Exploring growth in vertical inter‐firm relationships: small‐medium firms supplying multiple food retailers
Journal of Small Business and Enterprise Development
This paper presents new insights into the growth of small and medium-sized enterprises (SMEs) engaged in vertical inter-firm relationships. It adopts a processual and resource-based perspective and focuses on the experiences of fresh produce businesses which have achieved high rates of growth while supplying the UK's large multiple food retailers. The context in which these suppliers operate is shown to be a complex and dynamic supply chain, characterised by increasing structural concentration
... nd close vertical linkages. The primary research investigates how certain SMEs have prospered in an apparently 'hostile' environment. It includes a programme of matched-depth interviews, conducted across the retailer-supplier dyad. Content analysis of transcripts reveals six factors which appear to be strongly associated with the formation of 'successful' relationships. In subsequent interactions, securing 'developmental' supplier status appears to open the way to a self-reinforcing cycle of Penrosian learning and reinvestment. This cycle contributes to growth in the supplier firm. The authors argue that, with certain crucial caveats, growth-oriented SMEs can develop mutually beneficial relationships with much larger 'customer' firms. The paper concludes by drawing out wider policy implications and indicating how this contextualised approach might be used in other contexts. Managerial and policy implications The UK's food industry supply chain is now dominated by multiple food retailers who are developing close vertical linkages with their suppliers. At the same time, traditional channels, such as fresh produce wholesale markets, are in decline. These structural changes, together with the inherent characteristics of their product, have restricted the strategic options available to growth-oriented suppliers. Some small-medium suppliers are managing to achieve high rates of growth while engaging in supply relationships with much larger 'customer' firms. Growth in supplier firms is stimulated by a combination of factors. Multiple retailers provide access to progressively larger markets, transfers of knowledge-based resources and strong incentives for cycles of reinvestment and innovation. 2 Relationships with large retailers are underpinned by the small-medium suppliers' ability to provide: traceability, a greater motivation to collaborate, the absence of competitive threat and, critically, access to sources of innovation and difference. The supplier's ability to generate these benefits, together with its ability to resolve sporadic conflict, can foster closer relationships with the larger firm. Suppliers securing 'developmental' supplier status appear to enter a self-reinforcing cycle of learning and reinvestment that can foster more rapid rates of growth. A 'defensive' relationship strategy, designed to minimise an SME's perceived dependence and to guard against asset appropriation, may prove counter-productive by limiting progress towards developmental status.