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Reward the Behavior—Not the Outcome

Even when opportunism doesn’t occur or can’t be proved, a trading partner who is bigger or creates a dependency situation can provoke action to redress the asymmetry.

By ·
By ·

The tiff between Apple and Qualcomm demonstrates the typical and atypical realities of supply chain relationships. Qualcomm is a giant with a long-term strategy whose patents dominate the modem market, such as the chips that go into Apple’s wireless devices.

The FTC and Apple allege that Qualcomm used its supplier power to coerce Apple into buying products that generated royalties for Qualcomm—an all-too-typical supply chain scenario of a large player throwing its weight.

Atypically, Apple has grown enough to potentially out-weigh the Qualcomm gorilla. Given Qualcomm’s sheepish response—downplaying the dispute as a “pricing disagreement”—Apple seems likely to increase its share of the money harvested from the consumer end market.

Leveraging buying or selling power is the go-to strategy prescription, yet too seldom are its perverse long-term incentives recognized. The Kobe Steel scandal demonstrates that when the customers get the lion’s share of the end-market profits, suppliers have little real reason to please highly demanding (and tight-fisted) customers and a lot of motive to cut costs, even if it means lying about product quality.

Even when opportunism doesn’t occur or can’t be proved, a trading partner who is bigger or creates a dependency situation can provoke action to redress the asymmetry.

For example, engine provider United Technologies acquired Rockwell Collins in order to gain more leverage over Boeing and Airbus – the world’s two largest aircraft producers with almost a trillion dollars in orders between them – despite the fact that engines enjoy higher margins than aircraft.

Rewarding the right behavior rather than the right outcome is too seldom considered as a supply chain strategy. The former incorporates long-term thinking, while the latter focuses on the short-term.

Learning how to incentivize right behaviors will become more important as the digital economy progresses because all the steps of the contracting process can be digitized, and relationships will be changed more frequently, as many companies have already experienced.


About the Author

Michael Gravier
Michael Gravier is an Associate Professor of Marketing and Supply Chain Management at Bryant University with a focus on logistics, supply chain management and strategy and international trade. Follow Bryant University on Facebook and Twitter.

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