Fitting purchasing to the strategic firm: frameworks, processes, and values

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Date: Winter 1990
Publisher: John Wiley & Sons, Inc.
Document Type: Article
Length: 2,828 words

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Fitting Purchasing to the Strategic Firm: Frameworks, Processes, and Values

In today's economy, successful firms must be strategically poised to take advantage of constantly changing market opportunities and to defend against competition. Much has been written about the transistions organizations undergo to become strategically oriented and about strategic marketing, distribution, production, and upper-management processes. However, few of these sources examine purchasing as an ingredient in what are considered necessary survival and success approaches for contemporary firms.(1)

The world marketplace is dynamic, to say the least, considering continual changes in product availability, prices, and competition. The "strategic firm" concerned with producting quality products in a timely manner must include purchasing and supply considerations in its planning, development, and operation. A review of firms across the country today reveals a myraid of purchasing organization structures that exhibit varying degrees of effectiveness, corporate impact, and human talent. In many firms these purchasing groups have evolved slowly, in response to a variety of immediate pressures, with little planned design.

From this point forward, this evolutionary process must be planned carefully and must be structured so that purchasing's roles, human skills, and resulting organization are congruent with the evolution of the firm itself. Failure to do so can make purchasing extremely vulnerable during periods of downsizing and reorganization, since only those functions that are perceived to contribute significantly to the welfare of the firm stand to remain intact. By staying in step with the strategic development of the organization, purchasing can capitalize on its uniquely important position at the inbound side of the firm. It can serve as a source of information about suppliers, the status of supplier industries, economic conditions, market conditions, and developing international trends - and thus provide critical inputs to the firm's strategic planning processes and its operations.

This article discusses the phases of corporate strategic development - then it explores the characteristics of purchasing departments that are consistent with each phase. The theoretical foundation for corporate evolution is found in the work of Gluck, Kaufman, and Walleck entitled "Strategic Management for Competitive Advantage."(2) This Harvard Business Review article continues to be regarded as the classical analysis of the developmental phases through which an organization progress as it evolves toward a formal system of strategic management. The purchasing input comes from interviews conducted by the authors with selected personnel in over 140 corporate purchasing departments in the United States and Canada during 1987 and 1988. The interviews included firms in a wide range of industries and geographic locations, as well as a variety of organization structures and department sizes.



Strategic management is defined as "a system of corporate values, planning capabilities, or organizational responsibilities that couple strategic thinking with operational decision making at all levels and across all functional lines of authority in a corporation."(3) It is this type of system that enables a large corporation to capitalize on its innovations and outspace its competition.

By studying 150 companies, authors Gluck, Kaufman, and Walleck determined that most companies follow a standard path in their evolution to strategic management. This path "can be segmented into four sequential phases: (1) basic financial planning, (2) forecast-based planning, (3) externally oriented planning, and (4) strategic management. Each phase is marked by clear advances over its predecessor in terms of explicit formulation of issues and alternatives, quality of preparatory staff work, readiness of top management to participate in and guide the strategic decision process, and effectiveness of implementation."(4)

In phase I, basic financial planning, the focus is on operational control with formal planning centering around the budgeting process. Revenues and costs are forecasted for the year, and performance is evaluated on the basis of actual versus budget. The time horizon is short, the focus is within the function, and the overriding objective is to meet budget goals.

The reactive perspective of phase I forces diverse companies to progress to phase II, forecast-based planning. In an effort to plan for future growth, phase II is characterized by the use of forecasting models that extrapolate past experience into the future.

Planning is conducted largely through a "gap analysis" procedure. Expected earnings are forecasted, desired earnings are plotted, and programs are developed to rationalize the environmental analysis, multi-year forecasting, and the allocation of limited resources across the various segments of the business. While generating improvements over phase I, the static focus of the process causes problems. Forecasts are produced once a year by extrapolating historical performance, often not incorporating known future environmental impacts on the business; and once the forecast driven business plan is developed, it cannot be altered until the next planning period.

Phase III, externally oriented planning, arises when companies realize that this lack of forward perspective causes missed opportunities. The planning procedure becomes more dynamic, constantly scanning the environment and responding to the marketplace. To facilitate this strategic focus, companies reorganize into strategic business units (SBUs) and each SBU develops its own product strategies consistent with the corporate strategy. By focusing on a limited number of product lines, SBU management can effectively monitor the business, develop and analyze strategic alternatives, and maintain a proactive posture.

Unfortunately, while the SBU structure does foster improved product planning, it does not facilitate corporate-wide opportunities for capitalizing on synergies in areas such as R&D and purchasing. Additionally, by requiring SBU managers to present strategic alternatives to corporate management, lower management levels typically determine which strategic options will be developed for senior management review each year. This filtering at lower levels can greatly impact the corporation in terms of long-term positioning and financial status.

Concern over this lost information, and the time delay for strategic alternatives to climb the corporate ladder, pushes corporations into phase IV, strategic management. This is an effort to join the strategic planning process with operational decision making. Three factors impact a company's ability to accomplish this merger: (1) the planning framework, (2) the planning process, and (3) the corporate value system.

Within the planning framework, strategic planning must be conducted on multiple levels. The process begins with product/market planning to set sales levels, price, and so on. This step is followed with business unit planning to determine market position and cost structures; shared resource planning to allocate resources across business units in the best interest of the corporation; shared concern planning to focus on the needs of groups of business units or customers; and, corporate-level planning to set organization directions and appropriately structure the financial and human resources of the company.

The objective of the planning process is to foster creativity in an ongoing manner at each of these levels. Approaches vary by company - and range from setting annual themes for strategy emphasis to negotiating with senior management for resources.

In order to succeed in phase IV, an organization must possess a culture supportive of the strategy planning framework and process. The company must value teamwork, foster an entrepreneurial spirit at all levels, foster open communication across levels, and generate a belief that through a successful process of strategic management the firm is capable of directing its own future rather than falling victim to environmental factors.


The research conducted by the authors examined the characteristics and operations of 142 purchasing organizations in an effort to determine whether the purchasing function varies correspondingly with the stage of development of the firm. Even though no categorization process is ever precise when dealing with dynamic organizations, the research revealed some fairly consistent patterns. The purchasing activities, management orientation, and the perception of purchasing's role correlated rather closely with the phase of development and sophistication of the firm as it evolved from a basic financial planning orientation to one of strategic management. This evolutionary process is summarized in Table 1.

In the phase I (basic financial planning) organization, the purchasing department is viewed as providing a buying service within the firm. Its purpose is to find ways to buy an item at a lower price than previously, with the overall objective of minimizing costs against budgetary norms. The concept of cost in this phase tends to be restricted to out-of-pocket costs and does not include the implicit costs of carrying inventory, quality problems, goods-in-transit, and so forth.

The perspective of the department is generally reactive - processing requisitions as they are received from users, conducting bidding activities, and writing purchase orders or contracts as necessary. The goods bought by this department generally are limited to such things as office furniture, supplies, and MRO items.

The systems established for the phase I purchasing department all foster this reactive, cost minimization behavior. Designed as a cost center, the department and personnel may be rewarded for pure cost minimization. At times, it may be provided a sum of money that is to be liquidated by performing services for other departments, followed by later reimbursement for these activities by the user. No matter what cost center approach is taken, purchasing personnel are evaluated in terms of how efficiently they respond to acquisition demands placed on them by users and how well they perform the clerical tasks of processing orders. Therefore, the primary concerns of the department relate to conformance of the function to the tasks established and demanded by others. The problems are basically process oriented - how to obtain an item faster, process an order in an expedited manner, or solve an immediate user problem.

In the phase II (forecast-based planning) department, there is a tendency to use the term "purchasing" as opposed to "buying," and strong emphasis is placed on forecasting and price/cost variance responsibilities. In addition to cost minimization, the mindset in this case broadens to include more positive cost reduction and cost avoidance activities. The philosophy of purchasing for quality also begins to emerge. The focus of the department still tends to be somewhat reactive, but this is tempered with some proactiveness in the development of purchasing plans that are consistent with the corporate plan.

In an attempt to become more proactive, it is clear that most departments in this stage work hard to manage the buying function and make the process more efficient. Typically, these departments are responsible for buying substantial quantities of major raw materials in addition to the more routine production and supply items.

This move toward a proactive, forward looking perspective requires personnel to possess some skills in managing processes and in forecasting. The management of people also begins to become a factor as the perspective of the function becomes more complex.

Despite these positive changes, some defensive issues still dominate in phase II. These often include concern about the scope of the purchasing function, vis-a-vis another department performing certain purchasing-related activities; concern over backdoor buying by others in the firm; and concern about the issue of centralized purchasing or the size of the department, both of which serve as traditional measures of department power. Unfortunately, such concerns tend to hinder progression to subsequent phases because they often lead to the measurement of development in terms of headcount, budget size, procedures, and so on, rather than in terms of purchasing innovation.

In phase III (externally oriented planning) settings, the function is broader and often includes responsibilities for inventories, transportation, and outsourcing. The purpose of the function is to support the lines of business and make positive contributions through various types of value analyses. positive contributions through various types of value analyses. Departmental plans tend to be integrated with those of the rest of the firm, and the buying cycle is designed to fit the product cycle of the line of business. The ability to do this successfully is facilitated by the fact that purchasing in this phase often has a full range of commodity responsibilities, and can even extend to managing outsourcing relationships.

The systems in phase III are structured to allow purchasing to pursue profit-seeking ventures through the sale of company materials, scrap and surplus items, and through hedging. The focus of the department is on supply chain management and on positioning itself for maximum contribution to the line of business. This requires the development of a strong planning perspective and the employment of strong managerial skills - interpersonal, analytical, and integrative (with respect to other departments).

Phase IV (strategic management) incorporates the broad concept of supply management. Anything that involves inbound material or service needs of the firm is included within the scope of the department's responsibilities. The vision is extremely broad - and purchasing functions as an equal member of an entrepreneurial team responsible for product development and line of business results. The stance is completely proactive, providing strong input to the creation of corporate values and plans.

In some phase IV firms, little or no actual purchasing is performed by people in the function. Rather, purchasing personnel are the focal point of supply relationships between various engineering and manufacturing people in their firm and individuals in different functions within supplier firms.

They are the coordinators of the commercial relationships. As such, they are extremely knowledgeable about the supply market. Typically, they are in a position to recommend either the acquisition of a source firm or changes in products or materials in line with market opportunities and constraints. These are prerogatives often reserved for marketing or product management, but they also exist in some phase IV purchasing groups.

As a team member in management activities, a phase IV purchasing operation typically is no longer concerned with department size or reporting line. Evaluation systems usually are structured to foster true supply management and to appraise managerial performance. In fact, decisions often are not viewed in a purchasing context, but rather in the context of their impact on the operations of the total firm.


The structure of the organization in which purchasing resides can influence the level of the department's development. Multi-tiered purchasing organizations often contain mixes of the four phases. That is, a field buying site that reports to a plant manager having phase I characteristics might exist in the same firm that has a strong central purchasing group that performs high level planning, is involved in outsourcing, and is fully integrated into product planning and performance.

In a decentralized, strategic business unit organization, the firm as a whole may be operating in a phase III mode. However, if a strong financial orientation exists within the division, the purchasing activity often functions at a phase I or phase II level. Thus, purchasing is out of sync with the rest of the organization. This was found to be fairly common in the case of large conglomerate organizations.

Some of the more sophisticated purchasing departments today are operating as profit centers, with their performance being measured by a concept of profit rather than cost minimization. Occasionally, these departments even generate profit by selling their purchasing services to other firms. In this case, a problem can arise if the emphasis on profit creates financial barriers to cooperation and integration with line of business managers. In a few cases studied, internal line of business managers were performing back door buying because it was more expensive to utilize their own firm's purchasing department!


To be regarded as an equal contributor to the strategy and success of the organization, purchasing must develop in congruence with the rest of the firm as it evolves along a path to strategic management. Failure to do so not only relegates the purchasing function to a lesser status in the organization, it also deprives the firm of the strategic contributions that can be made by purchasing.

The strategic purchasing operation tailors its activities, its management approaches, its budgetary structures, and its personnel skills to the needs of the total organization. Movement up the continuum of growth phases requires careful examination of current practices in light of what is applicable at each successive stage. The excess baggage of old procedures, methods, and personnel practices can limit this move. Every activity and philosophy must be reviewed in terms of its ability to support the corporate planning framework, the corporate planning process, and the corporate value system.


[1] See, for example, Michael E. Porter, Competitive Advantage - Creating

and Sustaining Superior Performance (New York: The Free

Press, 1985), p. 52; and Thomas Peters and Robert H. Waterman, In

Search of Excellence, (New York: Random House, 1984). [2] Frederick W. Gluck, Stephen P. Kaufman, and Steven Walleck,

"Strategic Management for Competitive Advantage," Harvard Business

Review, No. 80404, (July-August 1908), pp 154-61. [3] Gluck, et al., Ibid. [4] Gluck, et al., Ibid.

Virginia Freeman is Associate Director of Executive Programs at Penn State University and a Ph.D. candidate in business logistics at the same university. This article is based on research she conducted under an NAPM doctoral dissertation research grant.

Joseph L. Cavinato, C.P.M., is Associate Professor of Business Logistics at Penn State University. He has extensive prior industrial experience. He teaches and conducts research in purchasing and materials management.


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Gale Document Number: GALE|A8855353