Linköping Studies in Science and

Technology, Thesis No. 1458

LiU-TEK-LIC 2010:29

Developments in Distribution Channels

- A Case Study of a Timber Product Distribution Channel
 

Wei Guan

2010

Department of Management and Engineering

Linköping University, SE-581 83 Linköping
© Wei Guan, 2010

Linköping studies in science and technology,

Thesis No. 1458

LiU-TEK-Lic 2010:29

ISBN: 978-91-7393-268-4
ISSN: 0280-7971

Printed by: LiU-Tryck, Linköping

Distributed by:

Linköping University
Department of Management and Engineering
SE-581 83 Linköping, Sweden
Tel: +46 13 281000, fax: +46 13 281873
“…so many fragments…, so many beginnings…, …so many pleasure…”

- Roland Barthes
 ABSTRACT
This thesis describes and analyses the trends and developments of actors along distribution
channel. In particular, the study focuses on resellers and manufacturer based on the
empirical material from one particular case study. The study has three main goals: (1) to
investigate the challenges arising from channel actor developments, the effects of these
developments on the structure of the retailer supply chain and their implications for
manufacturers and suppliers, (2) to identify explanations for manufacturer’s vertical
integration of distribution and the resulting impacts and, (3) to conduct a preliminary
customer value analysis relating to the distribution channel of solid wood products.

The study has taken an exploratory and qualitative research approach with an abductive
reasoning process. A case study strategy was adopted, which studied a distribution channel
consisting of a Sweden-based timber manufacturer that vertically integrated a distributor in
the UK. Semi-structured interviews comprised the primary data collection technique in
this study. A two-step data collection process was conducted between May 2009 and April
2010, including 29 interviews with 24 interviewees from eight organizations, representing
the manufacturer, distributor and reseller in the distribution channel. Non-participating
observations were carried out by attending sales meeting and joining account managers on
store visits. All interviews were documented and transcribed and the information was
collated into case units, along with any supporting secondary data, such as company
magazines, web resources, annual reports, sales reports, meeting presentations, etc.

This thesis has produced several findings. Reseller developments have promoted the
formation of reseller demands, such as integrated solutions with respects to logistics,
marketing, merchandising, innovation, etc. Retailer developments have driven the change
of a retailer supply chain structure, and have opened up a number of new questions to be
posed on manufacturer and its positioning in the supply chain. The most important factors
driving the manufacturer’s vertical integration of distribution are customer demands, the
manufacturer’s repositioning strategy with regard to its business focus and its positioning in
the supply chain. The vertical integration of distribution transforms the manufacturer into
a direct supplier to large timber product resellers. It also offers the supplier a great
opportunity to enhance offerings and establish strategic relationship with customers. The
output of suppliers has expanded from solely manufacturing goods to also include services
and knowledge associated with goods. In practice, it can be complicated for a supplier to
create and communicate value. A full understanding of what timber product customers
seek in terms of value elements has not yet been achieved. This study has assisted in terms
of understanding the differing value that channel actors place on a range of product,
physical distribution, service and supplier value elements by developing a value analysis
framework. Suppliers can use this framework when designing, customizing and marketing
offerings for customers.
 ACKNOWLEDGEMENTS
This thesis is the culmination of two years of study and research as a PhD student. Writing this
section allows me to look back at my work, the days and months of studying and researching and
to remember everyone who was by my side throughout this period. This thesis was only possible
thanks to the invaluable contributions from a range of people and organisations.

First of all, I am very thankful to my supervisors, Staffan Brege and Jakob Rehme, whose
encouragement, guidance and support from start to finish enabled me to develop an understanding
of the subject.

I am grateful to the Lean Wood Engineering (LWE) research project for providing a research
platform and encouraging research that is closely connected to industries. Special thanks are due to
our industry partner, SCA Timber in Sweden and SCA Timber Supply Ltd. in the UK, whose
kind support and cooperation made this thesis possible. In this regard, I would particular like to
mention the tremendous support I received from Anders Ek and Neil Emsley. Many other people
provided exciting new ideas and helped me with my data collections. I owe my deepest gratitude
to the following people: Jonathan Bower, John Buffel, Sarah Cater, Jeff Fisher, Dave Foster, Kay
Lockwood, Paul Knowles, Lauren Obrien, Paul Oldham, Debbi Penny and Robert Simpson.

It was a pleasure to meet people from DIY retail and BM trade industries. They shared so much of
their knowledge and experience, which contributed greatly to this thesis. I would like to thank
everyone who graciously agreed to share their experience and knowledge. As agreed, I cannot say
their names but their kind and indispensable participation is greatly appreciated.

I also would like to thank Erik Sandberg, who read the entire manuscript and made various
suggestions that were incorporated in the final results.

My colleagues from Industrial Marketing and Industrial Logistics have always been friendly and
supportive: I will miss the dinners, beers and jokes with them.

Anna Ahlbeck and Lena Sjöholm were always kind while helping me with a variety of
administrative practices.

The support of dear friends in China, Sweden, the UK and the US was very important for me and
made this two-year period a beautiful and unforgettable experience of work and of life.

Last but not least, with deep gratitude, I would like to thank my deeply loved parents, without
whom I would not be here and doing what I am doing.

Linköping, September 2010

Wei Guan
 TABLE of CONTENTS

1. INTRODUCTION ................................................................. 1
1.1 Changing Retailer Characteristics...............................................................................1
1.2 Challenges for Manufacturers .....................................................................................4
1.3 Changing Times, Changing Channel .........................................................................5
1.4 Research Project........................................................................................................5
1.5 Research Purpose and Research Questions ................................................................6
1.6 Relevance of the Research.........................................................................................8
1.6.1 Theoretical Relevance....................................................................................8
1.6.2 Practical Relevance ..................................................................................... 10
1.7 Delimitations ...........................................................................................................11
1.8 Contributions of Papers and Their Linkage to Research Questions ..........................11
1.9 Outline of the Thesis ...............................................................................................12

2. LITERATURE REVIEW........................................................ 13
2.1 Supply Chain ...........................................................................................................13
2.1.1 Descriptions of Supply Chain ....................................................................... 13
2.1.2 Position in Supply Chain ............................................................................ 14
2.2 Distribution Channel in Focus .................................................................................14
2.2.1 Distribution Channel Matters ....................................................................... 15
2.2.2 Channel Functions .................................................................................... 16
2.3 Importance of Retailers............................................................................................16
2.3.1 Retail Developments .................................................................................. 16
2.3.2 Implications of Retail Developments................................................................ 18
2.4 Expanding Offerings of Manufacturers .....................................................................19
2.5 Customer Analysis....................................................................................................21
2.5.1 Customer Needs........................................................................................ 21
2.5.2 Customer Value........................................................................................ 21
2.6 Different Perspectives of Business Integration ...........................................................23
2.6.1 The Supply Chain Management Perspective: Supply Chain Integration.................... 24
2.6.2 The Strategic Management and Economic Perspective: Vertical Integration.................. 24
2.6.3 Comparison of Supply Chain Integration and Vertical Integration ........................... 25
2.7 Vertical Integration ..................................................................................................25
2.7.1 Driving Forces of Vertical Integration............................................................... 25
2.7.2 Impacts of Vertical Integration ....................................................................... 28
2.8 Frame of Reference: ................................................................................................29

3. TIMBER PRODUCTS DISTRIBUTION ................................. 30

3.1 Sawmill Sector is Essential in Forest Industry............................................................30
3.2 An Old Material Facing Challenges..........................................................................30
3.3 Supply Chain of Timber Products ............................................................................31
3.4 Distribution Channels of Timber Products ...............................................................32
3.5 Timber Consumption and Distribution in the UK ...................................................34
3.5.1 Timber Consumption in the UK ................................................................... 34
 3.5.2 Timber Retailing in the UK ......................................................................... 34
3.5.3 Timber Merchanting in the UK ..................................................................... 36

4. METHODS.......................................................................... 37
4.1 Research Purpose.....................................................................................................37
4.2 Research Approach..................................................................................................37
4.2.1 Reasoning Process...................................................................................... 37
4.2.2 Enquiry Form .......................................................................................... 39
4.3 Research Strategy ....................................................................................................40
4.3.1 Case Study and Units of Analysis ................................................................. 40
4.3.2 Selection of Case and Units of Analysis ........................................................... 42
4.4 Data Collection........................................................................................................42
4.5 Data Analysis............................................................................................................45
4.6 Quality Standards: Validity and Reliability ...............................................................46
4.6.1 Validity.................................................................................................. 46
4.6.2 Reliability ............................................................................................... 48
4.7 Summery of Research Methods and Process.............................................................49

5. DATA PRESENTATION ...................................................... 51

5.1 SCA Timber ............................................................................................................51
5.2 SCA Timber Supply (SCATS) .................................................................................52
5.2.1 Three Sites of SCATS in the UK ................................................................. 52
5.2.2 Offering.................................................................................................. 55
5.3 DIY Retailers ..........................................................................................................57
5.4 Builders’ Merchants .................................................................................................63

6. ANALYSIS AND FINDINGS ............................................... 67

6.1 Developments of Resellers .......................................................................................67
6.1.1 Growth of Resellers.................................................................................... 67
6.1.2 Positioning of Resellers................................................................................ 68
6.1.3 Reseller Supply Management ........................................................................ 69
6.1.4 Comparison between DIY retailers and BMs ..................................................... 70
6.1.5 Implications of Reseller Developments.............................................................. 72
6.2 Developments of Manufacturer Distribution ............................................................73
6.2.1 Driving Forces of Vertical Integration of Distribution............................................ 73
6.2.2 Impacts of Vertical Integration ....................................................................... 74
6.3 Addressing Customer Demands through Value Analysis ...........................................77
6.4 Summary of Research Findings ................................................................................78
6.5 Generalisability of Results ........................................................................................78

7. CONCLUSIONS AND IMPLICATIONS................................ 80

7.1 Conclusions .............................................................................................................80
7.2 Implications for Managing Practice ..........................................................................89
7.3 Limitation and Future Work ....................................................................................90
8. SUMMARY OF PAPERS ...................................................... 93

REFERENCES: ....................................................................... 94
 LIST of FIGURES
Figure 2.1 Product Service Continuum.......................................................................... 20
Figure 2.2 Transition line form Product Manufacturer to Service Provider..................... 20
Figure 2.3 Three Perspective of Customer Value ........................................................... 23
Figure 2.4 Research Framework .................................................................................... 29
Figure 3.1 Supply Chain of Timber Products ................................................................. 32
Figure 3.2 Distribution Channels of Timber Products ....................................................33
Figure 3.3 UK Wood Consumption by Sectors.............................................................. 34
Figure 4.1 The Abductive Process.................................................................................. 39
Figure 4.2 Design for Case Study ................................................................................... 41
Figure 4.3 Research Process........................................................................................... 50
Figure 7.1 Research Options ......................................................................................... 91

LIST of TABLES
Table 1.1 Papers and Their Connections to Research Questions .................................... 11
Table 2.1 Factors Driving Vertical Integration................................................................ 28
Table 3.1 Major DIY Retail Chains in the UK Market .................................................. 35
Table 3.2 Major Builders’ Merchant Chains in the UK Market ...................................... 36
Table 4.1 Relevant Situations for Different Research Strategies......................................40
Table 4.2 Companies Studied and Respondents Interviewed.......................................... 44
Table 4.3 Summery of Research Methods...................................................................... 49
Table 5.1 Summary of DIY Retailers Studied ................................................................ 57
Table 5.2 Growth of DIY Retailer................................................................................. 61
Table 5.3 Offerings to DIY Retailers ............................................................................. 62
Table 5.4 Summary of Builders’ Merchants Studied .......................................................63
Table 5.5 Growth of DIY Retailer Growth ...................................................................65
Table 5.6 Offerings to BMs............................................................................................ 66
Table 6.1 Comparison between DIY retailers and BMs.................................................. 72
 Introduction

1. INTRODUCTION
Many companies do not sell their products directly to end users. In mass production and
consumption industries in particular, many manufacturers rely on distributors,
representatives, sales agents, brokers, retailers or some combination of these intermediaries
to distribute their products (Hughes and Ahearne, 2010). These intermediaries perform a
variety of functions and constitute a marketing channel, that is also referred to a trade
channel or distribution channel (Kotler and Keller, 2008). The importance of channel
intermediaries has grown in recent years, largely due to increased size, improved level of
product knowledge, technical competence, specialisation and various other factors
(Kalafatis, 2000). In a typical distribution channel for consumer goods, for example,
manufacturers sell to retailers, which sell to consumers in markets. Retailers break bulk,
holds inventory, provide shelf space, create promotional displays and advertising, create
one-stop-shopping convenience and a pleasant shopping environment, all of which
increases demand for the manufacturer’s product (Desiraju and Moorthy, 1997). Retailers
gain a central position in many industries thanks to their increasing degree of
concentration and internalisation, successful launching of retailer brands and by controlling
more and more of the value-adding functions with the distribution supply chain (Burt,
2000; Dawson, 2000; Elg, 2003).

1.1 Changing Retailer Characteristics

The conditions for conducting business in the retailing industry are changing rapidly, as
they are in many other industries. Driven by a complex mix of technological, social,
economic and political factors, mergers, acquisitions and internal restructuring have
reshaped the competitive environment of retailing industry (Hingley et al., 2006). Changes
have occurred in various areas of the business and, in almost all the cases, they have
involved an increase in concentration. For most consumers, retailers represent the final and
therefore the most visible point of supply chain. Consequently, development at this level
consequently has a direct effect on suppliers and consumer choices (Dobson et al., 2003).

Bigness
Firstly, and perhaps most obviously, is the size of retailers. Large retail chains have
emerged, commanding significant share of national markets. The example of Walmart,
with 2009-2010 sales of $405 billion and with 7820 stores worldwide (Walmart, 2010),
suggests that some retailers continue to pursue the benefits of large scale. Synergies in
distribution and customer acquisition, enhanced infrastructure sharing, and cost savings
resulting from better resource deployment are usually cited as the benefits of growing
retail scale (Dragun and Howard, 2003). Apart from the traditional economy of scale, large
size gives retailers potential power over many aspects of buying relationships (Dawson,
2000). Size, and the resulting buying power, allows large retailers to obtain more
favourable terms from suppliers (Chen, 2003), as well as to charge suppliers directly for

1
 Introduction

access to their shelf spaces, for instance through listing charges or shelf-space fees (Dobson
et al., 2003).

Along with the development of bigness, a number of terms have been attached to super
retail operations, including “hypermarkets”, “big-box retailers”, “discount retailers”,
“mega-retailers” and “category-killers”. There is commonality among these retail formats
in terms of their physical size but, more importantly, these retail formats represent different
retail operations on several dimensions, including breadth and depth of product assortment,
level of service, price policy and customer demographic profile (Arnold and Luthra, 2000).

The success of big retailers has been based on particular management systems and
philosophies, for which centralisation has been a key mechanism, both for implementation
strategies and for achieving economies associated with size (Dawson and Shaw, 1989). A
high degree of management centralisation, covering central buying operations, labour
policies, advertising, administration and distribution, has a number of implications related
to developing and maintaining a quality image across a retail chain. According to Burt
(2000), the centralised operational decisions relating to product assortment, merchandising,
store layout, pricing and promotion, allow retailers to develop a clear, consistent image
and market position for their customers. Moreover, such a management system makes it
possible to build up a coherent set of core values through the retail offer and ensured that
these values are delivered consistently (Burt, 2000). Similar to the concept of centralisation,
researchers have also used standardisation to describe retailers’ strategies (e.g., Rigby and
Vishwanath, 2006). For decades, dominant chains such as Walmart and Best Buy have
pursued single-minded strategies of standardisation, unifying their store format,
merchandise mixes and operating and marketing processes.

Retail Consolidation
Retailing industry has undergone major structural change, which has primarily been
associated with growth in the market share of large retailers. Throughout the 1990s and
into the new millennium, there has been a trend towards consolidation in retailing
(McGurr, 2002). Retailers have been motivated to deliver their growth, either organically
or acquisitions or a combination of thereof. The success of big retailers has led to the
demise of many small and medium-size retailers, resulting in a small number of chains
increasing their market shares (Chen, 2003). Increased operating scale by retailers has led
to increasing domination of a limited number of large-format and multiple-store retailers
that attract the majority of consumer spending take shape (Guy, 1998). In Europe, retail
market consolidation is not restricted to national borders but involves an increasing
number of cross-country mergers. According to Wrigley (2002), the majority of consumer
spending in Europe is concentrated into the three largest markets of Germany, France and
the UK. The majority of national retail markets in the EU are highly concentrated with
five-firm market shares between of 60 and 75 percent (Wrigley, 2002).

2
 Introduction

Retail consolidation has several implications, both for retailers and manufacturers. It makes
life harder for independent or small retailers, because they cannot buy efficiently or invest
enough in technology to keep their operations competitive (Kumar, 1996). Small retailers
have to change the way in which they conduct business, reduce their number of
employees or change their pricing, product mix and store positioning (Cotton and
Cachon, 2007). Additionally, as retailers have gradually learned how to integrate operation
tightly, especially with respect to purchasing, the pressure on manufacturers has increased
(Kumar, 1996). The operations scale of large retailers enables them to drive down the
prices and margins that suppliers receive. In addition to these contractual elements,
retailers seek further payments after contracts have been signed. Examples of the additional
payments consist of contribution to store openings and extensions as well as discounts in
the events of mergers and acquisition or anniversaries (Dobson et al., 2003).

Retail Supply
A shift has taken place in the distribution pattern in the retailing industry. Prior to the
1980s, it was a common practice for suppliers to deliver products directly to individual
stores. In the mid-1980s, however, retailers gradually moved towards central warehousing:
suppliers then delivered to the retailers’ distribution centres, which enabled the retailers to
supply their stores more efficiently (Blanc et al., 2006). According to Fernie et al. (2000),
leading UK retailers such as Sainsbury’s and Boots began to build distribution centres in
the late 1960s and 1970s. By the mid 1980s, many grocery and department store
companies had also rolled out the centralised distribution pattern. Electrical, Do-It-
Yourself (DIY) and other specialist retailers followed this movement in the late 1980s
(Fernie et al., 2000). Retailer’s distribution centres receive incoming orders from suppliers
and redistribute them to individual stores (Buzzell and Ortmeyer, 1995). Distribution
centre could function as a “flow through” centre that only distributes orders to stores, or it
may distribute some stock and hold some stock for future replenishments (Nahmias and
Smith, 1994). Distribution centres play a critical role in reducing logistics costs, increasing
operation efficiency and providing a better service to customers (Voss et al., 2005; Yang et
al., 2010).

Retailers have prioritised buying decisions (Mulhern, 1997), which has had a dramatic
influences on the retailers’ overall performance. Historically, the number of suppliers
registered at a retailer was large because the retailer tended to use a competitive approach
of involving a lot of suppliers to lower prices (Rittenberg and Tregarthen, 1999).
However, recent trends have encouraged companies to use fewer suppliers and establish
closer relationship with them (Ogden, 2006). Collaborative sourcing or partnership
sourcing has been widely discussed in the literature as a dominating method of improving
supplier performance (e.g., Macbeth and Ferguson, 1994; McIvor et al., 1997; Parker and
Hartley, 1997). According to Sarkar and Mohapatra (2006), a prerequisite for developing
a strong supplier-retailer relationship is having a small number of suppliers. Dowlatshahi
(2000) reports three rationales for supply base reduction: (1) a smaller supply base reduces
supplier development cost, (2) close and workable relationships can only be developed

3
 Introduction

with a limited number of suppliers and (3) substantial business can be rewarded to only a
limited number of suppliers (Dowlatshahi, 2000).

1.2 Challenges for Manufacturers

The challenges posed to manufacturers can be illustrated in various ways, the most notable
of which include the position in supply chain, business strategy focus and the output of a
manufacturer offer. A major characteristic of a distribution channel is that the retailer is
closer to the end consumer than manufacturer. Therefore, the retailer is often better
informed about demand conditions than the manufacturer (Desiraju and Moorthy, 1997).
The distribution structure makes product distribution possible but often obstructs effective
communication between manufacturer and consumer. Consequently, manufacturers may
push products through distribution system without a clear view of the exact preferences of
their eventual customers (Ciccantelli and Magidson, 1993; Gradde, 2004; Pitta and
Franzak, 1997). Apart from inadequate knowledge of final demand, manufacturers have
found it is increasingly difficult to develop their marketing strategy if they are isolated
from the particular retailer’s strategy (Crosten and Kumar, 2005).

Besides, the ways in which manufacturing is perceived and practiced are changing.
Manufacturers supplying to a mass marketplace have long had a production focus by
placing great emphasis on meeting production quotas, ensuring quality levels, and suitably
pricing their products for retail distribution in order to perform competitively (Blois,
2001). However, an increasing number of manufacturers have shifted their focus from
internal to external concerns, such as the competition environment, competitor
movements, trends and changing customers’ needs. The pioneers of market orientation
studies (e.g., Kohli and Jaworski, 1990; Narver and Slater, 1990) highlighted the fact that
market-oriented firms focus on the customers, the competitors and cross-functional
coordination by generating and communicating market intelligence throughout the
organization and responding to it effectively. Kohli and Jaworski (1990) also noted that it
is critical for businesses to identify the needs and preferences of not only the end-
consumers, but also of the distributors of their products. This point indicates that this
market orientation involves all the components of the distribution channel, as opposed to
a restrictive strategy that involves only the distributors or the end consumers.

Furthermore, the output of manufacturers has been broadened from manufacturing goods
along to include services and knowledge associated with goods. As many authors have
noted, manufacturers tend to deliver more high-value services and customer-focused
solutions (e.g., Davies, 2004; Gebauer et al., 2005; Penttinen and Palmer, 2007). Some
authors of business strategy literature (e.g., Slywotzky and Morrison, 1998; Wise and
Baumgartner, 1999) argued that many of the world’s leading manufacturers have built
their success on the movement from manufacturing to services, which represents an
increasing proportion of their total revenue. Services are become attractive because they
provide revenue streams and higher profit levels and require fewer assets (Wise and

4
 Introduction

Baumgartner, 1999). Brax (2005) concluded that the changes to manufactures identified in
earlier research include (1) the changing nature of the manufacturing company’s offering
(2) shifts in the manufacturer’s value chain position and (3) the nature of the
transformation process from a manufacturing company to being a service business (Brax,
2005, p.143).

1.3 Changing Times, Changing Channel

In order to response to retail developments and remain competitive, manufacturers have
made several shifts regarding their business strategies and practices. Distribution strategy
has, and is likely to continue to enjoy increased attention as a means of achieving a
sustainable competitive advantage (Rosenbloom, 2007). Rosenbloom (2007) also argued
that the main reason for this development is that it is more difficult for competitors to
quickly copy well-formulated and well-managed distribution channels. Developments of
distribution channels have exhibited certain characteristics. Firstly, the multiple channel
strategy is widely used by companies to deliver their products and services to customers.
Examples include the sales force channel, the distributor channel, the sales rep channel, the
e-commerce channel (Friedman and Furey, 1999) and the newly emerged m-commerce
channel including mobile telephony, SMS and text messaging, and WAP and 3G mobile
services (Payne and Frow, 2004). Stone et al., (2002) argued that companies are moving
towards multiple channel integration, characterized as a synergistic combination of channel
functions (Görsch, 2000). Apart from the diversification of channel types, forward
integration into distribution channel, especially the integration of downstream customer
interface, draws the attentions of manufacturers and makes it popular in the modern
business environment (Osegowitsch and Madhok, 2003).

1.4 Research Project

When starting as a PhD student at the division of Industrial Marketing, I was fortunate to
be involved in the research programme of Lean Wood Engineering (LWE), a research
platform based on cooperation between three universities and more than 20 industrial
companies. The objective of LWE is to integrate R&D between technology and
management, within the three following supply chains:
• Industrial timber housing,
• Wood components, products and systems
• Furniture and interior solutions
All of LWE’s projects are based on specific industrial needs, which ensure the industrial
relevance of the projects. The research project in which I have been involved falls within
the scope of business development of wood components and products manufacturing
industry. The industrial partner of the project is SCA Timber, a Sweden-based timber
products supplier. The company has undergone several transformations since the early
2000s, both at the strategic and operational levels.

5
 Introduction

In the British market, which is one of the company’s key foreign markets, do-it-yourself
(DIY) retailers and builders’ merchants (BMs) are developing side by side. These sectors
represent the last step of marketing channel before a timber product reaches its customer.
Although to some extent, they are competing for the same customer group, they have
different mindsets regarding running business and timber supply. Traditional suppliers
generally find it difficult to keep up with the demands from DIY retailers and BMs,
examples of which could include weekly deliveries of small quantities, support in
marketing, and new product development etc. Beyond the new demands posed by large
buyers, the sawmilling industry itself has been challenged by intensified competition
within the industry and increasing substitution of other materials (Roos et al., 2001). In
order to cope with these challenges, and also in line with SCA Timber’s new strategy of
taking the supplier role in the distribution channel, SCA Timber set up a distribution
platform in the UK, which enabled them to distribute more products in the UK market.
A few years after the strategic move in the UK, the company launched a similar business
model their home market: Scandinavia.

The company's new distribution channel, involving vertical integration, has exhibited
certain characteristics that fit well with the trends discussed in previous sections. On the
buying side, the DIY retail market is a large and growing sector in the UK, reaching a
value of £12.7 billion in 2009 (Verdict, 2010). It is the second-largest market in Europe,
after Germany and in terms of the market structure, it is highly consolidated.
Approximately 62 percent of the market share is registered at four large chain stores: B&Q,
Homebase, Wickes and Focus (Mintel, 2009). These retailers also tend to use fewer but
larger suppliers. On the selling side, the manufacturer adopts multiple channels to dispose
their products. Moreover, firstly in the British market and then in the Scandinavian
market, the company has expanded its business scope into distribution.

1.5 Research Purpose and Research Questions

The above discussion raises some vital issues regarding distribution channel and the actors
within it. Developments in the manufacturing and retailing stage have effects on channel
actors in relation to the position in the supply chain and the business focus. The trends and
developments of channel actors have given rise to companies’ transition in channel
management. Nevertheless, vertical integration- one of the changes that have occurred to
manufacturers’ distribution strategy- has received less attention in the literature on
distribution channel. Instead of taking a close look at every development, this thesis argues
that it is more significant to understand the meanings of these developments and their
resulting consequences for distribution channel and the actors within it. Accordingly, the
overall purpose of this dissertation is to describe and analyse the developments of different actors
along the distribution channel and their resulting consequences from a supplier’s perspective.

6
 Introduction

As one of the methods through which manufacturers can sell, modern retailers have
evolved from being merchants who make profits from differences in their buying and
selling prices to businesses that create value by providing a broader range of products and
service (Mulhern, 1996). Retailers strengthen their position in distribution channel as a
result of certain trends and developments, including retail consolidation, control of
distribution centres, their access to scanner data, and successful launch of private brands.
More importantly, retail trends and developments have significant implications for
manufacturers and consumers. This leads to RQ1, which studies developments among
reseller, including retailers and merchants, and the implications for supply chain and
supplier.

RQ1. How can resellers’ developments be described and analysed?

As Blois (2001) noted, manufacturing firms naturally have production orientation,

especially for those manufacturers that supply to the mass marketplace. However, the
production orientation, involving efficient operation, low cost production and lower
prices, has been criticised because it dose not create a great deal of value for the consumers
in terms of customer satisfaction, or in the form of additional product benefits (Jones et al.,
2008). Apart from the criticism of manufacturers’ traditional business strategy focus, value
migration has also stimulated the transformation of manufacturers, not only in the business
logic but also in the scope of business. Wise and Baumgartner (1999) pointed out that
production, the traditional role of manufacturers in supply chain has become less and less
attractive because value and profits are moving down to the downstream, at which point
channel actors seems to enjoy more profit. As value has been shifting toward customers,
distribution has gained in importance (Wise and Baumgartner, 1999). In order to improve
competitiveness and profitability, some manufacturers have reshaped their distribution
strategies, for instance by integrating downstream business. Therefore, RQ 2 is proposed
to address the changes to manufacturers’ distribution strategy.

RQ2. How can manufacturers’ distribution strategy developments be described and

analysed?

Current researches have put a lot of efforts into highlight the importance of value in
customer decision-making. The value concept is likely to be applied to distribution
channel actors as well, because resellers must be able to assess the value provided by
suppliers in order to make more informed decisions concerning new supplier selection and
existing supplier retention (Simpson et al., 2001). This argument indicates that value
creation leads suppliers to more effective customer satisfaction, which further builds long-
term relations with customers. Kohli and Jaworski (1990) showed that many firms find it
critical to know the needs and preferences not only of their end consumers but also of the
distributors that market their products. As a result, it will be especially valuable to
understand value for actors in the distribution channel and how to address customer needs

7
 Introduction

when designing and marketing offerings to markets. The above discussion gives rise to
RQ3:

RQ 3. How can suppliers address customer needs when developing and marketing
offerings?

In sum, this study looks at the distribution channel from the supplier’s perspective, with
the intentions of exploring the developments of channel actors and analysing the
consequences of these developments.

1.6 Relevance of the Research

1.6.1 Theoretical Relevance

This research has been motivated by some gaps in existing literature, namely the
importance of retailer, rationales and impacts of vertical integration, and value creation in
distribution channels. Growing retailer size and scope not only aggregates retailers’ buying
power but also influences the retailer supply chain structure, which has implications for
other actors in the supply chain. Moreover, vertical integration, which this dissertation
refers to as “elimination of contractual or market exchanges and the substitution of
internal transfers within the boundaries of the firm via internal development or merger”
(Mahoney, 1992, p.559), is driven by some factors that have not been discussed
extensively in the existing literature. Last but not least, while the importance of customer
value has received a great deal of attention, customer value is still in its early stage in terms
of research. The theoretical rationales for this study are discussed below.

The Importance of Retailer is Overlooked

The literature on distribution channels has largely neglected the importance of the retailer.
Although the existing literature has noted the growing size of retailers and its influences on
channel power, this interest has been limited to the power shift between manufacturer and
retailer (e.g., Amato and Amato, 2009; Bloom and Perry, 2001; Messinger and
Narasimhan, 1995). The importance of understanding the power shift in distribution
channels lies in the theoretical and empirical links between channel power and profits and
in the potential for lower price for consumers when powerful retailers balance the power
of large manufacturers (Amato and Amato, 2009). The theoretical argument suggests that
large retail market shares may allow the channel power to shift from manufacturers to
retailers. The growing size of retailers indicates a likely shift in channel power in certain
markets from manufacturers to large retailers. However, the empirical literature offers
mixed evidence that retailers can transform channel power into higher profits (Amato and
Amato, 2009). The frequently cited Progressive Grocer survey confirms practitioners’
perception of the relative power gains by retailers in the grocery industry (Messinger and
Narashimhan, 1995). However, Aliawadi (2001) argued that there is no certainly empirical
evidence for an overall shift in market power toward retailers. Apart from the

8
 Introduction

investigations and debates about power shift, as well as its effects on financial performance,
little research has attempted to understand retailer concentration and its influences on their
decision making-such as the buying function-with which manufacturers and suppliers are
most concerned. Besides, there is no existing study of the relationships between structure
features of the retail sector in consumer goods (Nordås, 2008).

Understanding of Vertical Integration Need Some Updates

There is no lack of studies on vertical integration strategy. Several disciplines, including
economic, strategic management and law, have given a great deal of attention to
understand vertical integration. Some commonly cited explanations of vertical integration
consist of technological and operational interrelationships relating to scale and scope (e.g.,
Chandler, 1977), uncertainty and risk considerations (e.g., Arrow, 1969), information
externalities (e.g., Green, 1986) and strategic purpose (e.g., Balakrishnan and Wernfelt,
1986). Transaction costs analysis (TCA) (e.g., Williamson, 1979; Williamson 1985) is
particularly strong at explaining vertical integration. According to John and Weitz (1988),
the TCA approach embraces a blend of economics theories, organisational theories and
contract law. However, it is somewhat surprising that most studies concerning vertical
integration were conducted in between the 1960s and the late 1980s. Thirty years later, it
is worth asking whether these explanations are still relevant in today’s business
environment. Some authors have attempted to explore this question. For instance,
Osegowitsch and Madhok (2003) argued that recent cases of vertical integration indicate
that explanations such as market power, monopoly profit and transaction cost are
increasingly considered as insufficient to explain current vertical integration strategies,
especially for those companies that move down to the customer interface. Besides,
although studies regarding vertical integration have touched upon marketing aspects, such
as the integration of selling functions (e.g., Anderson and Schmittlein, 1984), the
marketing literature has a scant understanding of vertical integration.

Research into the impacts of vertical integration is not comprehensive. A majority of

studies regarding the impacts of vertical integration have focused on market power (e.g.,
Hastings et al., 2005; Normann, 2009), and market outcomes, such as the price of the final
product and product quality (e.g., Arya et al., 2008; Matsubayashi, 2007). The TCA
approach is also strong in this problem area. Almost no existing studies have been found
regarding the influences of vertical integration on a company’s position in the supply chain
or offerings to customers.

Value Creation in Distribution Channels is in its Formative Stage

The changing business environment, characterised by progress of globalisation, rapid
technology change and the saturation of markets, has challenged many companies to
achieve sustainable advantages through collaborative relationships with their channel
partners (Cousins and Spekman, 2003; Mentzer et al., 2000). The ability of suppliers to
provide superior value to their customers would constitute competitive advantages that are
rare, valuable and difficult to imitate (Simpson et al., 2001). However, according to

9
 Introduction

Simpson et al. (2001), almost no research has been conducted to examine how value is
created for a channel partner, or the consequences that accrue to channel members. In
addition, Lepak et al. (2007) argued that there is little consensus about what value is or
how it can be achieved. The ability of value creation to affect competitive advantage has
led some academics to call for research that focuses on channel partner value creation
(Simpson et al., 2001), and customer perceptions of value (Ulaga, 2001).

1.6.2 Practical Relevance

In practice, some problems have been observed in the distribution channel of timber
products. First of all, due to the current push-mode production strategy and the
heterogeneous nature of resource, production is geared towards getting as many as
products from logs as possible, and production output mix is not accurately known.
Additionally, the industry is set up to produce commodities based on standard sizes and
grades. Production units are usually large in order to take advantage of economies of scale.
Consequently, processing of large batches, large inventory and low flexibility are common.

Secondly, the route that timber products take from raw material to end users is long-
winded and expensive. From the forest to the hands of end users, timber products pass
through several stages of producers and intermediaries. To a large extent, deals are made in
a chain in which middlemen obfuscate customer requirements and demands from
manufacturers. The lack of knowledge about markets and end users is partly due to the
timber manufacturers’ production-oriented strategy, multiple-level distribution channels
also account for this problem. Middlemen are not so active in sending messages about
markets to upstream partners. The middlemen often blind upstream companies to
changing market conditions, which hinders the manufacturers’ ability to develop fully
customer-oriented, market-driven strategies.

Thirdly, along with the DIY retailer consolidations, they have consolidated their supply
base in order to increase supply chain efficiency. Retailers largely view timber products as
a different or special range to be bought and handled, in comparison with other product
ranges. DIY retailers usually have their own distribution centres, which centralises the
coming goods and then distribute them out to branches. However, these DIY retailers
focus on delivering high-value and low-bulk products. They refuse to distribute low-value
and high-bulk products (uglies) from their own distribution centres. Hence, DIY retailers
prefer to purchase timber products from suppliers that source from multiple sources and
operate distribution centres.

Lastly, building material distributors, including DIY retailers and builders’ merchants, have
achieved dramatic growth, especially in the DIY sector. Apart from the efforts of some
market research companies, such as Mintel, Verdict and Data Monitor, there have been
relatively few academic studies of this important retail industry (Williams, 2008).

10
 Introduction

1.7 Delimitations
This dissertation delimits to the distribution channel to the chain consisting of
manufacturer, distributor, resellers and consumers. However, because this study focuses on
business-to-business interactions, the consumers of resellers are not emphasised. The
overall study takes the supplier perspective; although investigating the reseller is one part
of the study, the main purpose is to look at the consequences of resellers’ developments
for the supplier.

1.8 Contributions of Papers and Their Linkage to Research Questions

The proposed research questions are contributed by individual papers. Table 1.1 displays
the research focus of different papers and how they connect to research questions. Paper 1
discusses several trends that have impacted resellers in the British building material
retail/trade market and summaries. The findings towards resellers’ demands contribute to
the solution of RQ1. Moreover, the research findings of Paper 1 provide an explanation
for the manufacturer’s vertical integration of distribution from the customer or market side.
At the same time, the discovered customer demands could serve as important attributes to
consider when developing new offerings. Paper 2 explains the supplier’s strategic
development in distribution and analyses its impact on the supplier, thereby contributing
to RQ 2. However, the research findings reveal a great influence on the supplier’s offering
development, which is the topic of Paper 3. In this sense, Paper 2 is believed to contribute
to the first two research questions. Paper 3 studies a new product development case with
the purpose of answering RQ 3.

Table 1.1 Papers and Their Connections to Research Questions

Linkage
Paper Focus Method
to R.Q.
R.Q.1
Multiple case
Paper 1 Resellers’ developments R.Q.2
studies
R.Q.3
Single case
Downstream integration in study with R.Q.2
Paper 2
distribution embedded R.Q.3
units
Addressing demands of channel Single-case
Paper 3 R.Q.3
actors study

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 Introduction

1.9 Outline of the Thesis

This thesis contains three papers, which build the foundation of the research. The
synthesis section is organised as follows:

• Chapter 1. Introduction: Introduces readers to the problem area being investigated,

provides the rationale for conducting the study and presents the research purpose and
research questions.
• Chapter 2. Framework of Reference: Start by reviewing theories associated with
the research questions in order to help the readers understand the theoretical domain.
The chapter then relates theories to the research questions and develops a theoretical
framework for analysis.
• Chapter 3. Timber Products Distribution: Describes the distribution channels of
timber products as well as the channel actors.
• Chapter 4. Methods: Presents and rationalises the research methods chosen and
discusses the research process.
• Chapter 5. Data Presentation: Presents the empirical evidence and results.
• Chapter 6. Analysis and Findings: Discusses and analyses the empirical results.
• Chapter 7. Conclusions and Implications: Concludes the thesis with a summary of
the research contribution, implication, limitations and suggestion for future research.
• Chapter 8. Summary of Papers: Summarises the appended papers in terms of
purposes and research findings.

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 Literature Review

2. LITERATURE REVIEW
This chapter has two main purposes. The first is to review the theories associated with the research
questions in order to provide readers with an understanding of the theoretical domain. The second
purpose is to relate the theories to the research questions and develop a theoretical framework for
analysis. The reason for discussing the theories is not to produce a comprehensive survey of their
richness but rather to provide a framework within which to facilitate the collection of empirical evidence,
conduct the analysis and, finally, achieve solutions to the research questions.

2.1 Supply Chain

2.1.1 Descriptions of Supply Chain

As a result of the growing interest in industrial markets and networks, researchers have
found themselves flooded with a number of terms, such as “supply chains”, “demand
pipelines”, “value streams” and “support chains”. The supply chain concept originated in
logistics literature, and logistics has continued to have a significant impact on the concept
(Chen and Paulraj, 2004). Initially, the emphasis of this concept was on assisting product
movement and coordinating supplier and buyer (Bechtel and Jayaram, 1997). Logistic
managers in high inventory industries, such as the grocery and retail industries, observed a
great benefit from the management of materials coming in and going out. Since its
introduction in the retail industry, the supply chain concept has spread to many other
industries (Bechtel and Jayaram, 1997).

The supply chain is the chain links each element of the manufacturing and supply process,
from raw material to end users (New and Payne, 1995; Scott and Westbrook, 1991). A
supply chain consists of all parties that are directly or indirectly involved in fulfilling
customer demands. Typically, this includes the manufacturer, supplier, transporter,
wholesalers, retailers and customers (Chopra and Meindl, 2007). The scope of supply
chain can be defined in terms of the number of firms involved in the supply chain and the
functions involved (Cooper et al., 1997). Cooper et al. (1997) also defined that supply
chain structure is the configuration of companies within the supply chain. Dimensions to
consider include the length of the supply chain and the number of suppliers and customers
at each level.

New and Payne (1995) described that the supply chain as including activities such as
planning, product design, fabrication, assembly, transportation, warehousing, distribution,
post-delivery and customer support. Cooper et al. (1997) used a slightly different
perspective to describe the activities involved in a supply chain: business process, which a
set of activities designed to fulfil certain objectives. Typically there are seven processes: (1)
customer service management, (2) demand management, (3) order fulfilment, (4)
manufacturing flow management, (5) procurement, (6) product development and (7)
commercialisation (Cooper et al., 1997). The discipline of supply chain management

13
 Literature Review

(SCM) has received increased attention due to the fact that it focuses on creating both
top- and bottom-line improvements by streaming the flow of material and information
across the chain, which creates competitive advantages for the supply chain or companies
in the supply chain (Christopher, 1992).

2.1.2 Position in Supply Chain

Nicovich and Dibrell (2007) described how value is added within an industry, through a
series of sequential operations or stages in a supply chain. A specific company may
undertake a few stages but the company will tend to favour one or the other as its primary
focus. The position chosen in its industry supply chain will have significant economic and
marketing implications (Nicovich and Dibrell, 2007). Harland (1997) added that the
industry supply chain can be separated into two halves: upstream and downstream.
Upstream operations tend to provide a harder, more tangible package to customers, while
intangible service elements are often more important in the downstream (Harland, 1997).
Companies with activities centred in either half differ greatly in aspects of success factors.
According to Nicovich and Dibrell (2007), companies in the upstream are closer to the
raw material end of supply chain, at which value is added through transforming raw
materials into standardised commodities or intermediate products, which can be used by
downstream members. In the upstream, therefore, competitive advantage is more likely to
involve process and cost-oriented mechanisms that facilitate the achievement of low-cost
position. On the other hand, companies in downstream are relatively closer to the
ultimate consumers. These companies are characterised as being able to produce products
that meet the diversified needs of consumers (Nicovich and Dibrell, 2007). Value added in
the downstream is the contribution that intermediaries make to complete exchanges with
end customers (Kim and Frazier, 1996). Value is added through advertising, positioning
products and marketing channels. Instead of competing based on cost position, success at
the downstream lies in proprietary features, product development and customisation
(Nicovich and Dibrell, 2007). It is also worth noting that value added by downstream
intermediaries might not be economic or monetary value; the development of close social
and personal relationships may also be regarded as adding value to the products and
distribution (Kim and Frazier, 1996).

2.2 Distribution Channel in Focus

Coughlan et al. (2006) defined a distribution channel as a set of independent organisations
involved in the process of making a product or service available for use or consumption.
The ultimate goal of a distribution channel is to bridge the gap between producers and
consumers by adding value to products or services (Kim and Frazier, 1996). Typically,
manufacturers, intermediaries (wholesaler, retailer, specialized) and end users are perceived
as the key actors of a distribution channel (Coughlan et al., 2006). Based on these
definitions, it is not easy to determine where the distribution channel actually starts, since
there might be multiple producers involved in manufacturing the final products at

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 Literature Review

different levels. Some of these producers are close to the end at which raw material is
supplied, while others are closer to the end that deals with final buyers or users.

There are two essential decisions when designing a channel of distribution: a strategic
decision and a tactical decision. The former one decides the number of levels between
supplier and consumer, while the latter determines the intensity of the selected structure
and policies of channel management (Rangan and Jaikumar, 1991). The complexity of
these decisions is increased by widely different social, culture, economic and political
patterns (Ensign, 2006). Compared to supply chain management, distribution channel
seems to have a view of “inside the chain”. It is more common for distribution channel
studies to investigate the seller-buyer dyad, and they often take either the seller’s
perspective or the buyer’s perspective (e.g., Amato and Amato, 2009; Deusen et al., 2007).
In contrast, supply chain management appears to have a view of “over the chain”, which
means that studies of supply chain management tend to take a globe angles and try to
encompass multiple interfaces (e.g., Gunasekaran and Ngai, 2005; Love et al., 2004).

2.2.1 Distribution Channel Matters

Strategic management of distribution channels is growing in both popularity and
significance in the business world (Levi and Weitz, 2008). There are several reasons for
this. Firstly, as value has shifted towards customer, distribution has moved from being the
backwater of strategy to the main stream, since it is where much of the profit in many
industries can be found nowadays (Wise and Baumgartner, 1999). In other words,
distribution and its network have become an important source of success and competitive
advantage. This phenomenon has been emphasised extensively. Anderson and Narus
(1990) reported that it is mutually recognised and understood that the success of
manufacturers and distributors depends on the other firm. Their statement indicates that a
manufacturer’s success can not be reached from their own effort alone; having a good
partner in distribution is very important. Loomba (1996) also suggested that in order to
compete effectively, today’s firms must re-evaluate their existing distribution and make
adjustments when necessary. Hyvönen and Tuominen (2007) claimed that the changing
business environment has recently challenged many firms to seek out new methods to
achieve sustain performance advantage through market orientation and distribution
channel collaboration.

Secondly, distribution channel strategies affect many other aspects of marketing strategies.
According to Kotler and Keller (2008), distribution affects sales, since if the product is not
available, it cannot be sold. Most customers will not wait until it can be reached. Delivery
is seen as a part of the product that influences customer satisfaction.

Thirdly, the choice of distribution network has long-term consequences. The structure of
the distribution network is one of the most difficult decisions to change. According to
Chopra and Meindl (2007), the impacts of selecting a distribution network often lasts for

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 Literature Review

decades. Changing on the channels and channel shifting is too costly. In the long run,
distribution channel strategies involved in strategic alliances and partnerships that are
founded on trust and mutual benefits create distinguishable interests (Chopra and Meindl,
2007).

2.2.2 Channel Functions

The channel function concept has already been extensively discussed by academics (e.g.,
Ajzen and Fishbein, 1980; Mallen, 1973; Rangan et al., 1992). McCammon and Little
(1965) argued that functions are considered to be the basic determinants of channel
structure; that is, a system designed to carry out necessary tasks. Some researchers have
discussed channel structure in terms of the functions performed by channel members
(Mallen, 1973). The basic idea was that channel functions could be allocated in different
combinations among various channel actors depending on the characteristics of the
channel (Wren, 2007). Channel functions are categories of activities and services that add
value to physical goods as they move from manufacturers to customers (Atwong and
Rosenbloom, 1995). Rangan et al.’s (1992) list of eight channel functions ia described
briefly below:
• Product information: Provide information about products for customers,
particularly for those products that are new to market and are technically complex.
• Product customisation: Adjust product technical configuration to fit the customer’s
requirements. Even a standard product must satisfy a specific customer’s
requirements for factors, such as size or grade.
• Product quality assurance: Ensure product reliability for customers.
• Lot size: Provide jointed purchase effort if the product has a high value.
• Assortment: In some cases, a customer may need a broad range of products under
one roof. In other cases, assortment may be related to the breadth of the product
line.
• Availability: Customer demand might be difficult to predict; if so, the channel must
support a high degree of product availability.
• After-sales service: Provide services, such as installation, repair, maintenance and
warranty.
• Logistics: Provide transportation, sorting and supplying products to end users (ibid)

2.3 Importance of Retailers

2.3.1 Retail Developments

Retailer Image
Approximately one-third of all consumers’ spending passes through the retail sector
(Nordås, 2008). Retailers are selective in terms of what merchandise lines are carried in
the stores, so as to simplify the consumer shopping experience (Sternquist, 1994). Retailers

16
 Literature Review

provide manufacturers with access to market segments and consumers (Levi and Weitz,
2008). Right from its origins, the function of retailers in distribution channels has been to
break down bulky supply into separate stocks (Mulhern, 1996). Retailers were originally
only considered as merchants who made profits from the price difference between their
buying and selling prices (Levi and Weitz, 2008). However, the scope of the retailing
business has moved far beyond breaking bulk and is now defined as a set of activities that
involve selling products and services to end consumers (Mulhern, 1996). Retailers today
take many forms, including department stores, mass merchandisers, supermarkets,
convenience stores, specialty stores and online stores, etc. (Coughlan et al., 2006). The
total offer to consumers is becoming more complex, involving a mix of products, services
and facilities (Elg, 2003). The most successful modern retailers are not only outstanding
merchants but have also developed a unique and strong brand image (Levi and Weitz,
2008). For instance, Walmart has defined itself as an “everyday low-price” retailer, and
B&Q has positioned itself as a lifestyle retailer. These retailers create value for consumers
by providing more services and a broader range of products.

Retail Growth and Retail Consolidation

Modern retailers have achieved organic growth, which involves developing new products
or brings existing products to new markets, and acquisition growth, which involves
acquiring business or assets (Bahadir et al., 2009). Retail growth, especially acquisition
growth, affects the retail market structure in a significant way. The retail consolidation that
has occurred in Europe and North American has led to the emergence of large retailers
(Dragun and Howard, 2003). Market share for small and medium retailers is shrinking and
moving towards two extremes. Gagnon and Chu (2005) described these two extremes as
mega retail format and focused specialist retail format. When it comes to the reasons for
retail consolidation, Dragun and Howard (2003) introduced three causes of retail
consolidation: greater buying power, synergies and cost-saving potentials.

Retail Supply Management

According to Dawson and Shaw (1989), the success of multiple retailers has been based on
particular management systems and philosophies. One such system has been a strong
central control of operations, covering buying operations, labour policies, advertising,
administration and distribution. The move by retailers towards distribution centre
operation can be seen primarily as a response to the risk of running out of stock (Dawson
and Shaw, 1989), and also about controlling retail distribution (Fernie et al., 2000).
Moving to a centralised distribution also potentially extends the supply base for retail
brands. Burt (2000) explained that reducing the number of delivery points allow smaller
suppliers and new entrants without established distribution capabilities to supply retail
brand ranges.

When it comes to the supply base of retailers, one significant change is the reduction in
the number of suppliers. Historically, many companies have adopted a competitive
approach of involving many suppliers in order to obtain a better condition in prices

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 Literature Review

(Ogden, 2006). However, multiple sourcing usually results in lower prices but requires
more time for negotiation and might delay or disrupt production schedules (Cruz, 1996).
With the growing importance of purchasing as a field, in order to improve the overall
performance of a supply chain, many companies are adopting the strategy of supplier base
reduction and long-term collaboration development (Sarkar and Mohapatra, 2006).
Supplier base reduction is often associated with purchase strategy, just-in-time (JIT),
supplier management and partnership (Ogden, 2006).

Retail Brands
In some markets, such as the UK, retail brands have reached a mature state, while in other
markets, such as Spain and Italy, they are still in an early or developing phase (Elg and
Paavola, 2008). Despite the divergence of developments, more and more authors argue
that retail brands are becoming a major threat and challenge to the leading manufacturing
brands (Elg and Paavola, 2008). From the retailer’s perspective, retail brands have a
significant impact on a retailer’s differentiation and competitive superiority
(Lymperopoulos et al., 2010). Aliawadi et al. (2008) added that retail brands might also
improve customer loyalty. Their study found out that consumers who buy retail brand
from a retail chain are likely to build some chain loyalty, while those who do not buy
retail brands have no such loyalty.

2.3.2 Implications of Retail Developments

Retailers play a more active role towards manufacturers by setting product standards,
promoting products and obtaining and sharing information on consumer behaviour
(Nordås, 2008). Retailers are also networking organisations in distribution channels, due
to the fact that they coordinate products from different suppliers (Elg, 2003). Giant
retailers always have a large market demand in the retail market and are frequently the
largest buyer for the manufacturers. Secondly, giant retailers can offer more demand-
stimulating services to promote manufacturers’ products. Consequently, the giant retailers
have made themselves attractive to manufacturers (Yan and Wang, 2010).

A small number of retailers have taken a larger portion of the market share. Consequently,
the “gate-keeping” role of retailers is becoming obvious due to the fact that their location
in distribution channels is believed to have become increasingly significant (Burt and
Sparks, 2003). The concept of retailers acting as gatekeepers can be traced back to the
1960s. Gross (1967) adopted the term “gatekeeper” to describe the role of big retailers in
distribution channels. A gatekeeper refers to an individual or a group of individuals with
the power to make a decision that allows a particular item to enter or not enter a particular
channel. Gross (1967) argued that large-scale retailers’ go or no-go decision are very
critical to ensure consumer exposure at the point of sale and, ultimately, the
manufacturer’s chances for success, especially the success of newly developed products.
Thus, in order for a new product to find its space on the shelves of a retail chain, it must
be allowed by the gatekeepers who have the authority to accept new products (Gross,

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 Literature Review

1967). Hansen and Skytte (1998) echoed Gross’s (1967) idea, saying that retail chains in
most European countries have grown so large and powerful that wholesalers are removed,
although their functions are shifted either forward or backwards in the distribution
channel. Retail chains buy the products directly from the manufacturers, if they accept the
products. If the retailers do not accept the products, however, it becomes almost
impossible for the producer to market them (Hansen and Skytte, 1998).

2.4 Expanding Offerings of Manufacturers

A product is generally defined as “anything that can be offered to a market for attraction,
acquisition, use or consumption that might satisfy a want or need” (Kotler and Keller,
2008, p. 358). With regard to the total product, Levitt (1980) argued that marketers must
think through different levels of the product, each of which adds more value to the
consumers. Four such levels are generally defined: generic, expected, augmented and
potential product (Levitt, 1980). Lindgreen and Wynstra (2005) argued that the
competition nowadays occur in terms of what is added to products in the form of packages,
service, advertisement, financing, means of delivery, stock policies and everything else that
customers may value.

There used to be a clear partition of products, which divided products into goods and
services (Vargo and Lusch, 2004). However, the boundaries between services and goods
have become blurred, as products today are often characterised by bundles of services and
goods (Wise and Baumgartner, 1999), which are usually sold in a single package that
delivers value to end customers (Corrêa et al., 2007). As Vargo and Lusch (2004) explained,
either the word “product” or “service” is not sufficient to describe the true nature of what
is exchanged today on the market. Goods and services are combined in offerings.
Following Brax’s (2005) approach, the present study uses the term “offering” to denote
“any physical good, service, information or combination of these that a company can offer
to its customers” (Brax, 2005, p.143).

Another competitive strategy that has clearly emerged since the mid-1990s is that of the
“total solution provider”. Rather than just provide goods, companies have to manage
services to match with goods in order to provide value (Corrêa et al., 2007). According to
Brown (2000), customer demand is believed to be one major reason why manufacturers
have been transformed into solution providers. Companies are encouraged to focus on
their core competences and outsource many of their other business activities to external
providers. This creates a growing demand for suppliers to conduct many other types of
service activities which were once performed by customers themselves. The second reason
noted by Brown (2000) is the company’s seek of a unique competitive advantage.
Manufacturers find it difficult to differentiate their products. Service businesses, however,
often offer sustainable forms of differentiation, which enable manufacturers to obtain
higher margins (Brown, 2000).

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 Literature Review

A variety of authors have described the transition line from pure product manufacturer to
service provider. Oliva and Kallenberg (2003) proposed a framework that illustrates the
change in industrial firms’ offerings, with a continuum that ranged from absolute product
to complete service provider (Figure 2.1).

Service as Relative importance of

add-on tangible goods

Tangible goods
Relative importance of as
services
add-on

Expanding Services in Offerings

Figure 2.1 Product Service Continuum
(Adapted from Oliva and Kallenberg, 2003, p.162)

Gebauer et al. (2005) added two dimensions - share of service revenue and cumulative
investment in the service business - to measure the transition from products to services
(Figure 2.2). Similar to Oliva and Kallenberg’s (2003) model, Gebauer et al. (2005)
assumed that at one end of the continuum, a product manufacturer produces core
products, with services purely as an add-on to the products. In this case, revenue and
profits are generated mainly through the company’s core products and the contribution of
service to revenue is low. At the other end of the cotinuum was a service provider whose
product is just an add-on to services. The major share of revenue comes from providing
services and products only represent a small part of value creation. The transition starts up
with a few product related services business and ends up with a large number of service
offerings, such as customer support, maintenance contracts, consulting services, financial
services, etc. Furthermore, Gebauer et al. (2005) also pointed out that there is a potential
risk of making this transition. Some companies might be trapped by the service paradox,
which means that high investment in extending service business leads to increased service
offering and higher costs, but dose not generate correspondingly higher returns.

Figure 2.2 Transition line form Product Manufacturer to Service Provider

(Adapted form Gebauer et al., 2005, p.15)

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 Literature Review

2.5 Customer Analysis

2.5.1 Customer Needs

A fundamental theme of marketing is the expression of customer needs, also known as
customer demands. Customers have compound needs that affect purchase decisions (Shiv
and Hubber, 2000). Customer needs describe the benefits that a product or service must
fulfil (Griffin and Hauser, 1993), which may address several issues, including utility,
functionality, aesthetics, prestige, usability and pleasure (Khalid and Helander, 2004). In a
business-to-business context, the selling company has a limited number of large customers,
each of which must be handled individually (Håkansson et al., 1977). The authors further
stated that the relationships with industrial customers are complex, involving several
departments and decision makers on both the seller’s and buyer’s side to solve the buyer’s
technical, commercial and delivery needs. These three dimensions are explained below:
• Technical needs: Technical needs are often relate to the technical complexity of the
product. The degree of technological complexity is likely to be determined by
several factors, such as the required component and subsystem integration and
technological newness (Kim and Wilemon, 2003). The customer may need an
understanding of the product components and the component integration, by
which ensure they understand the value obtained. This mainly concerns quality and
functional aspects.
• Commercial needs: Organizational buyers use various means of competition in their
marketing activities. The common used means include advertising, sales promotion,
personal selling, technical service, delivery, quality and price (Håkansson et al.,
1977). Thus, customers require coordination with their suppliers on purchasing side
in order to ensure the delivery of the marketing mix.
• Logistical needs: Logistical needs describe customers’ requirements to get the
product from the seller to the buyer physically, legally and on time. The logistical
operation must be coordinate with other events, such as production schedules and
delivery of other products (Håkansson et al., 1977).

2.5.2 Customer Value

Defining Customer Value

Value is an abstract concept with meanings that vary according to context (Patterson and
Spreng, 1997). Professionals in academia and industry have long struggled to clarify the
meaning of value (Kummerow, 2002). The diversity of definitions of the term is caused by
the way in which the definitions are constructed. They rely on other terms, such as utility,
worth, benefits and quality, which are not well defined themselves. Value concepts also
differ in terms of the conditions within which customers think about value (Woodruff,
1997). In the past, customers judged the value of a product or service on the basis of some
combination of quality and price; the concept of value has expanded, however, to

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 Literature Review

convenience of purchase, after-sales service, dependability and so on (Treacy and

Wiersema, 1993). According to Simpson et al. (2001), the generally accepted definition for
value focuses on the total worth of the benefits received for the price paid. Value in
business markets is the monetary worth of the technical, economic, service and social
benefits a company receives in exchanges for the price it pays for a market offering
(Brandenburger and Stuart, 1996). Bowman and Ambrosini (2000) argued that value has
two components: perceived value and exchange value. Perceived value is subjective and is
determined by customers, based on their priorities. Exchange value is realised when the
product is sold. It is the amount paid by the buyer to the producer for the perceived use
value (Bowman and Ambrosini, 2000).

Within the marketing literature, the word “value” has a customer orientation (Woodall,
2003). On many occasions, therefore, the terms of “customer value” (e.g., Woodruff,
1997), “customer perceived value” (e.g. Monroe, 1991) appear as synonyms for value.
Value is created by identifying and understanding customers’ benefits and sacrifices
(Walters and Lancaster, 2000). Customer value is something perceived by customers rather
than objectively determined by a seller (Ulaga, 2001). The benefits provided by customer
value can be direct and easily measured or indirect and hard to quantify. The direct value
added by a supplier is derived from activities that can be expressed in a monetary sense,
and include benefits that lead to decreased costs or increased sales. The indirect value
comes from intangible aspects of the relationship (Simpson et al., 2001). A lot of research
has been conducted to investigate the construct of value; however, research in the context
of business-to-business markets is limited (Homburg and Rudolph, 1997; Ulaga and
Chacour, 2001).

Perspectives of Customer Value Creation

Ulaga (2001) summarised a variety of articles included in the special issue of Industrial
Marketing Management regarding consumer value in business markets and concluded that
there are three perspectives of value creation (Figure 2.3). The buyer’s perspective looks at
how suppliers create value in products or services compared to competition. The seller’s
perspective deals with attracting, developing and retaining customers. Finally, value
creation through relationships, partnering and alliances is considered as the third
perspective (Ulaga, 2001).

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 Literature Review

The Buyer’s Perspective The Seller’s Perspective

Value creation through Value creation through
products and services customer equity

The Buyer-Seller Perspective

Value creation through
networks

Figure 2.3 Three Perspective of Customer Value (Ulaga, 2001, p. 317)

Ulaga’s (2001) framework indicates that suppliers can create customer value by providing
products and services as well as building and maintaining seller-buyer relationship. The
augmented product concept presents four value-adding levels of product: the core product,
the expected product, the augmented product and the potential product (Lindgreen et al.,
2009). Besides products and services, the relationship between supplier and buyer is
another source of customer value. Establishing closer relationship between a supplier and a
buyer is increasingly cited as a notable differentiator of high and low performance in
distribution channels (Hyvöene and Tuominen, 2007), since practitioners and consultants
recognise that supplier-buyer relationships possess inherent mechanisms that inhabit the
development of value (Aastrup et al., 2007). The vital purpose of a supplier and a buyer
engaging in a collaborative relationship is to work together in ways that add value for both
companies (Anderson, 1995). Following Anderson and Narus’s (1990) definition of
distributor and manufacturer working partnerships, the present dissertation defines the
supplier-reseller working partnership as the extent to which there is mutual recognition
and understanding that the success of each company depends in part on the other firm,
with each firm taking action to provide a coordinated effort that focuses on jointly
satisfying the requirements of the customer marketplace.

Customer satisfaction is often regarded as the impact of customer value, because

consumers have first-hand experience and familiarity on which to base satisfaction
evaluations and satisfaction, which will have an influence on re-purchase intentions
(Patterson and Spreng, 1997). Overall satisfaction is the customer’s feelings in response to
the evaluation of one or more use experiences with a product (Woodruff, 1997).

2.6 Different Perspectives of Business Integration

The topic of the importance of integrating suppliers, manufacturers, distributors, and
customers has received a great deal of research attention (e.g., Clinton and Closs, 1997;
Reck and Long, 1988; Rudberg and Olhager, 2003; Stevens, 1989; Troyer and Russell,
1995). Researchers have addressed this problem through several different approaches

23
 Literature Review

including SCM (e.g., Lambert et al., 1998), process engineering (e.g., Birou et al., 1998),
and supplier/customer involvement in new product development (e.g., Petersen et al.,
2005). Two major fields of literature - strategic management and organizational economics
- and the SCM literature have made significant contributions to business integration.

2.6.1 The Supply Chain Management Perspective: Supply Chain

Integration
Supply chain management (SCM) has been described as the integration of all value adding
business processes, ranging from raw material extraction to the consumption of products
by end users (Cooper et al., 1997; Wisner and Tan, 2000). The challenge with integrating
of business processes is that supply chain integration not only involves integrating cross-
functional business processes within a company but also involves integrating processes
among actors of the supply chain (Lambert et al., 2005). Internal integration occurs across
company functions, while external integration occurs across supply chain actors (Richey Jr.
et al., 2010). External integration involves coordinating and integrating the forward
physical flow of deliveries to customers (Saunders, 1997; Trent and Monczha, 1998) and
the backward coordination of the flow of materials and information from manufacturer to
suppliers (Martin, 1992; Trent and Monczka, 1998). In the former type of integration,
manufacturers engage in downstream distribution activities, so it is recognised as
downstream integration. In contrast, the second type is referred as upstream integration
(Trent and Monczka, 1998).

Typically, the goal of supply chain integration is to achieve lower costs and/or better
services (Troyer and Russell, 1995). Collaborative planning, reduced inventories, lower
distribution and transportation costs, improved cycle times and customer services levels are
possible outcomes for a properly managed relational integration (Richey Jr. et al., 2010).

2.6.2 The Strategic Management and Economic Perspective: Vertical

Integration
Vertical integration (VI) is a corporate strategy that is of interest to the field of strategic
management and organisational economics (Mahoney, 1992). VI relates to a range of
decisions concerning whether companies should provide certain products or services in-
house, through their business unit, or acquire them from external organizations instead
(Harrigan, 1985). VI can be realised through two approaches: vertical financial ownership
and vertical contracts (Mahoney, 1992). Vertical financial ownership eliminates company
boundaries via merge and acquisition. Vertical contracting, such as exclusive dealing, resale
price maintenance or exclusive territories, is a viable alternative to vertical financial
ownership (Mahoney, 1992). According to Klein (1978), by shifting ownership of an
organizational asset, vertical integration may imply an increased ability to direct
cooperating inputs compared to a long-term contractual arrangement (Klein, 1978). Most
theories of vertical financial ownership that have been provided in the literature are
described more accurately as theories of vertical integration strategy (Mahoney, 1992).

24
 Literature Review

The empirical VI literature has defined two separate groups. The first group includes
those papers that consider the decision of whether to integrate forward to distributing and
retailing. The second group contains those studies that look at the “make-or-buy”
decisions, which is the decision about whether to integrate backwards (Lafontaine and
Slade, 2007).

2.6.3 Comparison of Supply Chain Integration and Vertical Integration

Stonebraker and Liao (2006) argued that in management theory, vertical integration is a
precursor to supply chain integration. Unsurprisingly, these two concepts share a number
of characteristics that can be exemplified by consistency of organisational culture and
policies, organisational fit, and complements of various organisational strategy components
(Stonebraker and Liao, 2006). However, the distinctions can be characterised along two
dimensions. Firstly, transactional cost economics (TCE) provides a theoretical basis for
vertical integration (Hobbs and Young, 2000) while supply chains can be based on the
theory of industrial dynamics (Chen and Paulraj, 2004). Secondly, while the primary
integrating mechanism of vertical integration is ownership, but cooperation and
coordination are the major integrating mechanisms used in supply chain integration (Lee
and Ng, 1997; Stock et al., 1998).

2.7 Vertical Integration

2.7.1 Driving Forces of Vertical Integration

A great deal of attention has been paid to the question of why business integrates
(Lafontaine and Slade, 2007). The explanations of vertical integration (VI) can be
organised into two major theoretical frameworks: the traditional framework and the
transactional framework (Majumdar and Ramaswamy, 1994). The traditional framework
views VI as a response to technological and operational interdependencies between two
successive stages of the activity chain (Bain, 1968; Chandler, 1977). Transaction cost
economics state that an integrated firm will do better than its non-integrated competitors
if there are high profits in the supply chain (Klein et al., 1978; Williamson, 1979), because
the two parties in a bilateral monopoly market will spend a lot of resources bargaining
over profits. In vertical integration, the incentive of a bargain is restrained bureaucratically
(Balakrishnan and Wernfelt, 1986). In other words, by integrating forward, the monopolist
can convert efficiency loss in two successive stages into its own profit and therefore
expand input use to the optimal level (Vernon and Graham, 1971; Warren-Boulton, 1974).
Next, VI is viewed as a strategic response to monopoly market power (McDonald, 1985).
If there are variable proportions between input and output, then integrating between two
successive monopolies maximises joint profits (Majumdar and Ramaswamy, 1994). Besides,
VI may serve as an entry barrier and therefore lead to excess profits. By integrating into
additional stages of a product, the manufacturer has raised the capital requirements for
entrants (Balakrishnan and Wernfelt, 1986). Similarly, Waterson (1993) argued that VI

25
 Literature Review

may raise its rivals’ cost or leave the market thin, thereby restricting the expansion of its
competitors.

The transaction cost analysis (TCA) approach distinguishes production costs from
distribution costs. Distribution costs relate to running the system, such as searching for
information, bargaining, monitoring and contract enforcing (Arrow, 1969). Williamson
(1985) argued that uncertainty is a principal factor involved in forward vertical integration.
In a distribution channel, uncertainties can exist with respect to many marketing activities,
for example: sales targets and promotional activities. The TCA approach points out that a
proper reaction to uncertainties is to internalise the transaction (John and Weitz, 1988).
There are two reasons for this. Firstly, VI allows sequential decision making to precede
more smoothly and secondly, the authority structure formed by VI permits faster
resolution of conflicts (John and Weitz, 1988). Barrera-Rey (1995) added that forward
integration by manufacturers may also be driven by the separation of downstream markets
for the purpose of price discrimination, which could happen in the case of a monopoly
selling to two industries.

Many of the explanations for VI were written in between of the 1960s and the 1980s and
their relevance and ability to explain the modern situation is debateable. Osegowitsch and
Madhok (2003) argued that the recent cases of VI might be driven by reasons that
traditional explanations based on economic theories have not addressed. They argued that
the current popularity of VI makes a departure from traditional motivations based on
altering industry structure and minimising cost. The traditional rationales for VI still exist
but they are being increasingly surpassed by new considerations (Osegowitsch and
Madhok, 2003). Beyond this, most of the existing VI studies have been conducted at the
micro-analytic level; analysis from a supply chain perspective is sparse, however, which
might be more necessary in this non-perfect, fast changing and interrelated market
environment.

The following is a list of driving forces for VI, excluding power and cost considerations.

Technical Complexity: As a result of high penetration rates and longer product life
spans in many manufacturing industries, the number of products in use has grown
dramatically relative to the number of products sold in any given year (Osegowitsch and
Madhok, 2003). Thereby, a significant portion of value-added activities have shifted away
from manufacturing towards maintaining and servicing existing products. This trend has
been reinforced with the rise in technical complexity, which further leads to a growth of
expenditure in their service requirements (Osegowitsch and Madhok, 2003).

Differentiation: According to Etgar (1978), one important vehicle for achieving product
differentiation is to provide customers with a higher level of service at the distributive
level. The use of distribution services for product differentiation is especially important for
products that cannot be easily differentiated by the products’ own attributes, because of

26
 Literature Review

the lack of physical differences or because consumers do not perceive any existing physical
differences as being significant. In order to achieve differentiation through distribution
services, forward integration is often required (Etgar, 1978). Osegowitsch and Madhok
(2003) added that not only has there been a decline in the portion of value-added by
traditional production activities, such as product design and manufacture, but their margins
have also dropped. In many mature industries in particular, the products have reached
levels of performance that already satisfy the requirements of most customers. Marketing,
distribution, after-sales services and all interactions with customers can potentially have an
impact on the company’s image. Thus, differentiation strategies frequently lead companies
to integrate forward in an effort to totally control their offerings and get closer to
customers (Osegowitsch and Madhok, 2003).

Higer profit: Wise and Baumgartner (1999) wrote that downstream markets offer
important benefits in addition to large new sources of revenue. Downstream markets also
tend to have higher margins and require fewer assets than product manufacturing. Thus,
the real money lies downstream, not in the production function (Wise and Baumgartner,
1999).

Strategic partnership with customers: Anderson and Narus (1995) also addressed the
capability of downstream activities to create competitive advantage. They argued that
service offerings in the customer interface provide supplier with powerful means of
retaining and expanding business with their most valuable customers, and bear potential
opportunities for companies to become more strategic business partners of the customers,
thereby improving customer retention (Anderson and Narus, 1995).

Customer needs of integrated solutions: Many companies are compelled by their

customers to offer an ever greater range of products and services (Osegowitsch and
Madhok, 2003). As customers concentrate more and more on their own core
competencies, they increasingly rely on their suppliers to provide them with solutions that
could be integrated in their businesses processes (Osegowitsch and Madhok, 2003).

Synergies: Close relations between manufacturing and sales can lead to synergies and
powerful synergies can also be obtained by suppliers that penetrate into their customers’
decision making process (Osegowitsch and Madhok, 2003). For example, becoming
involved in customers’ inventory management, suppliers have access to more timely and
accurate information about demand, which can be used to optimise the company’s
manufacturing plan (Osegowitsch and Madhok, 2003).

Learning: The distribution structure can isolate a manufacturer from its end markets, so it
is common for a manufacturer to push its products through the distribution channel
without adequate knowledge about the final demands (Gradde, 2004); this could
undermine the manufacturers’ profitability and competitiveness. It is necessary, therefore,
to learn about downstream customers and markets. Downstream integration facilitates

27
 Literature Review

access to both information and knowledge about customers (Osegowitsch and Madhok,
2003). The knowledge extends beyond insight into what customers want, to in-depth
understanding of why particular offerings are seen as desirable by customers, how best to
provide them and what future offerings might look like. Such knowledge can only be
generated through intimate contacts with customers (Osegowitsch and Madhok, 2003).

To summarise, the above-mentioned factors, can be grouped into the following five
categories: economic, technical, customer, marketing and strategic (Table 2.1).

Table 2.1 Factors Driving Vertical Integration

Category Factors
Economic factor Higher profits
Technical factors Technical complexity
Customer factors Customer needs of integrated solutions
Marketing factor Differentiation
Synergies; partnership with customers;
Strategic factors
learning

2.7.2 Impacts of Vertical Integration

The literature has examined the impact of vertical integration on market power (e.g.,
Normann, 2009; Hastings et al., 2005) and market outcomes, such as the price of the final
product and product quality (e.g., Arya et al., 2008; Matsubayashi, 2007). Besides market
power and market outcomes, vertical integration influences company’s position in supply
chain (Majumdar and Ramaswamy, 1994). The position is important because it
determines the resources, capabilities and competitive advantages needed in competition
(Nicovich and Dibrell, 2007). Including distribution business is also expected to influence
what to offer to customers and how to provide these offers. The declining value added by
core product design and production indicates that manufacturers need to provide more
extensive services, together with core products, in order to increase customers’ overall
satisfaction (Anderson and Narus, 1995; Gebauer and Friedli, 2005; Penttnen and Palmer,
2007). Most of the existing literature, however, has focused on the enhancement of
service of industrial products (e.g., Chase, 1981; Gebauer et al., 2005; Oliva and
Kallenberg, 2003), with very few studies looking at goods sold through retailers or
merchants. Beyond the lack of research, management literature is also almost unanimous
in suggesting to manufacturers how that they should integrate services into their core
product offering. Furthermore, the literature is surprisingly spare in describing the extent
to which services should be integrated (Oliva and Kallenberg, 2003).

However, impacts encompass possible negative results, which are not explicitly
differentiated from disadvantages in literature. Harrigan (1984) pointed out that the
possible disadvantages of VI include increasing internal cost because of the overheads

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 Literature Review

required to coordinate two stages in supply chain. Furthermore, there is a risk of

performance associated with VI; in today’s turbulent market, VI represents a commitment
to certain business that may lead to a loss of flexibility (Lafontaine and Slade, 2007).

2.8 Frame of Reference:

The research framework presents the issues discussed in this chapter and in the three
appended papers, as well as their connections to the research questions (Figure 2.4). On
the whole, this research has an interest in studying the developments in distribution
channel and its actors, as well as the consequences of these developments. Cases have been
demonstrated in three areas: resellers’ developments, manufacturer’s distribution strategy
development (specifically vertical integration of distribution) and the offering development.
Vertical integration is referred to as integration that is accomplished through financial
ownership. The research starts by exploring of the final link in a distribution channel: the
resellers, including retailers and merchants. Resellers’ developments catalyse the emerging
of new distribution solutions from upstream channel actors. In this sense, the new
demands from resellers can be seen as among the driving forces of a manufacturer’s
downstream integration strategy. Impacts of vertical integration of distribution might
occur at both the strategic and operational levels. This study only focuses on the impacts
made by vertical integration on the strategic level: the manufacturer’s position in the
supply chain and offerings to customers. Finally, a customer value analysis is conducted
with a case study of supplier’s new product development. The purpose is to describe and
analyse how customer needs can be addressed when developing and marketing new
market offerings.
Driving Forces:
Economic factors
Technical factors Customer factors
Customer factors
Marketing factors
Strategic factors
Business Integration:
Downstream vertical Integration/ Resellers’Developments
Supply Chain Integration

Supplier Offering:
Core product DIY Retailers Private
Manufacturer Distributor Physical distribution & &
Service BMs Professionals
Supplier

Impacts:
Market power Customer Needs:
Market outcome: price Technical Customer
Position Offering
and quality Commercial needs
Position Logistical
Offering

Figure 2.4 Research Framework

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 Timber Products Distribution

3. TIMBER PRODUCTS DISTRIBUTION

This chapter is a bridge of the theories discussed in chapter two and the case studies in chapter five. So
it is a mixture of the relevant knowledge written in existing literature and the secondary data collected
from multiple sources. UK market is addressed by the reason that it is a very representative market
within Europe.

3.1 Sawmill Sector is Essential in Forest Industry

The forestry industry is of great importance to the national economies of countries like
Canada, Sweden, Finland, Chile and New Zealand (Carlsson and Rönnqvist, 2005). In
Sweden, the forestry industry accounts for more than four percent of the country’s GDP
and almost 13 percent of its export of goods (Swedish Forest Industries Federation, 2009).
The forestry industry covers broad sectors, from road building, harvesting and
transportation to production at sawmills, paper mills and heating plant. The dominant
sectors include sawmills, pulp and paper and the wood board industries (Statistics Sweden,
2010). Among these, the sawmill sector is an essential part of the entire forestry industry.
Besides its purchase of saw-logs from either domestic or foreign sources, the by-products
of sawmills are important input for the pulp and paper industry, the wood board industry
and the energy sector (Lundmark, 2006). The sawmill sector is involved in many
production, consumption and trade activities that occur in geographically diversified
locations. Thus, it has a central position in the forestry industry that influences the entire
industry (Lundmark, 2006).

Studies and reports on the sawmilling industry have concluded that the industry has been
and remains production-oriented, since the industry is predominantly focusing on
technological advancements, functionality and internal competences striving to create
superior customer value (Nord, 2005). The sawmilling industry has also been traditionally
regarded as a low-margin industry, within which the price of sawn timber is an important
factor for competition among sawmills. As a result, the strategy of sawmills has been
orientated towards costs and larger units. The purpose of this strategy is to increase
productivity and pooling fixed investment, such as machines, energy production, logistics,
management and marketing (Björheden and Helstad, 2005).

3.2 An Old Material Facing Challenges

Wood, as building material, has an extremely long history. It has been facing some some
serious challenges, however, which fall broadly into three categories: (1) intensified
competition, both between individual sawmills and between exporting countries, (2)
increasing substitution by other materials, such as concrete, glass, plastic and steel for wood
and, (3) new demands from powerful customers (Roos et al., 2001). Competition of the
forest industry within the domestic markets will continue to grow, especially in the case of
wood products, to which comparatively little value has been added and where the critical
factor in competition is in production cost (Lundmark, 2006). According to Björheden

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 Timber Products Distribution

and Helstad (2005), the key factors driving the substitution of other materials for wood
consist of low added value, the perceived unpredictability of wood and the need for
expertise in order to use wood successfully. Additionally, leading consumers of sawn wood
products increasingly demand fast response, precision and flexibility in deliveries. New
markets for swan wood, such as DIY retailers and builders’ merchants (BMs), exert a great
deal of influence on supply chains structures (Nord, 2005). However, traditional wood
suppliers had problems with keeping up with the retailers’ developments. They are not
always able to meet the demands of weekly deliveries of small quantities, merchandising
support, product development and many others (Henningsson, 2005).

In order to increase competitiveness and improve profitability, sawmills have striven to re-
orientated their business strategies towards market-orientated production and the value
adding process. The principal ways of improving profitability consist of three options:
increasing either value-added share, volume or productivity (Roos et al., 2001). Producing
smaller pieces with specific dimensions and quality features, instead of standard products
offers sawmills great potential to improve their profitability. Moreover, sawmills have to
strategically position themselves appropriately and decide how production- or market-
oriented degree the company will be (Nord, 2005). In other words, sawmilling companies
need to have high operational effectiveness and, at the same time, must focus on the
production environment. Turning to the supply chain, the sawmill sector has called for
better coordination and integration of technology, logistics, organisation and information,
both upstream to the logging operations and more importantly downstream to the markets
(Roos et al., 2000).

3.3 Supply Chain of Timber Products

Several former studies have described the supply chain of timber products. Some of them
describe the supply chain in a general manner (e.g., Henningsson, 2005; Nord, 2005),
while others explain it in a specific geographic context (e.g., Frayret et al., 2007). Based on
the available literature and documents, a brief introduction of timber products is provided
below.

The timber supply chain comprises a vast number of operations, from harvesting of timber
to the sawmill, wood processor or importer, then to the distributor, merchant or retail
outlet, or to the manufacturer and, ultimately, to the final user. Forestry management may
include initial planting or germination of new trees and assessment of an existing forest
area. Once wood is removed from the forest during felling, it is sorted by its potential end
usage. Larger and higher quality logs are usually transported to sawmills, while smaller logs
and forest thinning is used to make paper, biomass fuel and wood-based panels, such as
oriented strand board (OSB) and medium-density fibreboard (MDF). Companies that
undertake the initial processing of wood are based close to forest resources and often
referred to as primary processors. Once primary processing has been undertaken, the wood
products will be packaged for transportation, which might be by lorry, train or ship.

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 Timber Products Distribution

Primary processors who sell to overseas markets often adopt agents based in the target
market to represent their interests. Agents have the expertise to understand the needs of
both sellers and buyers; such companies will earn a commission on each transaction in
return for their expertise. The first owner of timber or timber products that arrive in the
country is commonly referred to as the importer. Such companies purchase massive
qualities of timber and then beak them up into smaller lots, which they either sell to
distributors and merchants or to secondary processing manufacturers that produce finished
wood products like machined mouldings, treated fencing or decking. The retailer
represents the final link in the timber product supply chain; they break large volumes into
smaller quantities in each transaction.

The above descriptions of the timber product supply chain focus on illustrating a series of
activities, which link a group of firms together. If the spotlight is put on the firms involved
in these activities, the timber product supply chain can be simply illustrated as follows:

Figure 3.1 Supply Chain of Timber Products

(Adapted from TTF, 2010)

The forestry department fells trees in a forest and cut them into logs; the logs are then
shipped to sawmills, which cut logs into sawn timber. The sawn timber can be further
processed into panels, doors and windows and so on. These finished products will be
distributed through distributors or wholesalers to retail stores, where end users make their
purchase (Figure 3.1).

3.4 Distribution Channels of Timber Products

Timber product manufacturers use several different distribution channels to distribute their
products (Figure 3.2). The traditional route to markets for the sawmill sector is via various
types of middlemen, with products passing through the hands of multiple wholesalers,
distributors, exporters and importers (Nord, 2005). The major members of timber product
distribution channels are follows:
• Distributor: Timber product distributors are wholesalers who distribute timber
products to downstream buyers (Nord, 2005).
• Builders’ merchant: A builders’ merchant (BM) is a coordinator and distributor of
construction materials for private individuals and construction companies (Nord,
2005). Throughout history, builders’ merchants have played a significant role in the
construction industry. At the initial stage, they act as the intermediary between
building material producers and contractors. However, their role has shifted to a
source of working capital for contracting firms (Agapiou et al., 1998). Large BMs
operate national wide and are able to supply large construction companies. In

32
 Timber Products Distribution

contrast, small independent merchants operate in local or regional market. In order

to obtain better bargaining power and compete with large BMs, some independent
BMs choose joining buying groups.
• Further processor: A further processor is the manufacturer who buys from sawmills
and utilises the purchased products as inputs (Nord, 2005). Value-adding processes
are applied to transform inputs into final products for various uses. Further
processors include manufacturers of furniture, window, door, and staircases (Roos et
al., 2001).
• DIY retailers: DIY is a complex phenomenon that can simultaneously appear as
leisure, work, consumption and production. For many, DIY is a form of leisure,
whilst for others it is work. Either way, DIY certainly involves consumption
because it consumes materials and tools. At the same time, because material
transforms domestic space and often enhance property value, DIY can also be seen
as production (Watson and Shaove, 2005). One definition of DIY is “home
maintenance and improvement work conducted by household members on their
own household without the paid services of professionals” (Williams, 2008, p312).
Examples of DIY activities include repairing or adding additions to a home or
garden, fixing a fence, building a barbecue, internal and internal painting, staining
or wallpapering and so on (Mintel, 2005). DIY retailers provide one-stop-shopping
solution to serve private consumers or contractors with product needs for home
improvements (Nord, 2005). DIY retailers sell a wide range of building materials,
from ‘hard’ items like bricks and cement to ‘soft’ items like wallpaper and paint.
Among the entire product range, wood-based products, are strategically important
products from a retail trade perspective; often accounting for 4-20 percent of a
retailer’s total turnover (Henningsson, 2005).

Figure 3.2 Distribution Channels of Timber Products

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 Timber Products Distribution

3.5 Timber Consumption and Distribution in the UK

3.5.1 Timber Consumption in the UK

The Swedish forestry industry is highly export-oriented. More than 85 percent of pulp
and paper and 70 percent of sawn timber production is exported (Swedish Forest
Industries Federation, 2009). The UK is one of the world’s largest consumers of timber
products and it is also the largest foreign market for Swedish timber (Timber Trade
Federation, 2009). The UK currently imports around two-thirds of all the timber used in
the country. Approximately 60 percent of wood and wood products are used in
construction, both for new building projects and the renovation, maintenance and
improvement (RMI) projects. The furniture industry is the second-largest consumer, using
up 15 percent of wood products. The furniture industry primarily consumes sheet
materials, such as chipboard and Medium Density Fibreboard (MDF). Another 15 percent
of wood products, mainly softwood, are consumed by the packaging market. Fencing and
outdoor accounts for seven percent of UK wood consumption (Timber Trade Federation,
2009).

Figure 3.3 UK Wood Consumption by Sectors

(Source: Timber Trade Federation, 2009)

3.5.2 Timber Retailing in the UK

UK is the second largest DIY market in Europe and the UK DIY market experienced
solid growth in 2007. However, 2008 and 2009 have proved much more challenging as a
result of the economic downturn. The market is expected to begin to recover in 2010 and
to reach a market size of £7.2 billion (AMA, 2010). According to Williams (2008), 61
percent of the British population actively participate in DIY activity and it has been
estimated that active DIYers spend an average of £574 per year in the DIY retail market.

As in many others sectors, the intensive consolidation, which registers as a large portion of
retail sales is taken by a reduced number of retail organizations (Burt and Sparks, 2003),
has been observed in the British solid wood market during the past decades (Nord, 2005).
Due to the advantages enjoyed from economies of scale, large retailing chains tend to

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 Timber Products Distribution

dominate the market (Espallardo, 2006). DIY superstores and trade building supply outlets
are dominated by a small number of large companies, referred as the “big four”. The four
largest companies - B&Q, Homebase, Wickes and Focus - control more than half of the
all DIY retail sales in the UK (Williams, 2008). These giants have hundreds of stores
dotted around the country and primarily sell large volumes of off-the-shelf products.
These companies require comprehensive supply management to ensure that they always
have an entire product range in stock. Table 3.1 provides a general description of these
four retailers.

Table 3.1 Major DIY Retail Chains in the UK Market

Number of Market
Company Owner Turnover1 Trade2
Stores 1 Share2
321 stores in the £3.8 billion
UK (Year ended
B&Q King Fisher 35.0% 23%
9 stores in Ireland 31/01/2009)
60+ internationally
Cerberus £550
Focus 181 (May 2009) 4.8% 4.8%
Capital million
Home Retail £1.51
Homebase 345(End of 2009) 15.3% 5%
Group billion
Travis Perkins £900
Wickes 190+ 6.7% 33%
plc million
Source: 1. Annual company reports and accounts
2. Mintel (2009)

The domestic expansion by the very leading DIY retailers has meant that they are
increasingly taking a larger share of the overall sales away from other retailers. The result
has been a sharp increase in aggregate concentration. The consolidation in the British
market reveals a certain degree of complexity at the same time, in which some competing
brands actually belong to the same mother company. For example, the largest building
material distributor in Europe, Saint-Gobain, purchased the British builders’ merchant
brands Jewson and Graham in 2000. Focus acquired 139 Do It All (Holding) Stores in
1998. Two years later they acquired 131 Wickes stores and 98 Great Mills stores. In 2002,
Focus merged with Wickes. However, Travis Perkins, the biggest builders’ merchant,
took over the DIY chain Wickes in 2005.

Generally speaking, DIY retail chains are geared to serve private consumers. The figures in
Table 3.1 show that all these four chains have a trade customer base in various degrees.
Wickes, as a part of Travis Perkins plc, has one-third of their business conducted with
tradesmen. Homebase, on the other end, highly focuses on severing private consumers.

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 Timber Products Distribution

3.5.3 Timber Merchanting in the UK

Very similar to the DIY sector, four national builders’ merchants (BMs) account for over
60 percent of the total market share (Henningsson, 2005). Smaller independent builders’
merchants with one or a few branches share the rest of the market share. Although market
consolidations have been observed in the BM sector, the market is still very fragment,
because there are thousands of independent BMs making their living on local areas. But
under the huge competitive pressure from national BM chains, independent BMs find
their way to compete: joining buying groups. Motivation behind this is to buy better and
compete more effectively with their counterparts. Table 3.2 presents a brief description of
the biggest four players in the BM sector:

Table 3.2 Major Builders’ Merchant Chains in the UK Market

Number of Market
Company Owner1 Turnover1
Branches1 Share2
Grafton Group €2673 million 10% (Grafton
Buildbase 150+
plc (Group Revenue) Group)
€17.5 billion
Jewson Saint-Gobain 500+ 18%
(Group turnover)
Travis £3,18 billion
Travis Perkins plc 611 15%
Perkins (Group Revenue)
£3,14 billion
Wolseley
Wolseley plc 1900+ (Year ended 31 19%
UK
July 2008)
Source: 1: Annual company reports and accounts
2: SCA Timber Internal Presentation Material, 2009

Grafton Group plc, the mother company of Buildbase, owns other BM brands in the UK:
Jackson Building Centres, Macnaughton Blair and Selco Builders Warehouses. Jewson and
Wholseley are competing neck in neck in term of market share. Travis Perkins plc owns
the retail brand of Wickes. Worldwide, Wolseley is the biggest specialist trade distributor
of pluming and heating products to professional contractors and a leading supplier of
building materials to the professional markets. Jewson is the UK’s leading supplier of
timber and building products to the trade and general public. They operate over 500 stores
across the country.

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 Methods

4. METHODS
This chapter presents and justifies the choices on methodology, which includes research purpose,
research approach, research strategy, data collection and data analysis. Finally, the validity and
reliability of this study will be discussed in order to control research quality.

The author’s previous studies provided some knowledge and experience of academic
research. As a PhD student, my research logic and methods have been strongly influenced
by my supervisors and our research group. The system theory view and qualitative method
is the dominant research paradigm and tradition in the Marketing Logistic Research
Group.

4.1 Research Purpose

There are three options for research purpose: explanatory, descriptive and exploratory
(Yin, 2008). Explanatory study aims to establish causal relationships between two variables,
while descriptive study focuses on the accurate description of variables in the problem
model (Saunders et al., 2007). According to Frey and Fontana (1991), in exploratory
research the researcher typically looks at a social context that is unfamiliar or new. The
exploratory studies can be used “to satisfy a researcher's curiosity, to arrive at a better
understanding of a social context, to test the feasibility of a more complex study, to
develop methodological techniques, to identify nuances of a research setting that could
impact the investigation, to identify key informants, to add precision to a research problem,
and to serve as a source of grounded theory” (Frey and Fontana, 1991, p.177). Given the
differences between the three research purposes, the exploratory purpose was chosen as
the most appropriate for this study. The core of the aim of this study is to look at the
distribution channel of timber products and finally reach a more precise understanding of
the research problem. Besides, to some extent, this study intends to provide deep
description of the distribution channel of timber products and its relevant variables.
Therefore, the research purpose is partially descriptive.

4.2 Research Approach

4.2.1 Reasoning Process
There are two general approaches to reasoning that might lead to the acquisition of new
knowledge, expressly inductive reasoning and deductive reasoning (Hyde, 2000).
According to Hyde (2000), inductive reasoning is a theory-building process that starts by
observing some specific circumstances and seeking to establish generalisations about the
instances investigated. In contrast, deductive reasoning process is theory-testing approach
that starts with an established theory or generalisation and looks to determine whether the
theory applies to specific situations (Hyde, 2000). In brief, the inductive research approach
reasons from a specific case or a collection of observation to general law, while deductive
research approach reasons from general law to a specific case.

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 Methods

Initially, inductive research was seen as an appropriate research approach for this study.
The original plan was that the study would start with an investigation of prior theoretical
knowledge and then form a theoretical framework, which would be compared with real-
life observations, and then seek to establish generalisations about the phenomena under
investigation. However, when examining my entire research process, I felt that an
inductive approach could not fully describe the reasoning process, since there were back
and forth directions between theory and empirical study.

Looking back at the research process, I found out that data collection and theory
development occurred simultaneously. I started out with a literature search and readings
with the purpose of obtaining pre-perceptions and theoretical knowledge. During that
phase, I took several courses, most of which related to the field of industrial marketing,
logistics, and supply chain management, which I think are very helpful. After that, I
picked up a few themes that I thought were interesting and relevant, such as distribution
channel, retailing, sales etc. I then started another round of literature reading, but this time,
I had a narrower scope of interests and read theories in depth. On top of that, I read a few
published dissertations about the sawmilling industry and timber product distribution (e.g.,
Nord, 2005; Henningsson, 2005), which provided me with some research findings. In the
end of the first phase, I formed preliminary research questions and a research framework.
Interview guides revolving round research questions were also developed.

The second phase of study began with a trip to the UK to study the real-life situations.
During that trip, I obtained a better picture of the building material distribution industry,
especially the distribution of timber products. My pre-defined questions were answered by
respondents from different organisations in the distribution channel of timber products.
Some interesting themes emerged that I had not considered in the first stage, such as
retailer owned distribution centres. At the same time, I found there was some mis-
matching between theories and my observations. For instance, category management is
documented as a popular and widely applied management concept in the retailing sector.
However, this concept was not obvious in the DIY retailer sector. A few respondents
from the DIY retail sector claimed to have category management implemented but they
did not actually have clear view on this strategy and their practices deviated from existing
theories. Based on the comparison between theories and observations, I modified the
theory framework that I had used prior to the observation. Along with analysing the
collected data, I took a course relating to research methods, in which I obtained
knowledge and skills of research design, data collection and data analysis. This led to an
improved version of research design, including the research approach, research problem,
research questions, and data collection as well as analysis methods.

Along with the evolution of the study, a second round of data collection was conducted to
fill the gap identified in the former phase, to add new information and to double-check
some perceptions. When data collection was completed, data analysis was undertaken in

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 Methods

order to obtain research findings. Finally, conclusions were drawn and suggestions for the
theory were made.

The above process shows a mixture of deductive and inductive reasoning processes. In
parallel to the data collection, the search for complementary theories continued, guided by
the findings in the empirical world. This led me to believe that the abductive reasoning
process was the most accurate concept for this study. Dubois and Gadde (2002)
commented that case studies commonly use abductive reasoning. Following Kováca and
Spens’ logic (2005), the present study started with some prior theoretical knowledge.
Closer examination of the empirical world suggested a “theory matching” or “systematic
combining” attempt, which sought to find a new matching framework or theory
extension. Finally, a new theory framework was formed and conclusions were reached
(see Figure 4.1). According to Kováca and Spens (2005), the aim of this process was to
understand the new phenomenon and suggest new theories. My purpose was to extend
theories by integrating existing concepts and theories.

Figure 4.1 The Abductive Process

(Adapted from Kováca and Spens, 2005, p.139)

4.2.2 Enquiry Form

Qualitative and quantitative approaches refer to the method selected to treat and analyse
the collected data (Saunders et al., 2007). A qualitative method is used to study a small
sample but in depth with the objective of creating a better understanding of the specific
problem studied. In contrast, the focus of a quantitative study is to generalise, describe and
explain. It concerns comparisons and trial. A higher level of formalisation is used and
generalisations are sought (Saunders et al., 2007). Given the options, I chose the qualitative
enquiry approach, based on the reason that this study is more concerned with
understanding the meaning of the phenomena within channel of distribution rather than
with attempting to quantify these phenomena.

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 Methods

4.3 Research Strategy

4.3.1 Case Study and Units of Analysis

According to Yin (2008), the alternatives for research strategy are experiment, survey,
archival analysis, history and case study. Each strategy can be used for all three research
purposes and each of these strategies follows its own logic to collect and analyse data (Yin,
2008). The conditions of the research determine when it is best to use each strategy. Yin
(2008) summarised three conditions: (1) the type of research questions, (2) the extent of
control over behavioural events and (3) the degree of focus on contemporary events (see
Table 4.1).

Table 4.1 Relevant Situations for Different Research Strategies

Requires control Focuses on
Form of research
Strategy over behavioural contemporary
questions
events events
Experiment how ,why Yes Yes
who, what, where,
Survey how many, No Yes
how much
who, what, where,
archival analysis how many, No yes/no
how much
History how, why No No
case study how, why No Yes
(Source: Yin, 2008, p.8)

A research strategy selection decision cannot be reached without considering the

objectives and characteristics of the study (Woodside, 2010). Since, the author, as an
investigator, cannot manipulate the behaviour of research units, the experiment is not a
proper research strategy, at least according to Table 4.1. In addition, this study is designed
to investigate contemporary events rather than to track a situation over a long period of
time. For this reason, history strategy is not suitable either. Pure archival analysis is
considered to have a lack of flexibility and richness for the problems studied. Thus, case
study and survey seem to be possible research strategies. However, this study seeks deep
insights into several phenomena, which are believed to be hard to obtain by survey.
Woodside (2010) suggested that case research is useful when a phenomenon is broad and
complex, where the existing body of knowledge is insufficient pose causal questions, and
when a phenomenon cannot be studied outside the context in which it occurs naturally.
Thus, case study research is frequently used in business-to-business marketing research to
examine the decisions and behaviour of groups or individuals with organisation or across
organisations context (Dobois and Gadde, 2002; Halinen and Törnroos, 2005). With a
purpose of looking at trends and developments that happened to actors along timber

40
 Methods

product distribution channel in a theory-building approach, I chose case study as the

research strategy for this research.

Prior to data collection, another decision needs to be made with regard to whether single-
case study or multiple-case study is more suitable for this study. Answering this question
needs a clarification about what exactly is a case. Broadly speaking, cases include
“individuals”, “organisations”, “processes”, “programs”, “neighbourhoods” and even
“events” (Yin, 2008). Bonoma (1985) said that a case study is a description of a
management situation. Specifically, a case is “a description, directly obtained, of a management
situation based on interview, archival, naturalistic observation, and other data, constructed to be
sensitive to the context in which management behaviour takes place and to its temporal restraints”
(Bonoma, 1985, p.204).

Yin’s (2008) proposed two types of case study- single-case study and multiple-case study-
each of which has two sub categories: holistic and embedded unit of analysis. Among these,
the in-depth holistic case study with multiple embedded unit of analysis was chosen for
the present study.

Figure 4.2 Design for Case Study

There is a degree of ambiguity between case and unit of analysis and there is currently no
conceptual boarder line between the two (Grünbaum, 2007). Some believe that there is
no distinction at all (e.g., Patton, 2002), while others separate case from unit of analysis,
because the unit of analysis defines what the case study should focus on (Berg, 2001).
Figure 4.2 displays my design for the case study. The present study treats case and unit of
analysis differently. The case is the situation of of distribution channel that includes
manufacturer, distributor, DIY retailers and BMs, in which the management behaviour
takes place. The case is constructed to the context of timber products distribution. The
channel actors form the units of analysis. Each DIY retailer or BM is a unit of analysis.
However, due to their similarities, two unit groups, DIY retailers and BMs, are formed in
order to facilitate cross-group analysis.

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 Methods

4.3.2 Selection of Case and Units of Analysis

Strategic selection of case can increase generalisability of case studies (Flyvbjerg, 2006).
Flyvbjerg (2006) summarised two general type of selection, including random selection
and information oriented selection. I chose the information oriented selection as my case
selection strategy, because my goal was to maximise the utility of information from small
sample. Following this logic, a critical case sampling was adopted. According to Flyvbjerg
(2006), a critical case study is defined as having strategic importance in relation to the
general problem (p.229).

The case selection for this study was based mainly on the following criterion: some major
trends and developments that have happened to actors along distribution channel influence
their strategies or operations. The recruitment of case and units of analysis was influenced
by my research project. The choice can be categorised as theoretical sampling, in which
“the cases may be chosen to replicate previous cases or extend emergent theory, or they
may be chosen to fill theoretical categories and example of polar types” (Eisenhardt, 1989,
p.537). Although the connection to a specific organisation could be seen as a limitation,
the case of SCA is a relevant and interesting case to study. Their strategic move, the
vertical integration of distribution, displays a major change of a manufacturer’s distribution
channel. Their customers in the DIY sector represent an increasing retail sector that has
reported several trends and developments, such as consolidation. Despite the growing
importance of this retail sector, it has received limited research attention. Therefore, I
believe the distribution channel and its actors fit well with the case selection criterion.
Besides, the close connection with the supplier can also be seen as an advantage since the
access to key respondents in both the supplying company and the downstream buying
companies was secured. The close relationship with the case units allowed me to gather
information through informal and formal conversations, meetings and field visits.

4.4 Data Collection

According to Saunders et al. (2007), data can be primary and secondary. Primary data is
collected for the researchers’ own purpose and secondary data has already been collected
by other researchers, for other purposes (Saunders et al., 2007). Yin (2008) identified six
sources of collecting data for case studies: documents, archival, records, interviews, direct
observation, participant-observation, and physical artefacts. Yin (2008) also suggested that
all the six sources have their advantages and disadvantages and that no single source is
superior to the others. In fact, a good case study should use as many sources as possible.
Frey and Fontana (1991) noted that case studies normally focus on two types of data
gathering: observation and interviews. In the former case, a researcher plays one of the
several roles as a participant observer watching and listening as events unfold and members
interact in a setting. In the latter case, the researcher asks probing or directed questions
that reflect earlier observation or theoretical orientation (Frey and Fontana, 1991).

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 Methods

The primary data collection technique employed in this study was semi-structured
interview, which were conducted in an open-ended nature, but followed a certain set of
questions. Semi-structured interview provided better flexibility; the questions crossed
broad areas of decision activities and, as such, made it possible for me to ask for details on
relevant points. In other words, the question order and probes did not follow exactly the
same route for all interviews because of elaborations by respondents when answering. All
the semi-structured interviews were conducted face-to-face.

The data collection was conducted between May 2009 and April 2010 and the entire
process can be split into two stages. The first stage included a trip to the UK in May 2009.
During that trip, I intensively visited the supplier’s sites in Stoke and Whelspool, as well as
some reseller stores, which comprised both customers and non-customers of the supplier.
My interest was broad and open at that time, since the objective of that trip was primarily
to explore the timber products distribution industry and draw a picture of the current
channel of distribution. In the second stage, I made another visit to the UK in January
2010. Follow-up interviews were conducted with some of the respondents interviewed in
the first stage in order to check whether anything new had emerged and whether their
perceptions towards some questions had changed. The data collection became more
focused and additional interviews were carried out in order to gather information for the
questions brought forward during the course of study. Meetings were also held with
managers based in Sweden as a part of the second stage. The discussion with Swedish
managers evolved around two streams: one was to understand the distribution strategies
from a strategic level and the second was to discover how the company’s Swedish
operation and British operation influence each other. A total of 29 interviews, ranging in
duration from 30 minutes to 120 minutes, were conducted with 24 interviewees from
eight organisations representing the manufacturer, distributor and reseller in the
distribution channel.

It is important that the selected cases are relevant to the purpose of the study and that the
respondents have sufficient information on the studied phenomena. Respondents from the
supplier company included the marketing director and product manager in Sweden, the
managing director, operation director, marketing director, three account managers,
warehouse and transportation director and the purchase manager in the UK. These
respondents were chosen because I felt they represented multiple functional areas in the
organisation, which could provide perceptions from a variety of angles. Additionally, I
believed that these respondents possessed information that was rich and relevant to the
research questions.

DIY retailers and builders’ merchants from the supplier’s customer base were selected for
two purposes. The first was to explore the developments of resellers and the second was to
examine interactions between the supplier and its customers. The chosen DIY retailers and
BMs are leading companies in the British market and account for a notable portion of the
market share. In most cases, I talked with timber buyers and store managers. Table 4.2

43
 Methods

presents the studied companies and the interviewed respondents. The figures in brackets
represent the number of people interviewed.

Table 4.2 Companies Studied and Respondents Interviewed

Position in
Distribution Company Company Type Respondents
Channel
SCA Timber Timber • Marketing director
Manufacturer
Manufacturer • Product manager
• Managing director
• Operation director
• Marketing director
• Account managers(3)
Distributor SCATS Timber supply
• Warehousing and
transportation director
• Production manager
• Purchase manager
Homebase DIY retailer DIY manager and store
Reseller
manager
Focus DIY retailer Trading manager, garden
Reseller buyer and
store manager
Wickes DIY retailer Timber buyer and store
Reseller
manager
Travis Perkins BM Timber buying manager and
Reseller
store manager
Reseller Buildbase BM Store manager(2)
Reseller Selco BM Store manager (2)

Non-participate observation was also used under certain circumstances. Firstly, I sat in one
sales meeting when the supplier’s sales manager was discussing the possibility of supply
machined products to a particular client. I also visited the warehouses at two locations in
the UK to observe how these warehouses were organised as well as how materials or
products came in and were sent out if ordered. Last but not least, I joined two account
managers on their regular visits to DIY and BMs stores during my two trips to the UK.
My intention was to observe how the account managers interacted with customers in
terms of solving problems, taking advices, introducing new products into a range and
presenting new product ideas and so on.

In addition to primary data collected from interviews and observations, secondary data was
collected from multiple sources. The secondary data sources included annual reports, sales
report, sales meeting presentation materials, internal magazines, product lists, posters and

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 Methods

flyers at stores. Good arguments can be found in the literature to support the usage of
mixed data sources. Bonoma (1985) stated that mixed data sources serve as a means of
“perceptual triangulation” and provide a fuller picture of the business units being studied.
In line with this statement, Woodside (2010) added that the use of mixed or multiple data
collection methods in case study research usually contributes more than generality to
increase accuracy and complexity/coverage in a study. A mixed method approach is likely
to provide confirmation and disconfirmation of some beliefs and feelings of participants
collected during interviews. A rich, deep insight into what is happening and why it is
happening can emerge from such mixed-method research studies (Woodside, 2010).

4.5 Data Analysis

Data analysis was probably the most complex and challenging task of all of the phases for
me in this qualitative project. The challenges lay in interpreting and structuring meanings
from the data. Miles and Huberman (1994) recommended a three-phases method to
conduct data analysis that included data reduction, data displaying and conclusion drawing.

z Data Reduction: The objective of this stage is to organise the data so that conclusion
can be drawn and verified. For this reason, the selection, abstraction, simplification,
focus and transforms of data should be carried out.
z Data Displaying: Once the unnecessary data has been excluded, the rest of the data
should be displayed in an organised, compressed manner. This makes it easier for the
reader to read and easier for researchers to draw conclusions.
z Conclusion Drawing: This is the final analytical activity for researchers. Here, the
researcher must decide the meaning of things by noting regularities, patterns,
explanations, possible configurations, causal flow and propositions (ibid).

Having reviewed the data analysis procedure, it was possible to indentify three steps.
Firstly, I adopted multiple methods to collect the data. All interviews were recorded and
transcribed. Then data was reduced and only the relevant and significant data was kept;
this meant that the data that matched or mismatched the frame of reference was kept.
From the remaining data, the key points were marked with a series of code that were
extracted from the text. The codes were grouped into similar concepts in order to make
them more workable. Categories were found from these concepts. Tables and figures were
also developed to integrate findings across respondents and to answer the focal questions.
Interpretation of the data occurred by iterating from the data to the theory and back again
in order to make sense of the data. The main goal was to obtain a holistic and illuminating
grasp of meaning (Spiggle, 1994). The primary objective of analysing and interpreting the
interview data was to determine categories, relationships and assumptions based on the
respondents’ opinions of the topics through movement from data to observation and to
conclusions, while also iterating with the theories at the same time (McCracken, 1988).
Overall, interpretations of the data, along with triangulation from primary and secondary
data analysis, resulted in common themes.

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Within case units, the empirical findings for each research question included in this study
were compared to the literature featured in the conceptual framework. The analytic
process consisted of several stages, each of which represented a higher level of generality in
a circular way in order to arrive at conclusions and to generate or confirm conceptual
schemes and theories that describe the data (McCracken, 1988). Finally, the findings were
verified with the theories mentioned in the previous chapter and conclusions were
reached. Additionally, the case units of resellers were compared with each other in order
to identify any similarities or differences. To summarise, several different approaches were
utilised in order to analyse the case data. The primary analysis techniques included pattern
matching, explanation building, within-case analysis and cross-case unit analysis. Various
charts and tables were also utilised as part of the data analysis.

4.6 Quality Standards: Validity and Reliability

The quality concept in a qualitative study has the purpose of generating understandings
(Stenbacka, 2001). A good qualitative study can help “understand a situation that would
otherwise be enigmatic or confusing” (Eisner, 1991, p.58). Validity and reliability are the
most commonly used criteria evaluating the quality of qualitative research.

4.6.1 Validity
Validity refers to whether the findings are really about what they appear to be about
(Saunders et al., 2007). Construct validity is especially significant in case study research. In
order to overcome this problem, Yin (2008) recommended three case study tactics to
increase the construct validity: (1) use multiple sources of evidence, (2) establish a chain of
evidence and (3) have key informants review a draft case study report. Yin (2008)
continued by pointing out that the internal validity is used for causal studies only and not
for descriptive or exploratory studies. Therefore, the present study did not take internal
validity into account. The external validity concerns whether the research findings can be
applied equally to other research settings, such as another organisation (Saunders et al.,
2007).

External validity is commonly discussed in conjunction with generalisation, which deals

with “what is the case in one place or time, will so elsewhere or in another time” (Payne
and Williams, 2005, p.296). In business-school studies, researchers are interested not only
in development, testing, and confirmation of theories, but also in applying of theories in
real business settings. The most important form of generalisability in business-school
research is the generalisability of a theory to a description which would be used in a new
setting, for example, a setting other than the theory was empirically tested and confirmed
(Lee and Baskerville, 2003). This type of generalisation is classified as generalising from
theory to description. It involves generalising from theoretical statements, which have
already been developed, tested and confirmed in a published journal articles to empirical
statements (Lee and Baskerville, 2003).

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Critics typically state that single case study offers a poor basis for generalising (Bonoma,
1985; Eisenhardt, 1989). However, Yin (2008) argued that such critics are implicitly
contrasting the situation to survey research, in which a sample readily generalises to a
larger universe. This analogy to samples and universes is incorrect when dealing with case
studies, because survey research relies on statistical generalisation from a sample to a
population, whereas case studies rely on analytic generalisation, in which the investigator is
striving to generalise a particular set of results to some broader theory (Yin, 2008). As an
echo to Yin’s (2008) argument, Riege (2003) explained that the focus of analytical
generalisation relies on an understanding and exploration of constructs. The
understandings and exploration are usually achieved by comparing of initially identified or
developed theoretical constructs with the results of single- or multiple-case studies (Riege,
2003). Maxwell (2005) differentiated internal generalisability from external generalisability,
with the former referring to the generalisability of a conclusion within the underlying
setting or group and the latter relating to generalisability beyond the group, setting or
context. According to Maxwell (2005), internal generalisability is typically more important
to qualitative research than external generalisability (Maxwell, 2005).

External validity of case studies could be jeopardised by threats that might occur at the
research design/data collection, data analysis and/or data interpretation stages
(Onwuegbuzie and Johnson, 2006). The literature suggests various techniques for
establishing or enhancing external validity in case study research. For instance, Riege
(2003) summarised that using replication logic in multiple-case studies, defining scope and
boundaries of reasonable analytical generalisation for the research and comparing evidence
with extant literature could help establish the external validity of case studies. Besides,
triangulation is a frequently mentioned technique that is very helpful in enhancing
research validity. According to Fielding (2010), triangulation uses more than one method
and weigh up the outputs from these methods in order to assess the extent to which they
confirm or contradict each other, and what this reveals. In particular, it can often be useful
to use a combination of quantitative and qualitative methods to gain a broad overview and
insight into what the data mean (Fielding, 2010). Triangulation aims to provide a larger
database, further de-coding and interpretation of data and additional methodological rigor
(Frey and Fontana, 1991).

In order to ensure the quality of research, some steps were taken to enhance the validity
and reliability of the case study process. These steps are discussed below.

Construct validity: Multiple sources of evidence and informant review were utilised.
Interviews were conducted with between two and 10 individuals at each organisation.
The selection of informants was handled very carefully; only the individuals who were
considerably involved in the managerial situations upon which the study focused were
chosen. The respondents represented different actors along the distribution channel and
different fields within the organization. After summarising the interview data, case
descriptions were sent to the various organisations for review. Unfortunately, only very

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 Methods

few respondents had sent feedbacks to me. The reply rate from the customer side was
particularly low. Based on the limited feedback received from the respondents, minor
changes were made to the documents. As a supplement to the interviews, observations and
analysis of documents were used to verify the data. Apart from mixed data collection
methods, several theoretical schemes, such as distribution channel, retailing, purchase and
logistics were used to interpret the phenomena.

Internal validity: The analysis of the case study involved looking for patterns among the
various customer units and building explanations concerning as to why these patterns
existed.

External validity: Replication logic was used in multiple-case unit studies to establish the
domain to which the findings can be generalised. This step is important for ensuring
external validity. The reseller case units represent different conditions, such as product and
service, size of timber section and volume of purchase, with varying outcomes.
Concomitant with this diversity, there are some commonalities among the resellers’
developments and demands.

4.6.2 Reliability
Reliability deals with if a later investigation follows the same procedures of earlier studies,
the later study should reach the same findings and conclusion (Yin, 2008). Four factors
can pose great threats to reliability: participant error, participant bias, observer error and
observer bias (Saunders et al., 2007).

To ensure the reliability of this study, the tacit of case protocol suggested by Yin (2008)
was considered. A case protocol, consisting of an overview of the case study project, the
field procedure, the case study questions and a guide for the case study report, was
developed with the assistance of several reviews by the author’s supervisors to help
increase the reliability of the research results. At the data collection stage, respondents
were allowed to choose the most suitable date and time for them to do the interviews.
Ideally, the interviews would take place when the respondents were not in a great hurry
and they were neutrally motivated to answer my questions. Open-ended questions were
used in order to allow the respondent to express their meaning in their own words rather
being led.

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 Methods

4.7 Summery of Research Methods and Process

Table 4.3 summarises the research methods discussed above; options for each aspect are
presented and then the author’s choices are listed.

Table 4.3 Summery of Research Methods

Research
Options Methods chosen
Methods
Research Explanatory/ Mainly exploratory, partially
purpose descriptive/exploratory descriptive
Reasoning Deductive/inductive/
Abductive
Research process abductive
approach Enquiry
Qualitative/quantitative Qualitative
form
Research Experiment/survey/archival
Case study
strategy analysis/history/case study
Type of data Primary data/secondary data Primary and secondary data
Documents/archival/
Data records/ interviews/direct
Source of Documents/archival/records/
collection observation/ participant-
data interviews/direct observation
observation/and physical
artifacts
Data Within case analysis/cross Within case unit analysis/cross
analysis case analysis case unit analysis

Most of the research procedure is described in the sections on research approach, data
collection and data analysis. Instead of repeating them here, the main steps taken during
the research process are noted here (see Figure 4.3). I started with existing theories, most
of which are published in the fields of marketing, logistics, retailing and supply chain
management related. These publications offered theoretical knowledge and also some
existing findings, both of which contributed to the development of the prediction
framework. Research methods were then decided on and fieldwork was conducted in
order to explore the real-life context. There was some back-and-forth. The theory
framework was adjusted based on my observations in the UK. When the data collections
was completed, a grand case report embracing all the information collected was
documented but only the data relevant to my research questions was retained for the next
step, which was data analysis. Data was compared with the prediction framework and
matches and mismatches were recorded and discussed, which led to the final conclusions.

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 Methods

Prior theoretical knowledge

Step 1:Grounding in the Extant Literature

Existing findings or
competing findings

Step 2:Develop a prediction framework

Step 3:Determine research methods

Step 4:Conduct fieldwork

Transcribe interviews,
compile documents, etc. Step 5:Prepare case data

Step 6: Analyze case data

Revise prior theory or

develop initial model/ Step 7: Record hits and misses of predictions
framework to observation

Step 8:Conclusion making

Figure 4.3 Research Process

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 Data Presentation

5. DATA PRESENTATION
This chapter presents the empirical data collected from actors in three successive stages of the timber
product distribution channel - manufacturer, distributor and resellers - the first two of which only
included one case unit each. Multiple units were studied in relation to the last actor. Information is
organised under sub-headings with the purpose of obtaining solutions for the research questions.

5.1 SCA Timber

SCA Timber is part of SCA’s Forest Products, which produces publication papers for
newspapers, magazines and catalogues, pulp and forest-based bio-fuels. SCA Forest
Products also manages SCA's extensive forest holdings, supplies SCA's Swedish industries
with raw wood materials and offers transport solutions to SCA's units. SCA Timber is one
of the largest sawmill companies in Europe and it includes seven sawmills, wood-
processing units, distribution and wholesale operations. The total production of solid-
wood pre-cuts amounted to 1.8 million cubic metres in 2009.

During 2003 and the first half of 2004, SCA Timber conducted an extensive review of its
strategy. It formed the following new strategy in response to the changing environment:
Gradually and systematically SCA Timber shall develop relationships with selected customers toward
a supplier role implying that SCA Timber’s own products can be supplemented with products
produced through outsourcing or purchased, if needed.

SCA Timber concentrates mainly on the market for solid wood products for visible end-
use, such as wood for joinery and interior decoration. It places substantial importance on
its preferred market segments, such as the wood industry and modern building material
distributors. SCA Timber has adopted two principal directions in its strategy. The first is to
become a supplier to the wood processing industry, providing products that have been
made ready for the next stage in the processing chain. The second is to become a supplier
of finished solid wood products to the builders’ merchant sector. Today, the company has
three lines of business:
• Traditional raw material makes up 35 percent of net sales (50 percent of volume)
• Industrial timber accounts for 40 percent of net sales. Developed timber products, such
as components, are supplied directly to industrial manufacturers of windows, flooring,
furniture and laminated wood beams.
• Supplies to DIY retailers and builders’ merchants constitute 25 percent of net sales. A
broad range of processed wood is kept in stock for rapid and precise deliveries to
retailers and merchants depots in the UK, Scandinavia and the eastern United States.

Scandinavia, France and the UK (including Ireland), are the main markets for SCA
Timber, making up 58 percent of total sales. Scandinavia is the largest market for SCA
Timber. In terms of value, it is almost double size of the company’s second biggest market,
the UK. France is ranked third, followed by Japan and the US. SCA Timber provides a

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wide range of products and services to these markets, as well as storage and advance
distribution. In these markets, SCA Timber focuses on many different segments and has
created its own strong in-house sales organisations and logistics systems. In addition, they
offer a “just-in-time” service to the main markets from their supply terminals and wood-
processing facilities. In England in particular, they serve the building material market from
their distribution centre in Stoke-on-Trent in accordance with a “supply chain” concept.

In addition to these main markets, SCA Timber is also active in a number of niche
markets. These are equally as important as the main markets, the difference being that
SCA Timber specialises in just a few segments. It may involve supplying building materials
to companies in the eastern USA, providing components to the Italian window industry
and other appearance timber industries or products for house construction in Japan. These
niche markets account for 24 percent of SCA Timber’s turnover.

5.2 SCA Timber Supply (SCATS)

5.2.1 Three Sites of SCATS in the UK

SCA Timber Supply (SCATS) is a subsidiary of SCA Timber. The operations in the UK
include a distribution centre in Stoke-on-Trent (referred to hereafter as Stoke), a wood-
finishing operation in Welshpool and a wholesale operation in Hull.

Stoke-on-Trent
Supplying DIY retailers is a totally different business from the traditional timber business.
Retailers demand that suppliers offer holistic solutions and provide a skilfully crafted range
of products, as well as warehousing distribution options. The customer base also calls for a
product range that is more focused on wood, which is delivered shrink-wrapped and bar-
coded. In order to extend its reach in the UK market and to sell more timber, SCA
Timber started to investigate the possibilities of supplying the DIY segment. The
investigation result showed that, in order to supply the DIY retailers in the UK, a
distribution platform was needed.

In 2003, SCA Timber acquired BLC, a British distribution company. SCA Timber was a
supplier to the British distributor, helping it fulfil customer requirements for redwood and
white-wood products. BLC mainly supplied wood-based products to DIY retailers but
also some builders’ merchants. Stoke lies in the heart of the populous Midlands region of
the UK, with a substantial proportion of the English population living within a 100km
radius. Many of the company’s customers are active in both the DIY and the builders’
merchant sector. The main concentration of the Stoke operations became the provision of
supply chain management services to large DIY home improvement product retailers from
its base. Using a break-bulk business model, BCL Stoke was able to offer swift and
accurate procurement, selection and delivery of products, often using its small planning

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mill and sheet material cutting facility to service highly specialised requirements. It also
achieved Forest Stewardship Council (FSC) chain-of-custody certification.

In May 2004, BLC changed its name to SCA Timber Supply UK (SCATS). Through the
acquisition, SCA vertically integrated further down in the supply chain and became a
supplier to DIY retailers. In doing so, SCA Timber went from not supplying at all to
being the second-largest supplier of solid wood to the DIY retailers in the UK. Adding
SCATS to UK businesses not only provided SCA Timber with distribution and processing
facilities in strategic locations, it also gave the company expertise regarding the needs of
the British DIY retailing and BM sector.

SCATS supplies nearly 1000 DIY and BM branches across the UK. Including both indoor
and outdoor storage, the distribution centre has a capacity of 42,000 cubic metres. Other
than distribution capacity, SCATS has a complementary wood finishing facility with a
smaller planning mill and packaging line. Most of the finished products are door frame
components, which are packed in accordance with customer requirements and marked
with a barcode. The capacity of the packing line is around 600 sets per hour. In addition,
the facility carries out service planning of Plan-All-Round (PAR) and mouldings.

SCATS sources from over 100 external suppliers and handles over 800 types of products.
Sixty-five percent of SCATS’s inventory is distributed to the DIY sector. The SCATS
warehouse is 22,000 square metres; it deals with 800 barcodes and is divided into three
parts: tank area, shelf area, and ready-to-go area. The products arrive at the tank inventory
area and are then broken into small batches and put on pre-defined shelves. When orders
come in, workers drive trolleys around the shelves following an “S” route. Order pick-up
should be completed when the trolley arrives at the end of the shelves. The last step is to
move the ordered products to the ready-to-go area. About 20 trucks enter this area
everyday and 15 leave it, Approximately 700 delivery drops are made every week in this
warehouse to the DIY retail and BM trade. The transportation has been outsourced to a
third-party logistics company. The company has attempted to optimise its transportation: a
change of transportation provider occurred in 2008 in response to the old provider’s costly
service.

Welshpool
The second step on the way to becoming a “one-stop-supplier” was completed in 2007
with the acquisition of Severn Timber in Welshpool. This acquisition opened up a further
substantial channel for supplying the builders’ merchants market. Before the acquisition,
SCA Timber and Severn Timber had cooperated in processing, distribution and sales for
several years. The acquisition fits well with SCA Timber’s strategy of increasing its
proportion of finished products by reaching the building materials trade that focuses on the
“professional” market (construction companies, carpenters and craftsmen). Severn Timber
provides SCA Timber with a direct channel for finished solid wood products, from the

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forest to the builders’ merchants, which has strengthened their position as a supplier to
professional builders.

Severn Timber has three planning mills, one automated saw line, two advanced value-
adding bailing units and a treatment facility, as well as warehouses. Severn Timber turns
sawn solid wood products into planed and treated products at its base in Welshpool. It is a
major supplier of solid wood products to the BM sector. The production capacity is
approximately 70,000 cubic metres. Due to the product specification, some raw materials
are purchased from outside their mother company, SCA Timber. Approximately 300
delivery drops can be made per week to BM companies in England and Wales. In order to
guarantee the supply to DIY and BM customers, two to three weeks’ worth of stock is
held in Severn Timber side and six to eight weeks’ stock is held in Stoke.

After these two steps, SCA Timber made great progress in being a one-stop supplier to the
DIY and BM sectors. Currently, SCATS runs two different businesses: a traditional bulk
importer business and a distributor/wholesaler business. The traditional part of the UK
business supplies bulk volumes of sawn timber mainly to other industries but also to the
national BMs who have their own wood machining and distribution businesses.

Hull
SCATS’s terminal depot and wholesale operation is strategically located in the city of Hull,
a leading port for overseas trade, particularly for sawn solid wood products. Every two
weeks, vessels from SCA Timber’s sawmills arrive at the King George Dock. The ships are
loaded with wood-based products made from raw materials originating in the pine spruce
forest of northern Sweden.

The terminal in Hull receives 215,000 cubic metres of swan solid wood products every
year, and has a total storage capacity of 25,000 square metres, 15,000 of which are under
cover. Solid wood products are stored here before being transported to customers in the
timber industry and the BM sector, as well as to SCATS’s own operations in Stoke-on-
Trent and Welshpool.

Better access to market intelligence stimulates the entire company to be more market-
oriented. For example, SCA Timber periodically reviews the effects of changes in their
business environment, such as regulations and raw material supply volume.
Interdepartmental meetings are held to discuss market trends and developments. Market
intelligence can be generated from both formal meetings and informal talks, such as lunch
with industry friends and talks with trade partners.

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5.2.2 Offering

Core Products
At a strategic level, SCA Timber develops “visible wood” products for interiors and
carpentry. A large market for the company is developed wood, which refers to products
that are customised for the next stage in the processing chain and are supported by services
and warehousing that is integrated into the customer’s distribution and sales. Another
growing market is semi-industrial and industrial wood input materials, which are delivered
as finished products in various lengths, dimensions and quality of selected raw materials.

Looking at the product portfolio, SCATS provides a full range of timber or timber-
related products by its own production or external suppliers. The main products include
planed wood products, mouldings, solid wood flooring material, door-lining and casing
sets, decking/garden timber, edge-glued-panel(EGP)/furniture material, window material
(blanks/components) and standard sawn solid-wood products. As a complement, kitchen
worktops, chipboard flooring, melamine-coated chipboard, sheets and cut panels of MDF,
chipboard, hardboard and plywood are sourced from other suppliers.

Delivery Services
The service business is growing within the company’s total offering. In order to meet the
needs of various chains, a delivery service is available with both fully-loaded trucks to
distribution centres and multiple-drops to branches with small quantities. In the UK, some
chains have their own distribution centres, while others do not. For those who do not
have distribution centre or do not want to distribute from their own distribution centres,
the delivery service from outside the distribution centres directly to branches is required.
Since the value of order from a single branch is low, it is beneficial for SCATS to have a
distribution centre and make joint delivery with several types of products, as well as to
make a few drops on each delivery.

Training
Training programmes are provided to customers, ranging from half-day basic
housekeeping to the long-term Timber Champion course, which was provided to the
store personnel from the Focus chain last year, for example. Participants gather once a
month for lectures. After six months, a test was given. Those who passed the exam were
rewarded with a trip to Sweden to visit the forest and production sites owned by SCA
Timber.

Merchandising
There is a demand for private branding from all of the studied DIY retailers. This means
that they require wrapping and label bar-coding services, which are not emphasised by
BMs. In 2005, SCATS invested in a wrapping and branding station at the distribution
centre in Stoke. SCATS also works together with another company G (not its real name)
in merchandising support. G promises a two-hour call in-store call each month. They will

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complete inventory and housekeeping tasks, including correct pricing, stock availability,
removal of damaged items, project quantities, planagram integrity and photographs. In
addition, they are responsible for setting and maintaining old stock clearance bin. A
monthly DIY retail price tracker with movements and promotional updates is also
available for retailers.

E-business Application
WoodShop, SCA Timber’s Internet wood trading website, is the instant-access timber
purchasing system from SCA Timber and an extension of SCA Timber’s customer service
capabilities. It simplifies the purchase of wood products from SCA Timber and the service
is available for customers in 24 hours a day, seven days a week. WoodShop focuses on
industry and supply chain management sales that establish direct contact with customer
without wholesalers. SCA Timber feels that this e-business application can create higher
product value by providing customer with a chance to monitor and streamline the supply
chain.

Account Management
SCATS feels that its partnership with key customers is strategically important. At the
highest level, SCATS has two large accounts: DIY and BM, within which sub-accounts
are created. One or several managers are assigned to manage an account, depending on the
size of that account. One account manager (AM) might be in charge of several accounts
at the same time. AMs act as the liaison between SCATS and its customers and are
responsible for monitoring those clients and coordinating the marketing- or sales-related
activities in order to maximise the value of the products and services provided. AMs work
closely with clients to determine the clients’ needs and make sure that the products and
services provided meet those needs. It is the AMs’ duty to maintain and retain their
portfolio of clients and sales is also a part of the AMs’ job, although the current strategy is
to grow sales with the existing customers.

Marketing Support
In addition to in-store merchandising and staff training, SCATS is now working with the
Focus chain on a promotion campaign - Wood for Good. This generic wood campaign
started in 2000 and is now the largest timber promotional campaign ever undertaken in
the UK. The objective is to increase the value of wood sold in the UK by promoting
wood’s role in sustainable construction and in mitigating climate change through
advertising and public relations, website, online learning, seminars and publications.

SCATS has cooperated with Focus to design a timber guide and how-to leaflets (a simple
timber guide), covering Focus’s whole range of products to help end consumers choose
the right product for the right job. These can also be utilised for store staff training.
Webcard is run alongside the timber guide and enable end consumers to visit the Focus
website and download the information required. Since September of 2008, they have
launched project flyers to run alongside merchandiser calls, in order to help consumers’

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vision about timber usage. Posters of timber products usage developed by SCATS can be
found in BMs’ stores as well, such as Buildbase.

Partnership
A selective customer retention strategy is adopted. SCA Timber prefers customers that can
make them profitable and enable them to do the same in return. SCA Timber has evolved
from conducting deals via middlemen to collaborating on an increasingly closer and
deeper level with its customers. They want to work with successful customers that are
growing and have a high level of expertise. One of the criteria for this is that they
purchase products that are profitable for SCA Timber. Above all, SCA Timber’s priority
customers are those who want to actively collaborate with them in order to lower
common costs.

The personal relationship becomes more important when SCATS are in a close
partnership with its customers. To SCATS, it is important to have an open relationship
between seller and buyer. This means that the relationship must be strong enough to be
able to accept mistakes and ‘bad days’. All personal relationships with customers are
individual and must be maintained individually. A trend is that buyers are becoming more
professional, which, to some extent, affects the way of working with customers and
demands a more professional attitude and treatment from the supplier.

5.3 DIY Retailers

DIY retail is considered a strong, expansive and profitable customer segment for SCATS.
The British market for solid wood has experienced a fierce consolidation phase. This trend
is particular prevalent in the retail sector. SCATS supplies three out four large DIY chains
in the British market. Table 5.1 presents a summary of these companies.

Table 5.1 Summary of DIY Retailers Studied

Number of Customer
DIY Retailers Turnover
Stores Demographics
Home owners/
Homebase 345(End of 2009) £1.51 billion
Home improvers
Home owners/
Focus 181 (May 2009) £550 million
Home improvers
Home owners/
Wickes 190+ £900 million
Home improvers/trade
Source: Annual company reports and accounts

Homebase
Homebase is the UK’s second-largest home improvement retailer, with more than 300
large, out-of-town stores throughout the UK and the Republic of Ireland. Homebase sells
over 30,000 products across its DIY and decorating, home and garden ranges and has a

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growing Internet offering. It serves over 70 million customers each year through its stores.
Homebase added 14 stores in 2009, taking its portfolio to 345 stores. The portfolio was
287 stores in 2005. Homebase has increasingly been selling a broader range of home
enhancement products and services alongside traditional DIY goods and materials. In the
latter half of 2007, Homebase rolled out kitchen installation service. Over the year of 2008,
they introduced a greater number of value lines across a large number of product
categories.

Homebase serves as a good example of a DIY chain with an increasingly soft offer.
Homebase has got new management and has stared transforming its stores to offer a softer
DIY with focus on furniture, paint, wallpaper and internal decorations. With the present
strategy, although timber is only a small part of the total Homebase offering, it remains
very profitable. Homebase dose not aim to be the cheapest in timber, but instead to offer
good quality and innovative products. Homebase’s target customer group has higher
economic competence, so its price level is slightly higher than that of Focus and Wickes.

Homebase has a partnership with its suppliers, and refers to its close partners as “category
captains”. The category captains are key suppliers who can manage a given product
category of the business together with the retailer. That means that they will monitor sales,
stock levels and so on. Category captain are seen as proactive drivers in the relationship
and suggest improvements in the business, including marketing, logistics, product
development, innovations and range reviews. As a result, the category captains take some
of the workload off the buyer. The buyer is involved in a large number of product
categories and, as a result, do not have time to fully focus on any one in particular.
Consequently, the buyer requires a good partnership with its key suppliers who can take
responsibility for the development of their category.

SCATS has been working with Homebase for over seven years. The products that SCATS
supplies range from swan timber, architectural mouldings and claddings to linings, panels
and worktops. All products are DIY consumer adapted. Once timber reaches the UK, it is
taken to SCATS’s distribution centre in Stoke. It is then finished, packed, labelled and
bar-coded before weekly shipments are made to Homebase stores up and down the
country.

According to the Homebase manager responsible for the company’s DIY product range,
SCA Timber’s extensive and unrivalled holding is an important reason why Homebase
chose it as a partner. The choice is generally characterised by a desire to use fewer, larger
and better suppliers. In addition, good access to an independent supply of raw materials
ensures long-term availability of finished products. Furthermore, vertical integration of
distribution promotes an understanding of the importance of cost averaging at each stage.
Because of these reasons, Homebase regards SCATS as an important supplier.

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 Data Presentation

Focus
Focus serves the light DIY market sector and most stores have some form of garden centre.
Focus operates 181 stores and aims to be the store of choice and convenience for DIY and
products to consumers seeking to undertake light home improvement and maintenance
projects. Focus offers a broad range of its own branded products for enhancing home and
garden as well as the tools to carry out projects from paint, wallpaper, bathrooms and
kitchens to power tools and building materials. In October of 2008, Focus lunched the
Payless DIY brand and gardening products, which aim to provide customers with great
value at low prices. As part of a major business move, the first quarter of 2009 saw most
stores re-fitted with pet supplies, household goods (cleaning materials etc.) and houseware.
Focus’s target customer group is average public.

Like its peers in the DIY market, Focus has been adversely impacted by a significant
downturn in consumer demand and the long-term contraction in the size of the DIY
market. With a store portfolio in desperate need of investment, the retailer has embarked
on the rollout out of its new Genesis store format, which includes a significant
improvement in store layout and environment. The retailer has so far refurbished five
stores based on this blueprint and has previously stated that it has plans to embark on a
three-year rollout to the rest of its estate. As of January of 2010, there have been five new
format stores, in Wantage, Pontardawe, Harrogate, Wymondham and Woking.

Usually, Focus has two to three suppliers for each category. For timber products, Focus
now keeps three suppliers, one of which is SCATS. SCATS supplies Focus with DIY
swan timber, architectural mouldings, flooring, edge-glued panels, chipboard and work
tops etc. The purchase amount from SCATS was about £6.1 million in 2009. Focus is in
close cooperation with some suppliers and the trading director claims the company has
partnership with its suppliers. However, management sometimes still demands heavy price
reduction from its suppliers, which undermines the partnership. Focus works with
category management within the company but not opened up widely to the suppliers.

Although DIY retailers consider innovative products to be critical, not many new timber
products have emerged on the British market over the last 10 years. Deck-in-a-Box is
probably one of the few exceptions, which appeared as a result of Focus appealing for new
products for their stores. The concept was an easy-to-assemble, modular system for
decking because it was felt that there was no such DIY-friendly system available on the
market. A product development project was started at SCA Timber in conjunction with
three local subcontractors. The objectives were that the final product should include a
minimum number of components, be easy to transport in a car and put together using
only a screwdriver. In addition, the product should be FSC-certified and use a pressure
treatment solution with a low environmental impact. Most importantly, the price should
be in line with the corresponding price of buying the individual component parts. The
finished product: Deck-in-a-Box, was ready to introduce after six months. The product is
available in several different dimensions that fit different garden sizes. The box comes

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complete with all the necessary screws and brackets to fit the deck and an instruction
manual and checklist is attached. A number of innovative solutions and metal brackets
allow for a slimmer construction and lower volume of wood consumption than for the
same product built using solid timber. The product satisfies customer needs of three easy:
easy-to-shop, easy-to-take home and easy-to-install. The product was also competitively
priced. The product was distributed from SCATS’s distribution centre and warehouse in
Stoke and sold exclusively through Focus’s stores since March of 2008.

However, when selling the product to Focus, the supplier encountered difficulties. The
product manager from SCA Timber claimed that it was not easy for them to make Focus
understand the value that had been generated. The supplier did some calculation and
comparisons in order to show how much the end consumer can save, but the savings and
potential to increase sales for retailers were not clearly realised and defined by either the
supplier or the retailer.

Wickes
Wickes currently has a portfolio of over 190 stores. The Wickes range contains over 8,500
products, more than 3,500 of which are available on their website. Wickes’ stores and
website stock a wide selection of own-brand home improvement products designed to
appeal to tradesmen who undertake general repairs, maintenance and improvement project
for households and small business, as well as to serious DIY customers who carry out more
complete and complex DIY projects. These customers are more demanding in terms of,
quality and price. Wickes meet customers’ expectations by offering a focused range of its
high-quality primary brand and competitively priced home improvement products, such as
timber, building materials, tools and bathrooms. They have a number of themed in-store
showrooms highlighting their range of kitchens and bathrooms. Compared to the other
two DIY retail chains, Wickes puts more effort on hard-side DIY products. However,
some changes have been observed. In 2009, Wickes completely pulled out of the fitted
bedroom and conservatory markets. The company had previously been the UK’s largest
conservatory retailers but in a change of taste, conservatories were no longer considered
big sellers, so Wickes dedicated its store space to an expanded kitchen and bathroom range
instead.

In order to successfully handle the challenge arising from the competitive market place,
Wickes had radically reengineered its total supply chain. Three distribution centres were
created and the company’s supply base has been extensively consolidated. Only a very
small number of suppliers (an average of four), are retained for each category. Timber
product is an important product category for Wickes; more than one-third of Wickes
products contain some timber or timber fibre and many of these products are FSC-
certified. SCATS is the only supplier of consumer adapted decking products. The
relationship with suppliers was changed to vender owned and managed within the
distribution centres, which enables suppliers to take responsibility for the supply chain.

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Wickes has rolled out forecasting software to suppliers in order to help reduce stock levels
and the number of deliveries, in order to achieve savings.

Summary of DIY Retailer Growth

Growth is a common trend for the DIY retailers, which have delivered growth by adding
new stores to the portfolio, new product lines and adding services items to their customer
offerings. Growth in size can be exemplified by an increasing number of stores or selling
space. Expansion in scope mainly refers to adding new product lines and service items to
customer offering. Table 5.2 summarises some examples of the retailer growth.

Table 5.2 Growth of DIY Retailer

Size Scope
• Number of stores: 287(2005) to 345 • Added product range of
(2009)(purchased 27 stores from Focus in new-energy-efficient
2007) products
• Store selling space at year-end: • National roll-out of the
15,398,000 sq. ft. (2008) to 15,947,000 installation services for
sq. ft. (2009) kitchen and bathroom
Homebase
• Strengthened
transactional sales via
internet. Added 11,000
browseable product lines
• Trialled “Check &
Reserve” in 25 stores
• 1988-1998: Expanding from its base of 12 • Launched the “Payless”
stores and 72 stores (organic growth) brand of products
• 1998: Acquired 139 Do It All (Holdings) • Rolled-out the kitchen
stores design service
• 2000: Acquired 131 Wickes stores • Expanded the range of
Acquired 98 Great Mills stores products are available
Focus
• 2002: Merged with Wickes online
• 2005: Sold Wickes to Travis Perkins
• 2007: Sold 13 Tactical stores and 39
strategic stores to a number of retailers
• 2008-2010: Refitted six existing stores to
the new format
• 2009: Launched two new stores and total • Refreshed showrooms
retail selling space expanded by 0.4 which dedicated to
percent kitchen and bathrooms
Wickes
• Expanded bathroom offer
• Added new design
consultant services

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 Data Presentation

Summary of Offerings to DIY Retailers

Table 5.3 displays a summary of products and services provided by SCSTS to customers in
the DIY sector. It is noteworthy that the timber products displayed here are very general.
In fact, there could be many products that varied in wood species or dimensions belong to
the same product type. The purpose is just to show the product types rather than provide
a full list of products supplied.

Table 5.3 Offerings to DIY Retailers

Homebase Focus Wickes
Sawn, architectural Sawn, architectural Decking boards and
mouldings, claddings, mouldings, doors, decking components
linings, flooring, claddings, linings, (FSC Certified)
Timber products
panels, sheets, flooring, panels,
worktops etc. (FSC sheets, worktops etc.
Certified) (FSC Certified)
Weekly shipments to
stores or multiple
Deliver to Focus’s Deliver to Wickes’s
Delivery deliveries per week
distribution centres distribution centres
for high order volume
stores.
• Half-day basic Half-day basic house
Half-day basic house
Training house keeping keeping
keeping
• Timber champion
• Private labelled • Private labelled Two-hour in store
and wrapped and wrapped service per month
• Two-hour in store • Two-hour in store completed by third
Merchandising party
service per month service per month
completed by third completed by third
party party
• How-to leaflets
• Promotion
Marketing campaign :wood-
How-to leaflets N/A
support for-good
• “Why choose
wood?” guide
Account Account managers Account managers Account managers
management take responsibility take responsibility take responsibility
E-business EDI in order making EDI in order making EDI in order making
application and tracking and tracking and tracking

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 Data Presentation

5.4 Builders’ Merchants

Three BM brands, which are Travis Perkins, Buildbase and Selco, have been studied.
Table 5.4 summarises the company size and primary customer types for each of these
companies.

Table 5.4 Summary of Builders’ Merchants Studied

Number of Customer
DIY Retailers Turnover
Stores Demographics
£3.18 billion Trade/Home owners/
Travis Perkins 611
(Group Revenue) Home improvers
Trade/Home owners/
Buildbase 150+ £400 million+
Home improvers
Selco 28 £100 million Trade only
Source: Annual company reports and accounts

Travis Perkins
Travis Perkins (TP) is one of the UK's leading builders’ merchants, with more than 600
branches nationwide. The company supplies more than 100,000 products to specialist and
generalist tradesmen ranging from sole traders to national house-builders throughout Great
Britain. The key requirements of TP’s customers are product range, availability,
competitive pricing and customer Service. The company’s product lines include kitchens,
bathrooms, hand and power tools, landscaping materials, general building materials,
painting and decorating materials, timber and joists. . In addition to products, TP offers
various services, ranging from estimating services and timber services to tool and
equipment hire, for self-builders.

TP has strengthened its role as a timber supply specialist by keeping its own production
units which focus on fabrication and supply roof systems, internal door-set systems,
flooring, joinery and MDF mouldings. Services relating to timber products include
treatment, sawing, grading and direct delivery to site. Timber is a very important product
category for TP. According to the store manager, timber products contribute an average
of 20 percent of a branch’s turnover, although this figure could vary form branch to
branch. Instead of buying machined products from external suppliers, Travis Perkins runs
three sawmills because they believe this is the most profitable option. TP sources timber
materials from suppliers worldwide but mainly from Nordic countries and Russia. The
buying manager in charge of the timber sector says that TP values the security of supply
the most, since TP is such a big group and has a high demand level. He also believes that
in the future, TP will buy finished products from competent suppliers, while TP itself, will
just deliver the products from their distribution centres.

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 Data Presentation

Grafton Group
Grafton is the UK’s fourth largest merchanting business within the plumbers’ merchant
and builders’ merchant sectors, as well as the growing DIY market. The group is divided
into three divisions: merchanting, retailing and manufacturing. The merchanting division
trades from 303 branches and accounts for 85 percent of the group’s turnover. The huge
buying potential ensures their ability to offer their customers competitive pricing. The
company has more than 500 branches under brands such as Chadwickd, Buildbase, Heiton
Buckley, Jackson, Selco, Plumbase, Euromix, Woodies and Altantic Home Care. In 2009,
there was an increased focus on reducing the supplier base and developing closer alliances
with key suppliers.

As a competitive buyer, Grafton Group puts emphasises of supplier selection on the

following aspects:
• To offer a complete range of quality material for the construction industry and DIY
retail stores
• To be able to compete with the competition on all aspects of service and product
range
• To be geographically located in Grafton Group’s markets
• To form strong supplier relationships

For the timber products, Grafton Group demands that its suppliers to meet five criteria:
• Able to supply quality FSC certified timber products
• Able to supply a complete range of merchant and DIY timber mouldings.
• Able to provide a just-in-time service
• Able to provide staff timber training
• Able to provide marketing support and innovation ideas

Currently, SCATS has won business from three brands within the Grafton Group:
Buildbase, Selco and Chadwick Building Centre. In January 2010, SCA had just won
another three-year contract, starting in 2010 with the Grafton Group. Jacksons is a
potential customer for SCATS.

Buildbase
Buildbase is one of the UK's fastest growing builders’ merchants, with more than 150
branches. The company’s turnover reached £400 million in 2009 thanks to national wide
operations. All of Buildbase’s branches are long-established companies that have been
serving local trades people for many years, with knowledge and experience to match.
They believe strongly in understanding the needs of trade professional and their business
is developed specifically to meet those demands – large amounts of stocks, top quality
products, competitive pricing, reliable delivery, specialist staff and exceptional customer
service. The target customers are renovation- maintenance-improvement (RMI) project
contractors, often referred to as ‘white van man’, as well as small building contractors.
Buildbase is committed to sourcing timber and timber products from legal and well-

64
 Data Presentation

managed forests. Buildbase believes that their customers demand a wide range of FSC-
labelled high-quality timber, and they value maintaining long-term relationships with
suppliers in order to remain both competitive and informed.

For many years, SCATS has been one of the biggest suppliers of solid wood products to
Buildbase. Buildbase is also valued as a priority customer by SCATS. The collaborative
relationship began when Buildbase approached Wheshpool-based Severn Timber Products
(STP) to supply planed solid wood products. As SCATS and STP became closer, the
collaborative relationship between SCA and Buildbase also began to develop. Today,
approximately 90 percent of all finished wood sold in Buildbase branches comes from
SCATS. Total purchase volume reached 16,000 m3 and a total turnover of £5.6 million
was achieved in 2009.

Selco
Selco is a fast-growing, competitive and trade-only builders' merchant with branches
spanning four regions in England and Wales. Selco has a strong and unique market
position, as its target customers are RMI project contractors. Selco is also a priority
customer for SCATS, which supplies Selco with doors, skirtings, claddings and mouldings,
etc. In 2009, Selco contributed a total £3.5 million turnover with SCATS and the total
volume was 10,000m3. Selco dose not have its own distribution centre, so all deliveries
from SCATS have been made to branches.

Summary of BM Growth
Similar to the DIY retailer studied, BMs are also able to show growth in terms of size and
scope, as Table 5.5 shows.

Table 5.5 Growth of DIY Retailer Growth

Size Scope
• 2008: Opened its 600th store • Increased the range of
• 2009:Expansion was limited to the renewable energy
opening of six new sites to support local products
Travis authority stores • Built tool hire service
Perkins around the needs of trade
• Established “in-branch”
local authority service
point
• Added the product range
Buildbase N/A
of exhibition supplies
• During the year of 2009, the store • Constantly introducing
Selco network increased to 28 with the opening new products to the
of three new stores. product range

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 Data Presentation

Summary of Offerings to BMs

Table 5.6 organises the current offerings including products and services to BMs. Not all
of the items supplied are displayed in this table; however, the general product range is
illustrated.

Table 5.6 Offerings to BMs

Travis Perkins Buildbase Selco
Raw materials Boards, door tops, Boards, door tops,
(FSC-certified) skirtings, claddings, skirtings, claddings,
mouldings, door mouldings, door
casing sets, door casing sets, door
Timber products lining sets, specially lining sets, specially
machined items, machined items,
edge glued panels, edge glued panels,
chip board panels chip board panels
(FSC-certified) (FSC-certified)
Deliver to Travis Weekly deliver to Weekly deliver to
Delivery
Perkins’s warehouses stores stores
Industrial training Industrial training
run together with run together with
Training N/A British British
Woodworking Woodworking
Federation (BWF) Federation (BWF)
Not necessary in Not necessary in
most cases but a few most cases but a very
products are few products are
Merchandising N/A
privately labelled privately labelled
and wrapped ( e.g., and wrapped (e.g.,
door lining set) door lining set)
Pocket product Product profile
Marketing support N/A
guide posters
Account managers Account managers Account managers
Account
take the take the take the
management
responsibility responsibility responsibility
E-business EDI in order EDI in order EDI in order
application making and tracking making and tracking making and tracking

66
 Analysis and Findings

6. ANALYSIS AND FINDINGS

This chapter discusses and summarises the research findings from the case study and the appended
papers. The chapter also presents a holistic analysis of the thesis’s overall purpose and research
questions.

6.1 Developments of Resellers

6.1.1 Growth of Resellers

This study has found that resellers’ developments can be described in several ways. Firstly,
resellers have been growing. Peng and Heath (1996) defined that firm growth as primarily
involves “expansion of organizational size measured by assets and employees; increase in
volume of sales, profit level, or activities; as well as generation of new economic functions
or more lines of products and services” (p.495). Measurements such as assets, employees,
volume of sales etc. are relevant when examining reseller growth. However, considering
the major pattern for retail growth - developing new products or seeking new markets,
and acquiring business or assets - size and scope was chosen to describe reseller growth in
this study. Size refers to the number of stores or selling space, while scope involves adding
new products or services to the offering range.

In the case study, the resellers studied have been able to deliver their growth through both
organic and acquisition growth. Homebase, added 14 stores in 2009, taking its portfolio to
345 stores, up from 287 in 2005. Besides the growing number of stores, Homebase has
been adding product lines (e.g., added new-energy-efficient product lines to its product
range) and services (e.g., kitchen and bathroom installation) into their offerings. The case
of Focus shows some complexity. During the 1980s and 1990s, Focus managed to grow
by adding new stores though organic expansion. Between 2000 and 2005, however, a few
acquisitions and sales occurred within the retail chain, causing the size of the chain to
fluctuate. After 2007, the current Focus chain took shape and the development strategy
has focused on refitting existing stores. In 2008, Focus launched the “Payless” brand
products, which represent value for money and are fit for purpose. In addition, they have
rolled out the kitchen design service and expanded the range of products are available
online. Wickes experienced moderate growth in 2009; only two stores were added and
total selling space expanded by 0.4 percent. The expansion in scope found expression in
the form of refreshing showrooms, expanding the bathroom offer and adding a new design
consultant service.

Like DIY retailers, BMs have shown growth in the form of both an increasing number of
stores and expanding product or services items. Travis Perkins has increased the product
range of renewable energy products and built tool hire service around the needs of trade.
Buildbase has been able to add an exhibition product line that fulfils the need for

67
 Analysis and Findings

exhibition contraction projects. Selco added three stores in 2009 and has been constantly
introducing new product to its product range, a recent example is solid surface worktops.
Based on the above discussion, some interesting trends have emerged in terms of reseller
growth. Most of the resellers have slowed down the pace with which they have added
new stores due to the difficult economic conditions. Instead, the focus of growth has been
placed on scope by adding new product lines or service items. In particular, installation
and design services for private consumers and tool hire services for professionals have
attracted a lot of attention. In the DIY sector, another common focus has been the
expansion of the products range available online. In accordance with Elg (2003), the total
offer of resellers is becoming more complex, involving a mixture of products, services and
facilities.

6.1.2 Positioning of Resellers

Multi-location strategies are quite common nowadays. Wider geographic coverage is not
only a matter of obtaining an economy of scale, but also attracting customers. In the case
studies, retailers have shown the trends of developing their brand image. This is line with
the observation of Levy and Weitz (2008) that successful retailers are not only merchants
but they are also developing a unique and strong brand image. Retail brand image is
reflected in a retailer’s product assortments, services items, private label lines and pricing.
For instance, Homebase has positioned itself as a home improvement retailer for
homeowners, so its product assortment focuses on the soft DIY products: furniture, paint,
wallpapers and internal decorations. Focus differentiates itself from its competitors by its
positioning as a DIY and gardening retailer. Despite its traditional DIY product lines,
Focus emphasises the garden centres in its stores. In contrast, Wickes has positioned itself
as a brand for serious DIYers and tradesmen, so its product ranges are centred on hard-side
materials and its price level is lower than Homebase. Building a consistent retail brand
image is a fruit of retailers’ market strategy and been secured by the management systems
of centralisation and standardisation. Following Burt’s (2000) argument, these management
systems ensure that a coherent set of values are built up through a retailer’s offer and
delivered consistently. This means that when consumers walk into stores under the same
chain, they can expect to receive the same set of value.

Manufacturer brands are almost non-existing in the timber section, where the reseller
brands are dominated. This study offers two reasons for this. Firstly, branding is
underdeveloped with timber product manufacturers, which usually do not have a large
marketing budget, which means that the manufacturer brand is weak by itself. Secondly,
the reseller’s private brand strategy means there is no space for manufacturer brands.
According to the store managers from Homebase and Focus, customer loyalty is not strong
in the DIY sector because consumers often switch between retail chains for better value
for money. Under these circumstances, DIY retailers want to have their names on timber
product package in order to improve customer loyalty. As reported by Aliawadi et al.
(2008), a private label is likely to build chain loyalty. Plus, the case of Deck-in-a-Box

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 Analysis and Findings

illustrates that an exclusive-sold retailer-branded product could also be attractive for

retailers, since it can be a differentiator (Lymperopoulos et al., 2010).

Last but not least, the expansion of resellers’ scope has blurred the boundaries between
DIY retailers and BMs. The expanding product range has weakened the distinction
between the reseller’s customer groups, which used to separate DIY retailers from BMs.
Some DIY retailers are increasingly offering products and services to professionals, while
some BMs are gradually opening up to the public and offering DIY products. For example,
Wickes from the DIY sector and Travis Perkins from the BM sector are trying to attract
both private and professional customers, even though they have prioritised certain
customer groups. Nevertheless, timber products sold through DIY retailers and BMs
remain very different. In DIY stores, timber products are more adapted for customers
without extensive knowledge of products and skills using products, while timber sold in
BMs stores is more like raw material.

6.1.3 Reseller Supply Management

Buyers from resellers are becoming more and more professional in terms of product
knowledge and customer tastes. This trend has a significant effect on the way of working
with suppliers as it demands more professional attitude and treatment from suppliers. The
buyers at DIY stores usually shift their position between product categories regularly in
order to avoid personal connections with suppliers. This can sometimes lead to a lack of
knowledge when a buyer is transferred to a new category about which they have no prior
knowledge or experience. External experts are sometimes hired to aid buyers. For instance,
Focus hires wood consultants to assistant buyers when making complicated buying
decisions. Compared to DIY retailers, the buyers from BMs are sort of experts in their
product field. The buyers interviewed at BMs have at least three years’ experience of
timber purchasing and they are quite familiar with the habits of the industry and the
preferences of their customers. As the marketing director from the supplier commented,
this trend is a reminder that research into the timber supply chain, from forest to customer,
should be constantly conducted with different parties in order to keep pace with the
industry.

Modern DIY retailers and BMs prefer to use fewer and better suppliers. Choosing the
most appropriate source of supply has long been considered as one of the most important
functions of the purchasing department because a firm’s ability to compete effectively in
the market can be hampered significantly if the firm does not have a competent supplier
network (Ogden and Carter, 2008). The logic of reducing the number of suppliers for a
given product category or service is twofold. Firstly, following Sarkar and Mohapatra’s
idea (2006), a perquisite for developing a strong supplier-retailer buyer is to have a small
number of suppliers. Focus’s timber buyer commented that it is not possible for the
company to offer relationships to many suppliers at the same time due to the resource
limitation. The only feasible way is to condense the supplier base and offer relationships to

69
 Analysis and Findings

the selected active and large suppliers that carry wide product assortments. Secondly,
reducing the number of supplier can release valuable resources that can be more effectively
utilised in other supply management strategies (Ogden and Carter, 2008). The statement
of Homebase’s DIY manager supports Ogden and Carter’s (2008) argument. The manger
noted that the category captains’ active participation in assortment and store development
take some workload off the purchasing and sales managers at Homebase. He believes the
released time and energy can be used in many other managerial activities, such as
evaluating suppliers and improving service level in stores. As a consequence of the supplier
base reduction, qualified suppliers must carry wide assortments and be able to supply a
product category, or at least a large portion of it.

Although the resellers have reduced the number of suppliers registered at their supply base,
this thesis argues that a strategic relationship has not yet been formed between the resellers
studied and their suppliers. According to Lambert et al. (1996), a strategic relationship is a
tailored business relationship “based on mutual trust, openness, shared risk and shared
reward that yields a competitive advantage, resulting in business performance greater than
would achieved by the firms individually” (p. 10). In the case study, buyers from resellers
were not totally open to suppliers. One piece of evidence of this agreement is that resellers
are not fully comfortable with involving the supplier in their purchase decisions. External
experts are preferred to build the knowledge base. Another piece of evidence is that Focus
has been working with category management, although they are not widely open for to
suppliers. Focus drives its category management to retain some information for themselves.
Resellers are willing to work with a small number of suppliers, who offer relationships
with them, but leave opportunities open, which means that the possibilities of switching
to an alternative supplier still exist and, in turn, price competition still exists. One account
manager said that SCATS easily lost one product line with Focus because another supplier
could supply a similar product cheaper. In conclusion, relationships in the case studied
involving joint commitment and long-term cooperation exist between the supplier and
their customers, but sometimes both parties maintain their independence.

6.1.4 Comparison between DIY retailers and BMs

Although DIY retailers and BMs have made some similar developments in their business,
in many ways they remain very different. Regarding competition, the market for DIY
retailing has gone through intensive consolidation. The current market is kept under the
thumb of a few large retail chains but this is not the cases for BM market, which is
scattered, with almost 40 percent of the market share taken by a large number of
independent merchants. With regard to operations, DIY retailing chains are generally
standardised. DIY chains have a unified store image, decoration, store layout and product
presentation. When customers walk into any branches under same brand, they will not be
surprised or confused by the store atmosphere. Information technology (IT) is widely
applied in DIY stores, from point-of-sales data collection, to order and inventory
management. DIY chains seem are also more likely to have distribution centres in order to

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 Analysis and Findings

have fully control of the supply to branches. For suppliers such as the company studied,
the advantage of this type of arrangement is that the supplier gains all the volume from the
chain’s branches. However, retailers possess stronger control of supply to their branches
and branches can only be supplied what the distribution centres carry. Therefore, there is
no way for a supplier to influence a branch’s purchase decision. Some actual demand from
branches might be neglected if their distribution centres cannot supply. However, the
supplier can have a bigger purchase value on each delivery, which improves the efficiency
of warehousing and logistics. DIY retailers have strong demands in private labelling and
wrapping, which BMs do not stress. BMs attach more importance to volume availability,
since they usually keep large timber stocks in-stores.

In contrast, the BM’s operating methods differ from chain to chain and branch to branch.
Some of them have a refined management style, like that of the DIY retailers studied in
this research. TP, Buildbase, and Selco are all quite advanced in terms of store
management, employing methods such as unified store image, a clear and bright shopping
environment, unified assortments and application of IT etc. Centralised and standardised
operations with respect to purchasing, store format, merchandise space and assortment, as
well as the marketing mix, reduce the distinctions of between DIY stores and BM stores
in terms of management systems. BM stores usually have strong connections with local
business and the operation of these stores is highly dependent on store managers’
experience. Just like DIY retailers, centralisation and standardisation enhance the image of
a BM chain and ensure that a set of value can be congruously delivered to customers
nationally. In this case, customers keep coming back to a chain rather than a specific store.

A problem that might result from the mechanism of centralisation and standardisation is
the balance between standardisation and adaptation (e.g., Cox and Mason, 2007).
Providing standardised products and services across all locations is critical to the success of
the retail system. However, some actual customer demands may be neglected due to the
variations in consumer characteristics, special demand drivers and competitor
characteristics. One example to illustrate this conflict can be the appearance soft wood
products, for example mouldings. In the UK, different regions have produced their
version of mouldings. In addition to that, there have been different standards of each
version. The store manager from Focus commented that a standardised product range
could reduce their cost of inventory and warehousing, however, the risk is also obvious-
loss of sales.

Although the BM case units studied have shown some uniformity, one account manager
from SCATS added that this dose not provide a full picture of the BM business, since the
operation of BMs could be very different. In order to provide a different picture of BM
business, the account manager showed a family-owned BM that still works in a very
traditional way. The product range is very limited and most of products are stored in
uncovered yards. The branch does not use computers, so customer orders are hand-
written. The competence of the branch is very much based on the branch owner’s

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 Analysis and Findings

experience and connections to local builders. Table 6.1 presents a comparison between the
two sectors of DIY and BM based on the chains studied.

Table 6.1 Comparison between DIY retailers and BMs

Aspects DIY retailer BM
Market competition Highly consolidated Scattered
Major customer Private Professionals
Focus on home Focus on house
improvement, repair building and
Product range
materials and tools improvement
materials and tools
Suited to home Suited to
improvement construction projects
Product type
projects; small-size
and easy to use
Labelling and
High demand Low demand
Wrapping
Requirements on
Stable stock and Massive stock in
timber supplies Stock
quick replenish project quantities
Industrial training
• Half-day basic run together with
Training house keeping British
• Wood Champion Woodworking
Federation (BWF)
Merchandising Required Not required
Moderate level of
Highly centralised
Operation centralisation and
and standardised
standardisation

6.1.5 Implications of Reseller Developments

DIY retailers deal actively with manufacturers by defining products, setting product
standards, promoting products (Nordås, 2008). DIY retailers also have an influence on the
assortment and distribution structure. In fact, these retailers control more and more value-
adding channel functions, such as product information, product customisation, product
quality assurance, assortment, logistics and after-sales service, which put them in a more
central position in the supply chain. The role of DIY retailers as gatekeepers in the supply
chain is becoming clearer. As Burt and Sparks (2003) remarked, the retailer’s position is
critical in the distribution channel. Because retailers are the final link in the distribution
channel, they control the shelf space and the dominance of a few chains on the market,
which means that manufacturers have few alternatives in terms of routes to market. This
means that these large chains are, in effect, gatekeepers for access to consumers.

72
 Analysis and Findings

Increased scale and information power can be used in two ways to manage distribution
channels. The first way is to reinforce existing trading relationships with a focus on price.
Alternatively, the ownership of information can be used to amend the trade relationship so
that manufacturer and supplier can both use their skills and competencies to create mutual
benefits. Burt (2000) indicated that these two different ways lead to two types of
relationship: the traditional arm-length governance, which is based on intensive price
competition, and strategic relationships, which are based on mutual dependence in
innovation and development. Timber products are characterised as standardised
commodities for which production specifications can be easily transferred between
suppliers. One solution for a timber products supplier is to increase interaction, mutual
interest and proactive retailer involvement in order to raise the barrier of supplier
switching.

6.2 Developments of Manufacturer Distribution

6.2.1 Driving Forces of Vertical Integration of Distribution

In the case study, the vertical integration strategy of distribution is driven by customer
demands, which concurs with Osegowitsch and Madhok (2003), and can be understood
from several perspectives. Firstly, resellers are expanding in their size and scope but the
number of supplier registered at their supply bases is dropping due to the concentration of
supplier management. In such cases, qualified suppliers must carry quite a wide product
assortment. External sourcing is required to complement the product assortments.
Secondly, in order to supply the entire building material market suppliers should be able
to supply both the DIY and BM sectors which are very different in supply management.
Even within the BM sector, BMs are dramatically diversified in terms of the sophistication
of their operation. The mixed customer demands require suppliers to be able to supply
products that are adapted to both builders and ordinary consumers and to make deliveries
in flexible ways. Therefore, a distribution platform is considered necessary in the British
market. Thirdly, resellers expect more services. As retailers become more and more
concentrated on their core business, they increasingly rely on suppliers to provide more
solutions that can be integrated in their business process (Osegowitsch and Madhok, 2003).
This phenomenon is especially notable in the DIY sector. Activities such as product
development, design of promotional materials and merchandising, which used to be
conducted by retailers themselves, are now being passed to suppliers. Large retail and
merchanting chains tend to work directly with manufacturers that have extra organising
product assortments as well as distribution capabilities, rather than with intermediaries.
This makes it necessary to have a downstream position that could have frequent and close
interactions with retailers.

Although customer demand is an important driving force, it is not the only one in the case
studied. The manufacturer’s repositioning strategy regarding business focus and position in
supply chain also motivated its integration strategy. Like many other manufacturers, SCA

73
 Analysis and Findings

Timber used to put great emphasis on meeting production quotas, ensuring quality levels
and pricing their products suitably for distribution (Blois, 2001). However, the production
orientation and low profitability of sawmills were seriously challenged by the current
competition environment. Repositioning the business focus to market-oriented
production and value-adding processes was a response to those challenges. SCA Timber
has shifted to a business focus with a higher level of marketing orientation, in which it is
essential to learn about customers and markets. Understanding customers is especially
important in today’s market environment, which is characterised by intense competition
and uncertainties. One account manager commented that understanding customers is not
only about studying reseller’s purchase needs and requirements; it also includes
understanding customer’s industry, how and why customers run businesses. Working
directly with resellers bears rich opportunities to discover insights into customers’ current
and future tastes, as well as their businesses. It also provides a powerful way to maintain
the most valuable customers, thereby improving customer retention. Consequently, a
downstream position was needed. Besides, knowledge gained could be applied in
developing service offerings, which, in turn could help transform potential opportunities
into strategic partner relationships (Anders and Narus, 1995).

With regard to the positioning in the supply chain, just like the new strategy indicates,
SCA Timber planned to become a supplier to DIY retailers and BMs. This decision made
it necessary to use external sourcing and distribution capabilities in order to complement
the original business. Changing the position in supply chain was not limited to getting
closer to customers: the rationale for integration also included some other operational and
strategic considerations toward the supply chain. Timber industry is characterized as a
process industry, in which efficiency is highly important for competitiveness. Managing
more stages of the supply chain might enhance the total performance of the supply chain.
Strategically speaking, a company’s positioning in the supply chain relates to appropriating
value for itself by participating in a supply chain (Cox, 1997). Ideally, companies should
position themselves to possess those supply chain resources that have a low propensity for
contestation, and around which they can build market entry barriers (Cox, 1999).

In sum, bringing a distribution centre into a manufacturer’s business range is a decision

made based on strategic and efficiency considerations. Strategically, a supplier expects to
obtain greater control over the entire supply chain, which will, in turn, influence the
purchase of reseller chains. Operationally, a company with its own distribution centre can
stimulate suppliers to maximise their production capacity and improve the efficiency of
their warehousing and logistics.

6.2.2 Impacts of Vertical Integration

The impacts of vertical integration identified in this study can be categorised into two
groups: the impacts on the supplier and the impacts on the supplier-customer interface.
These impacts are discussed respectively in the following section.

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 Analysis and Findings

Position in Supply Chain

Before vertical integration, SCA Timber located at the first half of the supply chain and
played the role of a manufacturer that supplied to wood manufactures, wholesalers and
exporters. The business focus was to improve production efficiency and increase
production volume. Value was then added by transforming raw material into finished
products or semi-finished products for downstream members. In contrast, the company
now operates both upstream and downstream. It has become a supplier to resellers of
timber and timber products. The competitive advantages involve process and cost-
orientation as well as complete exchange with customers. Conforming to Nicovich and
Dibrell’s (2007) argument, SCATS can currently create value by advertising, customising,
packaging, positioning and distributing products. When a firm changes its position in the
supply chain, it must develop new capabilities. SCA Timber and SCATS now have a
priority to develop marketing capabilities.

Being a direct supplier dramatically influences the company’s knowledge about customers
and markets. The major problem facing consumer product manufacturers is that they have
no access to end users. This is because consumer products are typically sold in retail
situations, which separates the company from the end market (Pitta and Franzak, 1997).
Retailers possess information on end users based on sales data, some of which is passed on
manufacturers. In many cases, however, retailers keep this knowledge for themselves. The
further up the chain one goes, the less intelligence generation and dissemination there
seems to be on end users, especially in those cases where manufacturers supply products to
the retailer’s private labels. Being a direct supplier leads to a better access to market
intelligence, which could affect the company’s practice. In the case of SCA Timber,
regular reviews of business environment involving competition, industry policy, upstream
supply conditions and customer changes are made to adjust production and marketing
strategies. One of the results of this is that the product lines SCA Timber selling depend
more on real needs than internal politics.

Offerings
In order to create better value for customers, companies must fully integrate resources to
use the core capability of the company to deliver products that fully satisfy the needs at a
competitive price (Kothandaraman and Wilson, 2001). Research findings show that the
centre of timber offerings for DIY and BM customer is a package that includes three key
aspects: quality, price and delivery. Since timber products are natural products, the quality
of raw material is very important for buyers. If the quality is acceptable to the resellers,
then suppliers need to make the other two factors are acceptable. Price is a particularly
important issue in timber sales. The timber product price is basically based on raw material,
cost of sawing and cost of machine. Price is a sum of a margin and the cost. Delivery is
equally important as price for customers because it has a notable impact on resellers’
operation cost in terms of inventory, warehousing, and quality of customer service. In
addition to the package, this study discovered that there are some surrounding service
items that can be described on two dimensions: technical and commercial. Technical

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 Analysis and Findings

services consist of new product development, definition of timber product assortment,

optimisation and staff training. Commercial services include marketing, promotion,
merchandising, rebates and bonuses support. These service items contribute to either
increasing resellers’ sales or decreasing their cost. In agreement with Lindgreen and
Wynstra’s (2005), the expanding offering observed in this study indicates that competition
nowadays occurs not only in terms of product but also in the form of packages, service,
advertising, delivery methods and other aspects that customers may value.

SCA Timber’s marketing director explained that the company’s interest in providing
services is based on the differentiation logic. As Brax (2005) emphasised, differentiation is
not simply the addition of services to physical goods; the point is that suppliers must view
services as a means of differentiating their offerings. Although the service items provided
to customers are increasing, they are still perceived as adds-on to the timber products.
According to the marketing director at SCA Timber, sawmilling is a process industry that
relies heavily on raw materials and the outputs - timber products - are classified as
standardised commodities. Based on these reasons, it is not surprising that profits from the
timber industry come from high volume instead of managing services.

Supplier-Reseller Interaction
Interaction between suppliers and resellers is predominately about sales and services. The
sales process is less about selling a product and more about creating relationships
(Storbacka et al., 2009). The evidence is that the SCATS’s sales are moving to account
management, in which it is very hard to separate sales from services. Combining sales and
services extends into the marketing domain, where marketing towards resellers is heavily
relationship-orientated. The marketing of SCATS aims to retain existing customers and
improve customer satisfaction. It places a high priority on growing business with existing
customers into new product categories instead of expanding the customer base. This
observation is in line with Piercy’s (2009) statement that relationship- orientated
marketing can be characterised as the strategic management of customers and a customer
relationship has a higher priority than conventional marketing activities, which is
evidenced by companies transferring resources from marketing to strategic sales and
account management initiatives.

Not only are suppliers moving to a relationship approach to managing customers but the
customer companies studied have also shown an increased interest in concentrating their
purchase with fewer suppliers or distributors, to which they can provide long-term
commitment. As a result, customers are involved in fewer, but increasingly significant,
working partnerships in which better coordination of marketing and technical activities are
critical (Anders and Narus, 1990).

SCATS is now seeking an open relationship with its valuable customers. SCATS’s account
manager explained that the term ‘open relationship’ means that cooperation is not secured
purely by written contracts but by the mutual understanding, trust and even competition.

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 Analysis and Findings

In fact, the relationship between supplier and reseller is a combination of partnership and
competition. SCATS’s marketing director explained that while suppliers and retailers are
locked together in a joint effort to sell products to consumers, they also sometimes
compete for greater profits. Interestingly, the literature has echoed this observation: “the
days of power play between retailers and manufacturers are far from over” (Kuipers 2001,
p. 25). In addition, all relationships with customers are individual and must be maintained
individually. The management attention of strategic relationship is based on alignment
between the organisations managing across marketing, sales, purchase, supply strategy and
external partner partnership. Overall, the relationship with customers can be handled at
the personal, product and company levels. Account managers, the caretaker of customers,
are increasingly acting as relationship managers who manage the ongoing relationships in
order to coordinate delivery and customer service.

6.3 Addressing Customer Demands through Value Analysis

In business-to-business marketing, product and service offerings are often customised
(Flint and Woodruff, 2001). Customisation requires knowledge of key customers or
customer segments. It even requires an intimate knowledge of the different value
requested by different channel actors. Since retailer perceived value is positioned to
influence its commitment, cooperation and satisfaction (Simpson et al., 2001), it is
important for retailers to understand the value of the new product. Understanding the
value of a new offering is a very complex topic, comprised of several factors. The first
factor lies in the concept of value itself. As Lepak et al. (2007) put it, despite the
tremendous efforts have been made by researchers and practitioners to understand what
value is and how it can be achieved, there has been little consensus so far. Another factor
is that retailers are focusing on the entire consumer offering rather than a single product,
which means that they have paid little attention to understand the value created by a
specific product and adding value to it. Besides, retailers and their customers may have
different interests regarding value and the customer have usually not been involved in the
process of value creation, so it is difficult for supplier to understand potential areas of value
creation.

Due to the complexity of value, suppliers often have difficulty with understanding and
communicating the value generated for customers and customer are often not fully aware
of the value received either. As Lindgreen and Wynstra’s (2005) argued, the identification
of value elements enables the suppliers to develop and market their products appropriately.
The findings derived from in-depth interviews show that suppliers can use a value element
analysis when designing, customizing and marketing offerings for customers. Suppliers
could focus on distinctive value elements along the dimensions of product, service,
physical distribution and supplier. For retailers, although these four categories are relevant,
the importance of them varied at different stages of new product development. For
instance, product attribute consumes most efforts when designing a new product, while
physical distribution and service attributes matter most when rolling the product out to

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 Analysis and Findings

markets and supplier attribute are more relevant in the retailer’s pre-purchase decision
phase. Moreover, it is not necessary for one product to stress all the value elements, but
suppliers need to ensure that the combinations of certain value elements solve the
problems of distribution channel actors.

6.4 Summary of Research Findings

At the end of this discussion on the research findings, I would like turn back briefly to the
research framework presented in Chapter 2 (see Figure 2.4 in p.29). There are two
reasons for this. Firstly, the above discussion and research findings have been organised in
the light of individual research questions. Although these researches questions are
somewhat interrelated, a holistic view is needed to understand the research purpose.
Reviewing the research framework makes it possible to connect these dots. Secondly, I
hope that the analysis here can promote the research into a higher level, in which I could
draw general conclusions and suggest theories.

This study has described and analysed the notable trends and developments of two major
actors along the timber distribution channel: reseller and manufacturer. The reseller’s
developments have promoted the formation of reseller demands, such as integrated
solutions regarding logistics, marketing, merchandising and innovation etc, which are
driving factors for manufacturer’s downstream integration. The offering of manufacturer,
the position and functions of manufacturer in distribution channel have also been
changing. Beyond looking at the trends and developments, this study is also interested in
the effects that these changes have on the structure of the retailer supply chain and the
implications for manufacturers. On the whole, this study implies theories along two lines:

• Retailer developments have driven the change in the supply chain structure and opened up a
number of new questions for manufacturers and their positioning in the supply chain.
• Vertical integration has reinforced manufacturer’s role as supplier in supply chain. This
transformation can be understood from two perspectives. Firstly manufacturing has becoming a
process that brings combinations of products and services through internal and external
collaborations. Secondly, manufacturing companies are playing more and more strategic functions in
the supply chain.

6.5 Generalisability of Results

The complexity of this case study can be seen as fairly high. The generalisability of this
study differs between the case level and case unit level. At the case level, many factors
could affect the working of the organisations studied. However, the trends that have
affected the channel actors are not unique or limited to the timber products retail industry.
For instance, retail consolidation and supply base reduction, which has been observed in
other retail sectors in different geographic locations. For example, Dobson et al. (2003)
found out that the consolidation process in food retailing has occurred across all EU

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 Analysis and Findings

member countries to a greater or lesser extent. Wrigley (2002) recorded that a majority of
the national food retail markets in the EU are highly concentrated with five retailers
account for 60 percent to 75 percent market share. Ogden (2006) conducted case studies
across diversity industries, such as transportation, pharmaceutical, education and computer
manufacturing, all of which have displayed the trend of supplier base reduction in varied
levels. On the case unit level, DIY units show a high degree of similarities, such as the
products supplied and the need to service items. On the whole, this qualitative study is
expected to generalise about underlying settings rather than beyond groups.

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 Conclusions and Implications

7. CONCLUSIONS AND IMPLICATIONS

7.1 Conclusions

7.1.1 Retailer supply chain structure:

Retailers are continuously adapting themselves to changing market conditions. In support
of Dobson et al.’s idea (2003), large DIY retailers actively source product range to meet
consumers’ needs and instruct suppliers to tailor products and develop private label
products. Large DIY retailers also dispense with the need for a separate wholesaling
function due to the fact that they integrate separate suppliers into their process by
implementing sophisticated logistics systems based on warehousing and distribution to
their own stores. The implications of this trend are twofold. Firstly, the retailer’s
gatekeeper role has been strengthened. In the retailing business, consumer needs are met
by the systematic management of category of products and/or services (Holmström, 1997).
By implementing the process of meeting consumer needs, large retailers make choices
about the width and depth of product ranges to ensure consistent and competitive value
that match their positioning strategy regarding price level and service level (see Coughlan
et al. 2006). The choices make retailers functioning like filters that keep those product
items that do not fit their purpose off consumers’ sight. Beyond this, due to the high level
of retail concentration, the interfaces with consumers have been aggregate into the control
of a small number of large retail chains. The remaining options through which
manufactures can reach consumers are limited. Therefore, large retail chains play the
critical role of gatekeepers in deciding which product items to stock at their stores (Burt
and Sparks, 2003; Gross, 1967).

Secondly, retailers are more likely to work with large producers and bypass intermediaries
that undertake the wholesaling function. The decision of whether to use middlemen has
long been regarded as a channel design problem in marketing and distribution channel
literature (e.g., Anderson et al., 1997; Rangan, 1987; Rangan and Jaikumar, 1991). The
formation of a manufacturer’s distribution channel is also a consequence of the retailer’s
choice of the type of supplier with which they want to work. The commitment to a
centralised purchase and distribution system has, to a large extent, replaced the wholesaler
by undertaking the functions the wholesaler used to undertake, such as sourcing, logistics
and ensuring availability. Instead, large retailers tend to work directly with large and
sophisticated suppliers that have production, sourcing, distribution, marketing and
innovation capabilities. This can significantly reduce the number of incoming order
deliveries can be significantly reduced and, in turn, improve warehousing and distribution
efficiency. These implications lead to Proposition 1:

Proposition 1: Active initiatives taken in sourcing, developing private product ranges and managing
supply systems based on warehousing and distribution to their own stores have strengthened the role of
retailer as gatekeeper in the supply chain and prompted them to bypass intermediaries and work
directly with large and sophisticated suppliers.

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 Conclusions and Implications

The developments in the retailer supply management system not only change who they
want to work with; they also affect the structure of the retailer supply chain. Following
Cooper et al.’s (1997) argument, the supply chain structure can be examined in two
aspects: length of the supply chain, which is the number of supply chain levels, and the
number of suppliers at a particular level. As mentioned above, the tendency to remove
intermediaries may decrease the number of supply chain actors, thereby shortening the
length of supply chain. At the same time, as retailers move from multiple to single (or a
few) supplier(s) for each product category, the number of suppliers registered at the
supplier-retailer level has been dramatically reduced. The above discussion gives rise to
some further speculative propositions, which are consistent with the data and for this study
and which deserve further investigation:

Proposition 2a: Developments in the retailer supply management system have reshaped the structure
of the retailer supply chain by shortening the length of the supply chain and reducing the number of
suppliers at the supplier-retailer level.

One of the fiercest debates about the retailer supply chain regards who holds the whip.
Based on a study of the European food retailing market, Dobson et al. (2003) concluded
that producer market power has largely given way to retailer buyer power. Their
conclusion indicates that large food retailers are now the main drivers of the supply chain.
The research findings derived from case study of timber products distribution both match
and mis-match the conclusion of Dobson et al. (2003). I agree with their conclusion, to
some extent, because DIY retailers, like food retailers, are active in some areas, such as
using centralised distribution systems to control their supply to stores, and instructing
suppliers to customise private label products and packaging. The actions have altered
suppliers’ behaviour and decision making. For example, supplier must to invest wrapping
and packing facilities in order to meet retailers’ needs of private labelling.

However, once DIY retailers pushing some responsibilities back to suppliers of uglies
(large-volume and low-value products), suppliers can actually gain control of more supply
chain activities, such as delivering orders to distribution centres or stores, as well as the
activities of merchandising and marketing their products in stores. Product innovation and
customer relationship, in particular, are driven mostly by suppliers. Examining the
activities involved in a supply chain (see Cooper et al. 1997; New and Payne, 1995),
reveals many activities that have been driven by suppliers, especially the suppliers of uglies.
These activities include production, warehousing, distribution, merchandising, new
product development and commercialising. In this sense, I argue that in the DIY retailer
supply chain, neither the supplier nor the retailer hold the whip exclusively, but they do
hold one end of it because they are driving the supply chain in different aspects. This leads
to Proposition 2b:

Proposition 2b: The retailer supply chain structure is driven mostly by retailers and supply chain
activities are mostly driven by suppliers.

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 Conclusions and Implications

Developments such as the concentration of the supply base, distribution centres, private
brands and the use of both buying and information power to restructure retailer supply
chain, are linked to the management mechanism of centralisation and standardisation. In
line with Burt (2000), transferring most of the operational decisions that relate to store
format, product assortment, pricing, promotion and service level from the store level to
the regional or even national levels allows retailers to develop a clear, and, more
importantly, consistent image and market position for their customers. Although
centralisation and standardisation make a critical contribution to retailers’ business success,
they can also cause problems. Because of diversity in consumer characteristics, special
demand drivers and competitor characteristics, some actual consumer demands might be
undermined, which can lead to a loss of sales. Thus, adaption or localisation has been
proposed as a substitution strategy for standardisation (e.g., Rigby and Vishwanath, 2007).
A major challenge for retail chains is to strike a balance between central control and local
touch. In the present case study, this challenge has great relevance and significance for BM
chains, since the connections to local businesses are critical to BMs’ business and customer
needs are diversified from one region to another. For suppliers, the diversification of local
needs leads to wide product varieties, which presents problems for suppliers in terms of
receiving accurate demand forecasts for different products, controlling the proliferation of
inventory and service performance (Lee and Tang, 1997). This sub-section concludes by
introducing proposition 3:

Proposition 3: Developments of retailer increasingly involve the management mechanism of

centralisation and standardisation, which enables retailers to develop a clear and consistent image to
their customers and ensure that a set of value is consistently delivered through retail offerings.

7.1.2 Vertical Integration Strategy:

Björheden and Helstad (2005) concluded that there are two battlegrounds, other than mill
productivity, for competitive advantages in the sawmilling industry. These are control and
management of raw material flows and the establishment of close contact with the market
of sawn products. Controlling the distribution business fits the second battleground of
competitive advantage. This study supports Osegowitsch and Madhok’s (2003) idea of
vertical integration (VI), that a supplier’s vertical integration is no longer limited to power
or governance efficiency. Instead, VI of distribution is primarily driven by external factor
of retailers’ demands and internal factors of a manufacturer’s repositioning strategy,
involving repositioning of the business strategy of market orientation degree and
repositioning of position in supply chain. These points can be summarised with
Propositions:

Proposition 4: A supplier’s vertical integration of distribution in today’s business environment is

mostly driven by demands posed by customers and the company’s strategic considerations regarding its
business focus and positioning in the supply chain.

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 Conclusions and Implications

In an increasingly tough competitive climate, manufacturers focus more intently on highly

processed products with higher knowledge content. This means that soft values such as
smart logistics, technical support and after-sales service have been assigned greater
importance. This trend is a response to customer needs of integrated solutions
(Osegowitsch and Madhok’s, 2003), and, at the same time, it is a major consequence of
the manufacturer’s vertical integration strategy. The findings of the present study also
reveal that the provided services should not be bundled with the product; services can
encompass many areas that relate to decrease resellers’ costs or increase resellers’ sales.
Service providers are not restricted to suppliers alone; third parties can also be used.
Working directly with resellers bears rich opportunities for researching customers and
discovering their needs and requirements in many aspects, including goods, services and
knowledge. The knowledge obtained from interacting with customer represents a
powerful means of improving the total offering, which in turn, improves customer
retention. This leads to Proposition 5:

Proposition 5: Improved knowledge of customers and the market and broadened offering from
manufactured goods, along with to service, technology and knowledge, are the important consequences
of a supplier’s vertical integration of distribution.

Positioning of Manufacturer
In the supply chain context, interaction between companies is a key aspect in accessing
and utilising other actors’ recourses and competencies (Cox and Lamming, 1997; Svahn
and Westerlund, 2007). When manufacturers move down in the distribution channel,
their role as suppliers is strengthened. Suppliers act as networking organizations in the
supply chain, undertaking the supply chain functions of organizing product assortments,
product customisation, assuring stock availability, logistics and providing after-sales services.
Thus, a richer understanding of manufacturing and manufacturer is required. In agreement
with Riis et al., (2007), manufacturing cannot be seen simply as a fulfilment activity; it is a
process that brings combinations of products and services through internal and external
collaborations.

Undertaking more functions in a supply chain demands intensive collaboration with other
suppliers in the business network, such as product suppliers, logistics suppliers and service
providers. The intensive collaboration actually exposes the supplier to more interaction.
Consequently, the key managerial capabilities, such as influencing, controlling,
coordinating and integrating (Svahn and Westerund, 2007), need to be strengthened. This
leads to Proposition 6:

Proposition 6: Although a supplier’s vertical integration strategy internalises the interactions between
two successive supply chain actors, it leads the company to more external interactions with other
suppliers of goods and services.

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 Conclusions and Implications

Becoming a supplier to DIY retailers or builders’ merchants through vertical integration

can also leads to several problems, one of which is the loss of competition focus. From a
manufacturer’s perspective, the priority when making sales is what can be produced. As a
supplier, however, they might need to use external manufacturers when fulfilling customer
demands. Furthermore, there is potential conflict between operations and marketing in
practice. Operations favour stable production of narrower product lines to encourage
operational efficiency. Conversely, marketing commonly focuses on satisfying customers
quickly with wide product diversity (Malhotra and Sharma, 2002; Shapiro, 1977). Inter-
firm coordination becomes increasingly necessary. The coordination opportunities
between the two areas are situated on strategic planning integration, strategic or visionary
forecasting, new product /or process development, tactical forecasting, marketing/sales
and operation planning, and operational integration (Malhotra and Sharma, 2002).

Offering of Supplier
Jones et al. (2008) suggested that manufactures must concentrate on multiple factors, such
as product quality and price, in order to be competitive, and that company factors and
product factors are both vital to a company’s performance. The argument that must be
made in this study is that to be successful, suppliers need to think over offering attributes
regarding product, physical distribution, service and supplier. Product attributes capture
elements such as price, advantage, technology sophistication functions, innovativeness, etc.
(Henard and Szymanski, 2001). The product-based attributes are fundamental, but they
are not unique factors that influence customers’ purchase decisions. Following Simpson et
al. (2000), customers’ purchase decisions might be considerably affected by intangible
service- and relationship-based factors (Simpson et al. 2000). The discussion above leads
me to the following proposition:

Proposition 7a: Product based attributes are the most fundamental factor that influence resellers’
purchase decisions, upon which intangible service- and relationship-based factors may have
considerable influences.

A large number of research has engaged in managing the industrial service of capital
products (e.g., Oliva and Kallenberg’s, 2003; Kindström and Kowalkoski, 2009; Mathieu,
2001a; Mathieu, 2001b; Smith, 1998; Penttinen and Palmer, 2007). However, the
literature on offerings for retailers is not sufficient. The present study provides an empirical
inquiry of the transformation from product to offering focusing on the retailing context. It
argues that although service is becoming more in timber offerings, it is still not the primary
source of profit for suppliers, and this situation is unlikely to change in the near future.
Process industries, such as sawmilling, rely intensively on raw materials and timber
products are characterised by a lack of differentiation in physical attributes. The value per
product unit is low, so volume plays a critical role in supplier’s profitability. This leads to
Proposition 7b:

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 Conclusions and Implications

Proposition 7b: Providing services is not the main source of profits for process manufacturing industries
whose outputs are characterised by high-volume and low-value commodities.

Organic growth is both a desire and a challenge for many companies (Hamel and Getz,
2004; Harmanciogl et al., 2007). Stimulating growth through product/service innovation
becomes increasingly important for timber manufacturers competing in such a competitive
market. Moreover, I argue that innovation has increasingly been regarded as an important
element of the supplier offering because it is not unusual for large chains to list innovation
ability as one of the criteria of supplier selection. The increasing importance makes
innovation the fifth dimension of offering, after product, physical distribution, service and
supplier (see Proposition 7c):

Proposition 7c: Innovation has become an important aspect of supplier offering.

Innovation in the timber product industry has certain features that make interesting to
look at. First of all, technology is not a major driver for innovation. Compared to the
high-tech industry, which has been characterised as more complex, information-intensive,
turbulent, and uncertain, because of rapidly changing technologies (Henard and Szymanski,
2001), the timber product manufacturing industry is often descried as a low-tech industry.
Because technology developments in this industry have reached a mature phase in
countries like Sweden, radical technology change is less likely. Secondly, innovation has
not been limited to product; it has been extended to service for large buyers, including
retailing chains and merchanting chains, which is manifested in the high involvement of
supplier in stores.

Thirdly, there is an innovation gap in the supplier-retailer-consumer chain. The consumer

waits for the retailer to come up with innovative products that solve their problems faster
and cheaper. However, retailers generally, undertake little fundamental research of product
developments and tend to push development responsibilities back to suppliers, who have
little contact with consumers, which make it difficult for suppliers to understand
potential development areas. There is clearly, a gap between the supplier’s technological
capabilities and the know-how of consumers. Therefore, competences relating to
technology and relating to consumers (Danneels, 2002) are essential. This summed up in
Proposition 7d:

Proposition 7d: The biggest challenge for commodity supplier innovation is not technological; it
depends on the supplier’s abilities to close the gap between technology and the know-how of end
markets.

Sales of Supplier
The business-to-business exchange literature has demonstrated that the move away from
individual exchanges to a relational approach is extremely popular during the past 20 years
(Hingley, 2005). This study reveals that supplier sales focus on growing with current

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 Conclusions and Implications

customers into new product categories, and they are moving towards the relational
approach. An argument can be made that to build a strong, enduring and flexible
relationship, it is important to select the most valuable customers, who are willing to
engage in relationship at the same time, is important. This leads to the two following
propositions:

Proposition 8a: Sales to retailers focus on growing current customers into new product categories
instead of attaining new retailers.
Proposition 8b: A premise of customer management is the selection of the most valuable customers,
who are willing to engage in the relationship.

As noted by Storbacka et al., (2009), sales in the business-to-business context are

increasingly associated with account management and solution development. The account
management process means that there is no fixed start or end-point in the sale process.
The transition from product selling to offering selling, from one-time sales to long-term
service obligations requires strategies beyond traditional marketing concerns to manage the
supplier-customer relationship, which could lead to substantial economic and learning
benefits, such as the coordination of marketing efforts and blocking of competitors. The
research finding also reveals that supplier has a individual retailer focus, which views
product, selling, pricing, promotion, logistics as an integrated whole to be decided on the
basis of the position of the individual retailer. Over and above this, account management
requires the commitment of substantial resources, especially in the form of managerial time
and effort. This study also shows that the relationship between supplier employees and the
business decision influencer from the buying side are extremely important in the industrial
buying context (e.g., Lindgreen et al., 2009). Proposition 9a and 9b refer to marketing to
large retail chains:

Proposition 9a: Customer management is a continuous business process including offering

development, sales and long-term services obligation, and it requires strategies beyond traditional
marketing concerns.
Proposition 9b: Supplier marketing to retailers is moving towards an individual customer focus, which
views the marketing mix as an integrated whole to be decided in the light of the position of the
individual retailer.

Some studies have concluded that managing customer can lead to superior financial
performance (e.g., Boulding et al., 2005; Lambert, 2004; Payne and Frow, 2005). In
practical terms, however, the evaluation of account management investment may involve
consideration of the trade-off between sale costs and benefits. Account management
requires investment in facilities, personnel, software and so on. Long-term service
obligation will also generate expenses, although these investments and costs will hopefully
lead to increased sales. Some questions remain: can the increase of sales compensate these
expenses? Is there a trade-off between sales cost and benefits? Is there a limit for sales

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 Conclusions and Implications

increase? Although the present study cannot answer all of these questions, they do create
opportunities for future research.

The transformation from manufacturer to supplier has a number of implications in terms

of how manufacturing is positioned, perceived and practiced. Riis et al., (2007) argued that
positioning manufacturing in its supply chain environment has become a question of fit
and focus. Adjusting the degree of market orientation, involving downstream business,
expanding offerings and investing in customer management are examples of
manufacturers’ strategic responses to changes in their environment in order to fit in. As
discussed in an earlier section, however, these strategic moves carry the risk of causing the
manufacture to drift off its main track of operation- production- and obscuring its
competition focus.

I believe there are two different types of logic of positing manufacturing in the supply
chain behind the problem of fit and focus. If a company focuses on a particular sphere of
knowledge, then they need to position themselves in the supply chain based on that
knowledge. I refer to this type of logic as position fit-and knowledge focus because, in this
case, the company uses its knowledge focus to fill a position in the supply chain. If a
company focuses on specific markets that they intend to supply, however, then the
company must position itself based on the needs of supplying these markets. The company
may occupy a number of different positions in the supply chain in order to fulfil the goal
of supplying the chosen markets. I characterise this type of logic as position fit-and-market
focus. The case of SCA Timber is a good example to illustrate the position fit-and-market
focus logic. The company set itself a goal of supplying both the DIY and BM sectors. In
order to fulfil this goal, their research results indicated that they need a distribution
platform and the vertical integration decision was then made in order to acquire a
downstream position in the supply chain. Furthermore, I believe that adopting the later
logic will not limit a company’s focus to a specific position or certain activities in the
supply chain, which will, consequently, encourage the company to gain a richer
understanding of its roles in the supply chain. Proposition 10 can be presented here to
summarise the above discussion:

Proposition 10: There are two types of logic for positioning a company in the supply chain: position
fit-and knowledge focus as well as position fit-and-market focus. These refer to fitting a company’s
knowledge with a position and fitting a company’s market focus with a position (a set of positions),
respectively.

7.1.3 Customer Value Creation

The extant literature has a common view that value is the total worth of benefits received
for the price paid (Simpson et al., 2001). Products and solutions are central to assessment of
a supplier’s value creation for customers (Möller and Törrönen, 2003). In practice,
however, estimating a product or offering value can be very problematic for suppliers.
Value estimation and communication is a complex issue that cannot be determined by a

87
 Conclusions and Implications

single rule. Comparatively speaking, it may be easier for suppliers to evaluate the cost of a
product or offering, but the benefits associated with the product or offering depends on
some soft aspects and perceptions of different actors in distribution channel. Soft features,
like differentiation and relationship, are very hard to be quantified in monetary terms. The
more intangible a service, the more problematic the evaluation of value. Based on the
above, the following proposition is made:

Proposition 11a: Evaluating the benefits associate with an offering is the most ambiguous but crucial
task in value creation. The more intangible the benefit, the more problematic the value evaluation is.

It is important to make downstream channel actors understand that the value created is
equally as important as value creation, since it determines customers’ willingness to
purchase and the prices they would like to pay. The case study in this research implies that
demonstrating and communicating value created do not always adequately demonstrating
the value created. An effective way to help customers understand the value could be to
divide the offering value into smaller elements. This leads to Proposition 11b:

Proposition 11b: The supplier’s ability of value to demonstrate and communicate vale is as important
as its value creation capability.
.
In conclusion, this study make three majorly contributions to distribution channel research.
Firstly, it provides a better description of distribution channels for timber products.
Research findings contributed to the previous understanding of implications of retail
developments for the supply chain and actors within it (Burt, 2000; Burt and Spartks, 2003;
Elg, 2003). Secondly, the conceptual discussion and findings of this study add to the
existing explanations and impacts of vertical integration from a marketing perspective.
This study also provides substantive support for some previous research findings about
driving forces, such as customer demands, learning, differentiation and strategic partnership
with customers (Anderson and Narus, 1995; Etgar, 1978; Osegowitsch and Madhok,
2003). Last but not least, this study contributes to the research on value creation in
business markets (Anders and Narus, 1999; Lindgreen and Wynstra, 2005; Walter et al.,
2001) by focusing on indentifying the value elements emphasised by downstream actors.

88
 Conclusions and Implications

7.2 Implications for Managing Practice

The managerial implications of this study can be expressed through the eight following
propositions:

1. Integrating downstream business could imply high investment, and, therefore, high risks.
Managers must understand the physical resources that are required within a supply chain
to deliver a finished product or service to customers. More importantly, managers must
understand the recourse and competences that are required to perform the functions of
certain position in the supply chain, because being manufacture and distributor requires
different sets of resources and capabilities.
2. Suppliers need a profit focus in order to understand the position of a supplier in the
distribution stage of the supply chain, particularly when sales conflicts with production.
Although vertical integration has internalised the manufacturers’ interactions with
distributors, it actually increases the interactions with other organizations due the needs in
purchasing, logistics and marketing. Thus, vertical integration in the supply chain calls for
an emphasis on the key managerial capabilities, such as influencing, controlling,
coordinating and integrating.

3. Managers should better constantly study consumer preferences and needs. A company
can use knowledge about customers in the areas of product development and customer
retention in order to achieve market success.

4. Business-to-business sales often involve customisation. Marketing to retailers requires

suppliers to treat retailers individually, therefore, products, selling, promotion, and logistics
should be treated as a whole and decided based on each individual retailer’ positioning.
The individual customer focus might challenge managers’ traditional method of customer
segmentation. The approach of a segment-of-one (Rigby et al., 2002) might be an
alternative to traditional customer segmentation, which groups several customers together
based on certain attribute.

5. The success of offerings is about more than just about price. It is a combination of
several factors that are carefully blended and balanced to satisfy a particular consumer need.
Customised products or exclusively sold products should be strengthened in the future.
The rationale lies in co-development and high levels of retailer involvement enhance
interactions between supplier and buyer, which lower the risk of replacement by other
suppliers. Interactions could be between the research and development and the marketing
functions,

6. The transition from products to offering demands that salespeople are knowledgeable
about not just marketing, but also about operations and finance, such as product issues,
quality control, R&D, delivery reliability, profit information, etc. Suppliers should
consider the role of salesperson’s role as that of a cross-functional coordinator rather than
an order taker.

89
 Conclusions and Implications

7. Relationship exists at the company level but has been maintained at the individual level.
Therefore, the role of account managers must to be emphasised. Managers should also
realise that it takes commitment and skills to manage relationships with customer.
Therefore, suppliers should have strategies in place for cultivating and developing
employees’ skills and the ability to manage customers. Managing the supplier-customer
interaction requires resources, an effective organisational structure and a well implemented
communication channel. Moreover, managers should notice that relationship may take a
longer time to produce results.

8. In reference to Lindgreen and Wynstra, (2005) a key issue in the development of new
products is how to identify, determine, increase and measure the (potential) value of the
new product for a customer in order to maximise the chances of adoption. For managers,
the importance of value creation for customers cannot be overemphasised. The
complexity of value makes it a difficult task for managers. One of many ways to break the
ice is to disassemble total value into four interrelated dimensions: product, service, physical
distribution and supplier. Product and service cannot be split when satisfying customers
needs. Managers must also understand that value creation is definitely not another fuzzy
word that induces customers to pay more but a mean to satisfy customer needs, and so
forth. Linking value to customer needs is the secret recipe for successful value creation.

7.3 Limitation and Future Work

This study has some limitations that have impacted my interpretation of the findings and
that create opportunities for future research. First of all, the research is based on interviews
with respondents from eight companies, representing multiple positions in the distribution
channel, including manufacture, distributor and retailer. The single-case approach is one
limitation of this study. Although information was obtained from a sample of the case
units and not merely from one single company, the approach still reflects the same
distribution channel. This creates an opportunity to validate the research with vertical
integrated distribution channels of non-timber materials in the same market (grid 2 in
Figure 6.1). Alternatively, comparative studies of a similar distribution channel applied in a
different geographic location (grid 4 in Figure 6.1) could be conducted in the future.
Secondly, the reseller case units were selected from the supplier’s customer base, an choice
considering the research purpose of examining the supplier-customer interactions.
However, it is might not be comprehensive when describing the resellers’ development.
Studying more case, could help identify additional characteristics that are important to
consider upon the resellers’ developments.

90
 Conclusions and Implications

Figure 7.1 Research Options

There are several promising areas for future research. Firstly, this study has investigated a
manufacturer that integrated a downstream distributor. In practice, some manufacturers
restructure their distribution strategy by skipping intermediaries and setting up their own
stores to distribute products. This type of strategy has some similarities with the vertical
integration studied in this research. However, there must be some new merged features
that are worthy of future studies.

There is a high demand for the merchandising from DIY retailers. However, there are
different solutions to this problem; some allow suppliers into their stores and put them in
charge, while others prefer to hire another organisation to do the job. It would be
interesting, therefore, to examine and compare different merchandising strategies across
DIY chains and product categories.

As noted elsewhere, suppliers and retailers have both attached importance to improving
product assortments through product innovation. However, retailers have less interest in
becoming specialists in any product category, so there is little product development effort
from retailers. Suppliers’ know-how about market development is often fragmented and it
becomes difficult for suppliers to understand potential development areas. One possible
direction for future studies would be to extend the study scope to the interface of reseller
and their consumers. These studies could focus on how distributors organising offerings
for their customers; how they are deal with their suppliers to deliver offering to customers,
how they take in new products and sell them and what kind of support they demand from
suppliers. This could lead to discussion of insights into potential areas for future product or
service innovation for suppliers.

DIY retailers and BMs are two distinctive business types, as touched on in this study.
However, due to the limitation of the sample of reseller cases, the configurations of
builders’ merchants studied are more or less similar, which leaves room for future study. A
comparison study could be conducted in order to investigate these two sectors in depth

91
 Conclusions and Implications

and compare them. Implications of the differences and similarities for suppliers could then
be discussed.

Previous sections have raised question of the trade-off between sales cost and benefits.
However, this study is unable to answer these questions, so they could be the subject of
future studies.

Lastly, understanding what customers seek in terms of value elements is still not fully
understood. This study has attempted to understand the differing value that channel actor
place on a range of product, physical distribution, service and supplier value elements.
This study has focuses on value elements for retailer but customer of retailer has not been
stressed. In addition, this study has not dealt with closing the gap between value and
willingness to pay. These questions deserve further study in order to reach greater
understandings.

92
 Summary of Papers

8. SUMMARY OF PAPERS

Paper 1:
This paper investigates the retail push, in which leading building material distributors are
placing greater demands on their suppliers. The research purpose is to investigate the
challenges arising from this transformation, thereby obtaining a better understanding of
retailers’ supply requirements and the consequences for suppliers. The study results
indicate that supplier’s proactive strategic moves, such as becoming a “one-stop shop”
supplier for DIY retailers comprising complete product portfolios and wide range of
service items by taking advantage of the distribution channel, are actually changing the
structure of supply chain.

Paper 2:
This paper studies the cause and consequences of vertical integration of distribution with a
case study of timber product manufacturer. This paper adopts a marketing perspective, by
which adds to the explanations and impacts of vertical integration in the extant literature.
The research findings include that customer demands, manufacturer’s repositioning
strategy regarding business focus and its positioning in the supply chain are the most
important factors driving the manufacturer’s vertical integration of distribution. First and
foremost, vertical integration of distribution transfers the manufacturer into a direct
supplier to large timber products retailers/trades. It also offers the supplier a great potential
to enhance offerings and establish strategic relationship with customers.

Paper 3:
Different actors in distribution channel have different purposes and the perceptions of
value may vary, with potentially conflicting agendas. For manufacturers, customer needs
are the most important aspect to address when developing new products. This paper takes
a case study approach to examine various tangible and intangible value elements requested
by channel actor within the context of a new product launch. A framework of customer
value analysis is suggested. The findings derived from in-depth interviews demonstrate that
suppliers could focus on distinctive value elements along the dimensions of product,
service, physical distribution and supplier. For retailers, although these four attributes are
relevant, their relevance and importance are varied at different stages of the new product
process. This study also argues that communicating value of a new product with customer
has equal importance as value creation and it should be a joint effort between a supplier
and its customer.

93
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