Case Scenario: Organizing Buying Groups to Cut Costs and Maintain Competitiveness

One challenge that businesses confront is cutting costs in ways that do not erode their ability to remain competitive. Many cost-cutting techniques, such as scaling back on hiring, lowering marketing expenses, or reducing inventory, may save money but may also decrease a business's chances of remaining competitive. Joining or organizing a buying group is one technique that can help to conserve a product-based business's financial assets without adverse side effects. A buying group, or buying co-op, is a partnership that bands small businesses and start-up firms together to attain volume discounts on products and services. An example is Intercounty Appliance, a buying co-op for 105 independent appliance stores in the northeast.

The co-op aggregates the purchasing power of its members to get volume discounts on appliances and other items such as flat-screen TVs. A similar buying group is ADo, a group that services eye care professionals. ADo Buying Group has relationships with a large number of vendors to obtain discount prices on glasses, contacts, and other supplies for its members. An example of a much larger buying co-op is the Independent Pharmacy Cooperative (IPC) which was founded in Madison, Wisconsin, in 1984. It has since grown into the nation's largest purchasing organization for independent pharmacies with over 4,500 pharmacy members. IPC is one of the major reasons that independent pharmacies are able to compete against Walgreens, Walmart, and CVS. There are similar buying co-ops in other industries. The beauty of buying groups is that they generally allow businesses to obtain the exact same product for a lower price, with no undesirable impact (other than the membership fee) on the other parts of their operations. The money that's freed up can go directly to a business's bottom line or be used to invest in customer service or other methods to increase competitiveness. There is no national directory of industry buying groups. The best way to find out whether there are buying groups servicing an industry is to conduct Internet research and ask industry participants.

Questions for Critical Thinking

1. Which of the four financial objectives of a firm, profitability, liquidity, efficiency, or stability, does participating in a buying cooperative contribute to the most?

2. Do some Internet and/or library research to try to discern whether there is a small business buying group or groups that new Venture Fitness Drinks, the fictitious company introduced in Chapter 3 and used as an example throughout this chapter, could benefit from. new Venture Fitness Drinks's products contain all the ingredients used to make smoothies and similar fitness drinks and shakes.

3. Identify three ways, other than buying cooperatives, that small businesses partner with other small businesses to cut costs without sacrificing their competitiveness.

4. In an effort to improve the financial position of their firms, do you think the majority of entrepreneurs spend an equal amount of time focusing on

(1) cost cutting and

(2) increasing revenues?

If not, which of the two do you think they spend more time on and why?