This could lead to the fear that while the leading firms face greater incentives to
innovate and differentiate in a world of vertical competition with delisting, the result
might be a reduction of dynamic efficiency given the decreasing number of leading
brand manufacturers. In fact, the collapse of second- tier brands implies that only the
leader would survive. 13
However, in this regard, a countervailing factor is at work. The fact is that private
labels themselves tend to become an increasingly important vehicle of product
innovation and quality products. Retailers themselves, in other words, are increasingly
involved in the process of food product innovation and differentiation. Given their
size, resources and capabilities, retailers are increasingly able to play several strategic
functions. They tend to externalize several functions such as production and logistics,
but internalize the functions related to innovation such as product development,
design and quality management, marketing and branding (Dawson, 2001). The reason
is that retailers are in a unique position to obtain precious data on customer
preferences and purchasing patterns at the point of sale and these data give them
access to information that can be utilized to directly initiate aspects of NPD and build
innovation networks as shown by Cox, Mowatt and Prevezer (2003).
Traill and Muelemberg (2002) find that private level suppliers introduce a large
number of new products. Their survey data show that private level suppliers
introduced the largest number of new products even if these new products are not
highly innovative. Particularly in fresh foods, private label products have taken the
lead in addressing the major consumer trends and needs. For example, there is
evidence that ready meals and organic food are now dominated by private label
products and product innovation increasingly comes from private labels (Jones,
McLaughlin and van Ossel, 2002).
In sum, the empirical evidence examined, although often rather anecdotal and/or
mainly based on industry analysts’ findings, tends to support the predictions of the
framework here developed. The framework predicts that upstream suppliers face
greater pressures to innovate and differentiate and that these pressures are
endogenous to the strategic role played by retailers. These predictions are consistent
with the empirical patterns observed. It is imp Their most robust empirical results
13 In trhis sense, our framework provides a simple context to focus on a specific
version of the idea developed in the strategic management literature according to
which it may be a serious strategic error for a firm to become ‘stuck in the middle’.
The concept has been developed by Porter who argued that firms must choose
between either a differentiation or a cost leadership strategy. A firm which remains
'stuck in the middle' between these two strategies will result unable to achieve
competitive advantage (Porter, 1985, 1990). One criticism of the hypothesis was that
firms can often combine low cost with differentiation. Indeed, there is empirical
evidence that successful firms have both very low production costs and a reputation
for high quality
Our framework show that a specific version of this hypothesis might be particularly
appropriate in the context of a competive environment characterized by vertical
competition, in the sense that in this environment firms have to avoid for their brands
a future of secondary brands ‘stuck in the middle’ if they wish to survive as brand
sellers.
22