Sustained Monopolistic Business Relationships: An Interdisciplinarity Case
| Author | Richard Wilding,Andrew Humphries |
| Published date | 01 December 2003 |
| DOI | http://doi.org/10.1111/j.1467-8551.2003.00382.x |
| Date | 01 December 2003 |
Sustained Monopolistic Business
Relationships: An Interdisciplinary Case
Andrew Humphries and Richard Wilding
*
UK Defence Logistics Organisation, RAF Wyton, Huntingdon, Cambridgeshire PE28 2EA, UK, and
*
Cranfield Centre for Logistics and Supply Chain Management, Cranfield School of Management, Cranfield
University, Cranfield, Bedfordshire MK43 OAL, UK
email: andrew_humphries@bigfoot.com [Humphries]; r.d.wilding@cranfield.ac.uk [Wilding]
Business-to-business relationships within sustained monopolies, such as those within UK
defence procurement, have received scant attention by management researchers. This is
unusual because under these market circumstances there appear to be few incentives to
achieve mutually beneficial outcomes despite their strategic policy importance. This
paper argues that an understanding of the monopolistic environment using a transaction
cost economics theoretical framework and supply-chain management, relationship
marketing and transaction cost economics concepts provides an innovative, inter-
disciplinarity approach to solving this problem as well as testing aspects of these
disciplines empirically in a novel area. This paper describes the results from a
substantial research project to test this hypothesis in the UK defence procurement
situation. It reveals a number of key dynamics within the sustained monopolistic
relationships surveyed and suggests considerable potential for further research.
Introduction
This paper addresses an under-researched area of
business-to-business relationships, namely the
relationship which exists where one or both
parties has a monopoly of supply or demand
(Fishwick, 1993). Many theories of buyer-seller
relationships have discussed in general terms the
concept of structural bonds and opportunism,
but not adequately applied them to the extreme
situation of monopoly buyer and monopoly seller
relationships. We first summarize the difficulties
faced by the UK Ministry of Defence (MoD) and
its major industrial suppliers in moving away
from traditional, adversarial relationships whilst
facing increasingly monopolistic business deal-
ings. We then justify the use of a transaction cost
economics (TCE) model as a theoretical lens
through which to view the problem. Interdisci-
plinarity is a radically different approach that
combines two or more disciplines to produce an
outcome that is more than the sum of the parts
(Starkey & Madan, 2001). Because the nature of
the business is supply-chain management (SCM),
relationship marketing (RM) provides an effec-
tive framework for describing business-to-busi-
ness relationships and TCE describes the
contractual arrangements of procurement, this
paper argues that concepts from these fields can
be used to address the problems identified when
viewed through the TCE theoretical lens. We
describe an exploratory research programme
within the sea, land and air elements of the UK
defence procurement (DP) environment and
present findings which not only expand our
knowledge of the business area in question but
also provide a better understanding of the
relational dynamics of sustained monopolies.
UK defence procurement
Historically, the relationship between the UK
MoD and the UK defence industries has been
adversarial. On one hand, with estimated equip-
ment procurement expenditure of d10 162 million
British Journal of Management, Vol. 14, 323–338 (2003)
r2003 British Academy of Management
in 2000/01 (DASA, 2001), the UK MoD has
immense power as British industry’s largest single
customer. It can thus determine the ‘size,
structure, conduct, ownership and performance
of the industry through pricing, profitability,
technical progress and exports’ (Hartley, 1998).
On the other hand, industry is a major exporter
and contributor to the UK’s balance of pay-
ments, its production for foreign sales reduces
UK MoD’s equipment unit costs, it develops
strategically important technologies such as aero
engines and is a significant employer in UK
industrial areas. However, the major UK defence
companies are virtual domestic monopolies and
can team with foreign companies to reduce the
choice of supplier. The UK MoD/industrial
supplier relationship is thus dominated by a
monopoly market in which each side wields
considerable power but where lack of trust and
the option to leave often reduces efficiency,
increases costs and offers little incentive to
cooperate (Humphries and Wilding, 2001c; Pal-
mer, 2001; Parker and Hartley 1997). Against this
background, the UK Government stated that its
Smart Acquisition initiative depended heavily on
partnership in order to reap the benefits of
competition and collaboration (Directorate of
Policy Planning, 1999). It is this challenging and
potentially mutually-exclusive business objective
that drives a need for research in this area.
The monopoly environment
In our search of the literature for a suitable
model with which to examine the relationship
conditions within a monopoly, we first consid-
ered two relationship power perspectives. Mi-
chael Porter’s (1980) five forces model of
competitive advantage considers business rela-
tionships are characterised by a short-term
orientation, arms-length competition and the
exercise of market power (Rugman and D’Cruz,
2000). However, although participants may aim
to achieve market dominance by limiting compe-
tition through the creation of barriers to entry,
this does not accurately represent UK DP
monopolies where equally powerful ‘partners’
can be locked in a relationship from which
neither can escape. Alternatively Andrew Cox
(2000) sees the combination of resource utility
and scarcity creating a power regime in which the
involved parties will employ adversarial/non-adver-
sarial and arms-length/collaborative arrangements
depending on their relative power positions as
showninthematrixatFigure1.
Quadrant I suggests limited information, re-
source sharing and the buyer/supplier aiming to
obtain a greater share of the exchange value. In
quadrant II a long-term, balanced relationship is
sought where there is little sharing of specific
assets but both parties gain some strategic
benefit. In quadrant III, the parties work closely
together and share sensitive information and
costly resources. However, the dominant partner
intends to take a disproportionate share of the
returns. In quadrant IV, both sides enjoy a close,
collaborative, equal arrangement, often called a
‘partnership’. This approach offers a clear per-
spective on the appropriate use of power within a
business relationship however, in a sustained
monopoly, where neither party has choice over
the selection of relationship strategy and where
equality of power really means equally disem-
powered, the relationship power analysis matrix
does not provide a robust framework for extending
thinking on long-term, monopoly relationships.
In a review of the contracting and TCE litera-
tures, we noted that when the cost of managing
the risk associated with human factors such as
opportunism became too high, the market could
break down and force a firm to internalize the
business, in effect creating an internal monopoly
(Faulkner & de Rond, 2000). However, TCE
generally treats monopoly as a short-term, highly
undesirable market aberration that would nor-
mally be dealt with by government antitrust regu-
lation (Williamson, 1996). We have nevertheless
Adversarial
arms-length
relationship
Adversarial
collaborative
relationship
Non-
adversarial
arms-length
relationship
Non-
adversarial
collaborative
Arms-Length
Equality
Inequality
Collaborative
Way of Workin g
Relati ve Share
of Value
Appropriation II
IIII
IV
relationship
Figure 1. Relation Power Analysis (Cox 2000) Note: Repro-
duced by kind permission of MCB, Copyright (2002)
324 A. Humphries and R. Wilding
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