective of this paper is to provide a comprehensive literature review of the importance of preferred customer status and customer attractiveness. The paper will provide and answer to the following research question: “What is the importance of being a preferred customer to achieve competitive advantage from the supply base?” The theoretical contribution of this paper is to develop an overview of the different factors which make preferred customer status and customer attractiveness important in today’s business environment. This paper also provides a managerial contribution by identifying the actions which can be taken to increase customer attractiveness and become a preferred customer as well as providing guidance on how to maintain preferential status. The paper is structured as follows. First, the exact meaning of preferred customer status and customer attractiveness is discussed. The next section seeks to establish under which circumstances a preferred customer strategy should be pursued in order to attain competitive advantage. The next part compares and integrates the different views on the benefits of being a preferred customer, followed by a section...

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