Relationships are very key in business, two economics professors, Rocco Macchiavello of London School of Economics (LSE) and Ameet Morjaria of Northwestern University conducted a research on the value of relationships in international business focusing on Kenya’s flower exporters.
The two scholars made great findings about relationships in the export business. They argued that exporters get good reputation through delivering flowers (roses) on a consistent basis, being reliable and doing it on a timely basis.
When these flower exporters prove their reliability, buyers place big and bigger orders with time. They also note that to build a reputation takes plenty of time. It is not easy and above all good reputation is easy to destroy. Reputation of earlier flower companies can have negative consequences on that of future companies which want to enter into the foreign markets.
The two economic scholars further argued in their research paper that companies producing roses in Kenya cannot access their end consumers directly, they have to pass through companies such as Walmart, Tesco, Carrefour and H&M among others. These are big time buyers of Kenyan flowers. Therefore, relationship with these companies must first be established.
Experience has shown that many western buyers put a lot of value on reliable supply. This reliability is not always guaranteed especially when buying or sourcing from developing countries where suppliers in most cases face unreliable situations. This becomes complex when mixed with poor regulatory or institutional environment.
The researchers argue that there are many advantages associated with purchasing goods from nations which have cheaper costs and lower wages. However, there are uncertainty associated with most of these developing countries and one of the them is getting disruptions in the supply chain.
There are higher costs involved in enforcing and monitoring contracts in cross border trade. Resolving these challenges and reaching agreements becomes even difficult due to existence of cultural differences.
The researchers found that Kenyan flower market is an ideal condition for their experiments. They aimed at putting monetary values on sourcing relationships. Roses are challenging to handle considering that they are highly perishable. This makes it difficult for buyers to prove in a court of law that the batch which they received from exporters was in a bad condition.
However, sellers and buyers are distributed across the world and as a result it is not easy for bad news to spread widely. In addition to that, the cost of seeking legal action across the borders is highly prohibitive. That way buyers are left with no redress when business deals go wrong. This usually happens when there are high peaks such as Mother’s Day and Valentine’s Day.
Usually flower roses are sold on a spot market at the Dutch auctions based in Netherlands. However, during peak periods Kenyan sellers of flowers have an option of selling in Amsterdam. However, this is not the case, still Kenyan sellers are said to supply their foreign buyers at lower prices lack of enforcement contracts notwithstanding. The difference between the value of their sales and the higher sales amount they would generate in Amsterdam is the value of relationships to the seller.
For instance, if a Kenyan flower farmer sells her flowers to a florist in Europe during high peak season for $10,000 instead of an alternative market where she would have sold for $25,000 at another auction, then her relationship with foreign buyers is pegged at an average of $15,000 in total.
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Researchers found out that it takes time to build relationships with foreign buyers. Sellers have to deliver roses in a timely and consistent manner for a long of period of time before finally cementing the relationships. This kind of trust makes the buyer to place larger orders.
The 2007/2008 post-election violence was a litmus test for many flower exporters from Kenya. The violence engulfed most of the country after the disputed presidential elections. This was a bad time for everyone because over 1,000 Kenyans lost their lives and property. Equally it was a bad time for flower farmers and exporters since they would not deliver to the florists abroad who counted on these deliveries. The rose farmers were not able to harvest their flowers because workers would not access the farms due to the ongoing bloodshed.
Even if the flowers were successfully harvested, there was no way of transporting them to the airport in Nairobi for further transmission to European markets. This is what made exporters unable to deliver on their orders.
Under that situation, the flower exporters had one option and that is to alienate their buyers. Guess who was affected negatively? It was surprising that long-term and new clients were alienated and instead exporters supplied flowers to the buyers with whom they had moderate relationship. This was quite astonishing and unexpected.
The sellers reasoned that a relationship with a new buyer is not valuable and that is why new buyers were not prioritized. Exporters were also confident that they had established good relationships and trust with long-term buyers and as a result they were assured that these clients will easily understand the seller’s situation.
That is the brief summary of a research paper titled ‘The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports’ authored by Ameet Morjaria and Rocco Macchiavello. The paper was first published on the American Economic Review in September ’15.