Buyer Dependency and Relational Capital Formation: The Mediating Effects of Socialization Processes and Supplier Integration
Petersen, Kenneth J., Handfield, Robert B., Lawson, Benn, Cousins, Paul D., Journal of Supply Chain Management
Organizations increasingly rely on members of their supply chain to help drive cost reduction, process improvement and quality in order to achieve a competitive advantage. Attaining these benefits, however, requires commitments of physical assets, intellectual property and problem-solving routines, which may leave a firm exposed to a loss of control and potential opportunism. A balance of trust and power exists within a supply chain relationship, enabling each party to commit appropriate resources required to operate an effective and efficient supply chain. Nonetheless, relative levels of power and trust will vary across an organization's supply chain.
Many characteristics of the relationship between buyer and supplier are influenced by buyer-supplier power dynamics (Kale, Singh and Perlmutter 2000; Maloni and Benton 2000; Benton and Maloni 2005; Ireland and Webb 2008). Although power issues have been discussed, the literature provides little indication of the influence of power on these relationship dynamics. In particular, asymmetrical power levels can serve as a powerful mediator for any buyer-supplier relationship (Lambert, Emmelhainz and Gardner 1999). Where one party exploits their power in the supply chain, suboptimal outcomes may occur; while withholding potential power is often likely to provide benefit to both parties (Maloni and Benton 2000). By managing these power dynamics, organizations can strategically adjust social relationships with their suppliers to achieve required outcomes.
Major shifts in power from one party to another are evident in the press. Wal-Mart is the most often cited example. In oil and gas, power has shifted in the last 4 years from the "Big Five" national oil companies, to the Engineering Procurement Construction (EPC) companies, who design and construct pipeline, chemical and refining plants. In this instance, the balance of power has shifted dramatically, as suppliers now have the authority to "call the shots." Similarly, the power shift in healthcare has moved away from the large pharmaceutical manufacturers to the pharmacy benefits managers and governments that determine what price point will be paid. Finally, a shift in power from the OEM's to Tier 1 suppliers is also evident in the automotive industry (Ro, Liker and Fixson 2008). In all of these examples, the specific nature of major shifts in bases of power on buyer-supplier socialization, trust, and relational capital is an important parameter that we hope to shed light on in this research.
We use resource dependency theory (RDT) to explore the circumstance in which a supplier has increasing levels of power over the buyer, such that the supplier may have little motivation to yield control or withhold the exercise of this potential power. We then explore managerial strategies that a buyer may implement to mitigate the impact of supplier power on the formation of relational capital within the relationship. Specifically, we posit that the degree to which a buyer is dependent on a supplier may affect the use of socialization processes and supplier integration, such these variables both directly and indirectly affect the development of "goodwill between buyers and suppliers," described as "relational capital" (Dyer and Singh 1998; Burt 2000; Dyer and Nobeoka 2000). The dynamics of these processes is explored in light of differentiated positions of relative power (dependence) in the relationship, and the associated outcomes. We explore the question of what happens when degrees of power (dependence) are modified? Does a shift in power lead to variation in socialization processes or level of supplier integration? We maintain the extent to which power is used (or not used) is an important parameter for managers to consider in their sourcing strategies. Buyer-supplier relationships are never at parity; there is always a dependence trade-off.
The remainder of the article proceeds as follows. In the next section, we review the literature on buyer dependence, socialization, supplier integration and relational capital, and then develop hypotheses representing the relationships between each. Our research methodology, including data collection, construct measurement and nonresponse bias, are then described. Data analysis procedures, using structural equation modeling, are provided in the next section. We then present the discussion and managerial implications of the findings, including a specific set of managerial interviews applied to augment our insights into the results. The article concludes with limitations and suggestions for future research.
THEORETICAL MOTIVATION: THE DYNAMICS OF ASYMMETRICAL POWER
The explicit, but often unacknowledged, social norm that pervades almost any relationship is mutuality (the sharing of power) and one important dimension of mutuality is found in the dependency of one party on another (Pfeffer and Salancik 1978). In the interorganizational relationship literature, power is an acknowledged but not often discussed parameter within the context of mutual relationship norms (Cannon, Achrol and Gundlach 2000). It is assumed that parties are at power parity, and much of the research then focuses on trust and mutuality with little discussion of the use of power (dependency). Most industries are characterized by power--increased consolidation--but in reality, economic power is not always the central issue. For instance, some authors argue that there may be several sources of power and that they are not mutually exclusive (Cousins 2002). For example, technological advantage (product, process or both) may be a source of power, as might "political" power from either an organizational or governmental standpoint. Finally, economic power can be classified in terms of relative size imbalance as well as in terms of reciprocity and mutual investment decisions (e.g., switching costs).
Prior studies have explored the nature of dependence and control in buyer-supplier relationships. For instance, Provan and Skinner (1989) found that dealers of agricultural equipment were less opportunistic when they depended on a primary supplier, whereas suppliers with greater control over dealers' decisions exhibited greater opportunism. Also, Frazier, Gill and Kale (1989) posit that firms often employ a number of coercive influences on trading partners under various conditions of dependence, including threats, promises, and legalistic pleas. A later study by Smith and Aldrich (1991) found that greater levels of trust between buyers and suppliers resulted in fewer bureaucratic controls, but only when mediated through information sharing.
RDT holds that organizations are embedded within a network of exchange relationships, and that in order to deal with their uncertain environment, they are dependent on other organizations for survival (Pfeffer and Salancik 1978). Thus, the power of an organization depends upon the resource dependency relationships it has with other organizations (Medcof 2001). If a focal organization is highly dependent upon another organization for an important resource, then the other organization will hold the relative balance of power. RDT proposes that three factors are critical in determining supply chain partners (Medcof 2001): (1) the importance of the resource, (2) the availability of alternatives and (3) the deployment of the resource.
RDT assumes that the primary objective of management in organizations is to operate on their environments to make them more stable. Thus, there is a recognition of the social context and constraints within which the organization must operate as well as the choice of organizational adjustments to these social realities (Pfeffer 1981). Managers are held to react in one of three ways to the existence of this dependency on their operations: (1) they work toward acquiring control over resources to minimize dependence on other organizations ("absorbing the environment"); (2) they attempt to control interdependence through legal means ("creating the environment"); or (3) they establish collective structures of interorganizational action ("negotiating the environment"). Adopting these strategies can change the relative bargaining power of the relationship and enable a firm to gain more favorable exchange terms, or at least, coerce others to do what they would not otherwise do (Pfeffer 1981).
Existing cases suggest that acquiring control over organizations is less satisfactory in terms of outcomes, while establishing collective structures of interorganizational action produces better results. Why? Managers at organizations who focus on establishing collective structures believe that suppliers and customers are an important resource given the uncertainty that exists in the supply chain. These managers have learned that by forging improved collaborative relationships with these parties, the relational rents generated can exceed the benefits extracted through the application of power in the relationship (Liker and Choi 2004). Comparisons of the differences in the application of power in supply chain relationships support this contention: for example, the cases of Wal-Mart versus Target, Toyota vs. GM, or others lead us to understand that working closely with a supplier or customer is often better than an arms-length relationship, even though power could be applied (Reinertsen and Smith 1991; Monczka, Petersen, Handfield and Ragatz 1998; Handfield and Nichols 2003; Liker and Choi 2004).
The central proposition of RDT, that all variation in interorganizational behaviors can be explained by the extent of uncertainty present, leads to an interesting question (Pfeffer and Salancik 1978; Pfeffer 1981). Does asymmetry in buyer-supplier resource dependence affect the buyer's use of socialization or integration processes? Can buyers mitigate their weaker position to create the same level of desirable relationship, even when they are in a position of more or less power relative to a critical supplier? This leads to the development of our theoretical model, which will be described next.
We derive a theoretical model, based in RDT, to explore the relationship among the level of buyer dependency, managerial responses in terms of socialization processes and supplier integration, and the effect on the development of relational capital. Our model is shown in Figure 1 and the discussion that follows.
[FIGURE 1 OMITTED]
Power and Socialization
In a situation of low buyer dependence on a supplier, the supplier is more likely to fear retribution if they do not perform. For example, powerful retailers often deduct large sums from their accounts payable to smaller manufacturers who do not meet 100% fill rates. Alternatively, suppliers may not provide their best products. As a tier 1 automotive supplier noted, "because this customer beats me up on price, I will not provide them with my most innovative designs, as I need to recover my R&D costs on it, and will sell it to my more favored customers" (Monczka, Handfield, Frayer, Ragatz and Scannell 2000, p. 73-74). We argue that despite the presence of dependence of one party on another, the creation of relational capital must be preceded by a socialization process which produces a mutual confidence that one party to an exchange will not always exploit the others' vulnerabilities when there is an opportunity to do so, which explicitly contradicts Sabel (1993). Socialization processes may include communication guidelines, team buildings, social events and joint workshops. When a buyer becomes dependent on a supplier, the buyer will be more apt to use these socialization processes to manage the buyer-supplier relationship. This has been documented in a number of cases that illustrate how large buyers can work collaboratively with smaller suppliers through socialization mechanisms to extract the same benefits (Sobek II, Liker and Ward 1998; Handfield and Bechtel 2002; Liker and Choi 2004). Socialization processes are similar to the boundary spanning activities suggested by Ireland and Webb (2008) as being important to balancing trust and power within interorganizational relationships.
Prior research has emphasized the close association between socialization and cooperative norms. Norms are the expectations about behaviors that are at least partially shared by a group of decision makers (Heide and John 1990). Cooperative norms are often developed in the early stages of a relationship, and provide guidelines and standards of conduct which allows trading partners to set ground rules for further exchanges (Dwyer, Schurr and Oh 1987). As such, cooperative norms serve as an in terorganizational governance mechanism, and can safeguard a relationship under conditions of power asymmetries (Heide and John 1990). Related research also suggests that the availability of alternatives is negatively related to cooperative norms (Cannon and Per-result 1999; Cai and Yang 2008). In effect, increased socialization is an outcome associated with a situation when the buyer recognizes that they need the supplier, and are in a position of increased dependence. Socialization provides the mechanism through which cooperative norms are created (Cai and Yang 2008). This leads us to the following hypothesis:
Hypothesis 1: Buyer dependence on the supplier is positively related to the use of socialization processes.
Dependence and Integration
In our model, we note that as a firm increasingly relies on their key suppliers for inputs into their new product development process, it becomes increasingly difficult to replace the tacit knowledge and intellectual capital developed through this relationship (Monczka et al. 2000; Petersen, Handfield and Ragatz 2003). This increases the relative dependence of the buyer on the supplier. In effect, the supplier has been "designed into" the product. When one actor does not entirely control all of the conditions necessary for achievement of an action or a desired outcome, resource dependence theory predicts that constraints placed on an organization by its environment can be mitigated by making the environment more stable (Pfeffer and Salancik 1978; Pfeffer 1981). We posit that when a buyer is relatively more dependent on a supplier, the buyer will seek to work more closely with that supplier and integrate them into their organization to secure stability in an uncertain and dynamic supply market. This may involve sharing technology information to drive codependence, and forming formal strategic partnerships. Clearly this does not apply to all commodities (purchase families/categories) equally, but requires a focused approach for strategic commodities (Handfield and Bechtel 2002). Buyers are more likely to hold open meetings in order to promote mutual respect, share information, and promote an environment where knowledge and information is shared openly (Dyer and Nobeoka 2000). The direct relationship between increased dependence and an effort to increase supplier integration is stated as follows:
Hypothesis 2: Buyer dependence on the supplier is positively related to the formal supplier integration mechanisms.
Socialization and Integration
Through the process of socialization, buyers and suppliers come to recognize the gaps that may exist in the way they conduct their work practices. At this point, there are two options: (1) the parties elect to discontinue working together if the gaps are too large; or (2) the parties work to narrow the gaps between their respective organizational social values and in so doing jointly promote the success of the relationship. As the partners go through socialization, they improve their working relationships and more formal integration mechanisms. In effect, we posit that socialization is an important mediator between the changing power dynamics that may exist, and the need for closer working partnerships. Socialization mediates and enables a more formal level of interaction through definition of cooperative norms (Pfeffer and Salancik 1978; Cai and Yang 2008x). This is formally stated as:
Hypothesis 3: Increased use of socialization mechanisms is positive associated with increased supplier integration outcomes.
Socialization and Relational Capital
While certainly important in the workplace, socialization is also important to the success of the relationships between supply chain partners. Prior research has identified formal and informal socialization as important components for creation of relational capital among supply chain partners (Cousins, Handfield, Lawson and Petersen 2006). For instance, socialization is thought to help partners build interpersonal relationships and trust, leading to a stockpile of relational capital (Kale et al. 2000), which can then be leveraged to enhance the buyer-supplier relationship (Cousins et al. 2006). Some hold that socialization provides the basis for a more ideal relational form (Lee 2004; Liker and Choi 2004). We assess the level of relational capital by the degree of mutual respect, trust and close interaction that exists between the partner firms. This conceptualization proposes that investments in socialization processes produce a bank of benefits and goodwill termed "relational capital." We propose that socialization mechanisms are required to ensure that both parties benefit from the experience (Kogut 1988), yet also take into account the compatibility of cultures and decision-making processes of the partner firms (Doz and Hamel 1998).
Hypothesis 4: Socialization mechanisms are positively associated with increased levels of created relational capital.
Integration and Relational Capital
We noted in Hypothesis 3 that for a group of buyers and suppliers who are working together and who have strong ties to one another, we expect more bounded solidarity, stronger reciprocity norms, greater trust, and sanctions against self-serving behaviors (Granovetter 1985). Mutual trust develops from exchange reciprocity in an environment in which norms are well enforced and free riding is kept in check (Coleman 1988; Levine 1991). Relational capital is also a function of formal agreements and interaction that occurs over an extended period of time. Repeated interactions, which occur through close working relationships, produce relational capital. The development of relational capital leads to a greater awareness of matters that occur over the life of a buyer-supplier relationship. The development of social capital also leads to improved insight into role requirements, which are often communicated through clues that originate in the informal social interactions that occur between the buyer and supplier (Chalos and O'Connor 1998).
Hypothesis 5: Supplier integration is positively related to the formation of relational capital.
Sample and Procedure
A sample of 750 UK manufacturing firms were surveyed from a database held by The Chartered Institute of Purchasing & Supply (CIPS), United Kingdom. An Internet-based survey was administered, with each respondent selected based on job function (purchasing manager or equivalent), plant size (at least 100 employees) and industry sector by SIC code. One hundred twenty-eight responses were received, of which 17 were deemed unusable due to missing data. The effective response rate was thus 14.8 percent (111/750), comparing favorably with other Web-based studies (e.g., Klassen and Jacobs 2001).
Of the responding firms, 45 percent were general manufacturing, 13.5 percent electronics, 10 percent specialist manufacturing, 9.9 percent automotive, and 10.8 percent were in industries classified "other," such as chemicals and pharmaceutical. The final 11 percent of firms had no response to industry classification. The response by position held within the firm was Vice President/Director (14 percent), Senior Manager (57 percent), and Junior Manager (29 percent). By functional area of responsibility, purchasing returned the greatest number of responses (89.9 percent), with the remainder composed of R&D and manufacturing managers. No significant mean differences were detected between either of these groups. The average experience in the industry was 9.06 years providing support that our informants were also knowledgeable about the issues under investigation.
We conducted pilot testing with six academics and nine industry contacts to assess the scale items' face validity, and to provide feedback on the content, design and usability of the survey Web site. Some minor content and design changes were made at this stage. A letter introducing the survey was mailed by CIPS to senior purchasing managers. The letter explained the purpose of the research, and contained a link to the survey Web site. Efforts were made to enhance the response rate by sending a follow-up email to managers 2 weeks after the initial mailing, and by offering respondents a composite summary of results (Forza 2002).
Tests for nonresponse bias were conducted by comparing early respondents (responses received within the first 2 weeks) and later respondents (responses received within the third week or later) (Armstrong and Overton 1977). A t-test of difference was conducted on firm size (employees and sales), and mean responses to each variable. No statistically significant differences were identified at p < 0.05.
In addition, we gathered data on sales, employees and industry from 22 purchasing executives who had logged onto the survey Web site, but did not progress to answering the survey. A t-test of difference along these dimensions between these nonresponders and responders was conducted, with no statistically significant differences (p< 0.05) identified. While not definitive, this test provided some assurance that the sample of firms responding to the questionnaire was closely representative of the broader population surveyed.
Operationalization of Variables
Appendix A shows the relevant scale descriptions.
APPENDIX A Survey Instrument Buyer dependency on the supplier BD1 Much of the success or failure of the new product development effort can be attributed to our key supply partners BD2 It would have been difficult to replace our key supply partners BD3 The new product development effort would have suffered greatly if I had lost our key supply partners Socialization Processes SP1 To what extent have team building exercises been used to improve the understanding you and your suppliers have of each other's businesses? SP2 To what extent have social events been used to improve the understanding you and your suppliers have of each other's businesses? SP3 To what extent have communication guidelines been used to improve the understanding you and your suppliers have of each other's businesses? SP4 To what extent have joint workshops been used to improve the understanding you and you suppliers have of each other's businesses? Supplier Integration SI1 To what extent has information exchange with suppliers through information technology reflected the degree of integration between your organization and its suppliers? SI2 To what extent has the level of strategic partnership with suppliers reflected the degree of integration between your organization and its suppliers? Relational Capital RC1 There is close, personal interaction between the supply partners at multiple levels RC2 The relationship is characterized by mutual respect between the supply partners at multiple levels RC3 The relationship is characterized by mutual trust between the supply partners at multiple levels
Relational Capital. We assessed relational capital using measures developed by Kale et al. (2000) which were built on the earlier work of Dyer and Singh (1998). These scales have also been used by Cousins, Handfield, Lawson and Petersen (2006). The scale consisted of three items measuring the level of mutual trust, respect, and interaction between the buyer and supplier.
Socialization Processes. We measured socialization processes using scales developed by Cousins and Menguc (2005), based on previous work of Chung et al (2000), Gupta and Govindarajan (2000), and Chung and Kim (2002). The socialization processes construct examined the structures and processes in place to facilitate socialization between buyer and supplier. A four-item scale asked respondents to indicate the extent to which they use team building exercises, social events, communication guidelines and joint workshops.
Buyer Dependence on Supplier. We measured the dependence of the focal firm (buyer) on the supplier by using a modified set of scales from Sivadas and Dwyer (2000) and Anderson and Narus (1990). The dependence of the focal firm on their suppliers was assessed by the extent of vital resources controlled by suppliers, attributed success of new product development due to suppliers, difficulty in replacing suppliers and the degree of suffering if the focal firm lost a key supply partner.
Supplier Integration. We measured the level of a firm's integration with suppliers using a two-item scale derived from Narasimhan and Kim (2002). The items included the degree of strategic partnership with suppliers and information exchange with suppliers through information technology.
All variables in the model were successfully measured. The variables were visually inspected for outliers, and Cook's/Mahalanobis distance tests were used to assess the distributions. No significant outliers were detected. In determining the measurement properties of the constructs used in the analysis, the reliability and construct validity of the variables in the model were assessed. The reliability of each construct was measured with Cronbach's [alpha] (Cronbach 1951). All of the multi-item measures had [alpha] [greater than or equal to] 0.75, an indication of sufficient reliability (Cook & Campbell 1979). A correlation matrix, means and standard deviations for each of the latent variables are provided in Table 1.
TABLE 1 Factor Correlations and Descriptive Statistics Variable (a), (b) 1 2 3 4 1. Buyer dependency on supplier 0.86 2. Socialization processes 0.25 0.76 3. Supplier integration 0.04 0.33 0.69 4. Relational capital 0.30 0.40 0.48 0.90 Mean 4.10 3.82 4.45 4.91 Standard deviation 1.42 1.25 1.39 1.17 (a) For N = 111, r has to be 0.189 or higher to be significant (p < 0.05). (b) Cronbach's [alpha] shown on the diagonal.
Confirmatory Factor Analysis (CFA)
CFA was used to validate the measurement model (see Figure 2). This measurement model was tested using EQS 6.1 with maximum likelihood (Joreskog and Sorbom 1982) estimation. The overall fit of the measurement model provided for a Bentler-Bonnett nonnormed fit index of 0.952, a comparative fit index of 0.964 and the root mean square error of approximation (90%) of 0.058. We may conclude that the overall fit of the measurement model is satisfactory (Bagozzi and Yi 1988). All factor loadings were of sufficient magnitude and significantly different from zero at the p=0.05 level. Standard tests of discriminant and nomological validity supported the measurement model as adequate to employ in the testing of the explanatory model.
[FIGURE 2 OMITTED]
Structural Equation Model
The structural model (with standardized solutions and t-statistics) is shown in Figure 3. All structural relationships were assessed by estimating the structural and measurement models simultaneously.
[FIGURE 3 OMITTED]
All parameter estimates in the model were significant, in the expected direction and of the expected magnitude. The overall fit of the structural model provided a Bentler-Bonnett nonnormed fit index of 0.940, a comparative fit index of 0.966 and a root mean square error of approximation (90%) of 0.065. We may conclude that the overall fit of the structural model is satisfactory (Bagozzi and Yi 1988).
Results largely supported the hypothesized model. Buyer dependence was positively associated with the increased use of both socialization processes ([beta]=0.316, p < 0.01), providing support for Hypothesis 1. However, contrary to predictions, buyer dependency was not significantly related to supplier integration, thus Hypothesis 2 was not supported. Socialization processes were significantly associated with supplier integration ([beta]=0.43, p < 0.01) (Hypothesis 3), along with relational capital formation ([beta]=0.33, p < 0.01) (Hypothesis 4). Finally, Hypothesis 5, that supplier integration was positively associated with relational capital, was also supported ([beta]=0.44, p < 0.01).
We have developed and tested a model examining the relationships among buyer dependency, managerial responses to asymmetry in terms of socialization processes and supplier integration, and finally, the effect on relational capital formation. In this section, we explore the results for each hypothesis, and provide a discussion of the implications of each.
Hypothesis 1: Dependence and Socialization
The results support the hypothesized relationship between buyer dependency and socialization mechanisms. Our finding provides additional support of the view of resource dependence theory related to "negotiating one's environment" (Pfeffer and Salancik 1978; Pfeffer 1981) where differential buyer-supplier power exists. This hypothesis also supports prior research in the area of supplier development. For example, industry-leading firms such as Honda, Toyota, Intel, and others are willing to invest considerable resources in nurturing and developing supplier capabilities in order to strengthen the resilience and capability of key supply channels (Krause, Handfield and Scannell 1998). A big part of this effort involves creating off-site mechanisms for dialogue, interaction, and on-going idea generation. As supply management evolves from a cost reduction capability to one that can directly impact supply chain risk and reduce the probability of supply chain disruptions, this type of activity becomes even more critical from a strategic business perspective. Our discussions with industry executives with substantial experience in nurturing supplier relationships also reflect this thinking. For example, a Japanese supply management executive working in a large North American automotive company noted the following:
We have to change the way we view suppliers. Instead of being hunters who seek to drive down Prices, we need to become farmers, with the objective of cultivating and nurturing our supply base, in order to produce a healthy harvest.
Hypothesis 2: Dependence and Supplier Integration
Contrary to predictions, we did not find support for Hypothesis 2, that increased levels of buyer dependency would lead to a managerial response of increased levels of supplier integration. Our findings suggest that a buyer, with limited power in the relationship, will not be able to increase integration with the supplier in order to create a reciprocal dependency. It is likely in this situation, that the supplier has little motivation to yield control of the relationship to the buyer and will rebuff any attempts to do so.
Hypothesis 3: Socialization and Supplier Integration
Although we did not find support for the buyer dependence to supplier integration relationship, our results point to socialization processes as a driver for supplier integration into partnerships and team interactions. In effect, structured social interactions amongst individuals within the buyer and supplier do matter when it comes to driving close working relationships. This research strongly supports the concept of cooperative norms, which occur when there are frequent transactions (Williamson 1985; Parkhe 1993); self-enforcing agreements that are ambiguous and informally codified (Dyer 1997; Cannon and Perreault 1999), and increased levels of information exchange (Hunt and Davis 2008; Ro et al. 2008).
Examples of how socialization drives increased integration is best exemplified by the way that some Japanese firms have sought to blur their organizational boundaries. Approaches that have been adopted include sharing research and development projects, placing their employees in other firms, and the development of inter-organizational cost management systems. Blurring organizational boundaries improves the efficiency of the entire value chain from raw material to customer. Organizational blurring typically occurs when information that is critical to one firm is possessed by another firm either further up or down the value chain. The two or more firms then create relationships that share organizational resources including information. The sharing of resources improves both inter and intra organizational coordination (Cai and Yang 2008). A field study analyzing the cost management practices of three Japanese firms in the same supplier chain identified the development of interorganizational cost management systems. These systems are designed to create downward cost pressures on the entire supplier chain (Cooper and Yoshikawa 1994). This pressure is achieved through several different mechanisms including target costing systems, minimum cost investigations, and quality-price-functionality trade-offs. These mechanisms relieve the sales team of the responsibility for pressuring manufacturing on cost and allow them to focus on other areas of coordination between the functions. Higher levels of socialization between team members facilitates the identification of innovative ways to reduce the supply chain cost of the products. These mechanisms have resulted in lower-cost products by allowing all of the firms in the chain to share information, in both Japanese and Western organizations (Nelson, Moody and Stegner 2005; Cai and Yang 2008). This sharing leads to better solutions to the cost reduction problem. By designing products jointly, the firms can try to reach a global minimum cost instead of a series of local minimum costs.
Hypothesis 4: Socialization and Relational Capital
The results support prior research in that group boundary-spanning and socialization can improve the effectiveness of buyer-supplier relationships (Ancona 1990; Ancona 1993). For example, Liker and Choi (2004) describe the importance of social interaction, and recommend that buyers understand how their suppliers work, increase the amount of face time, and share in formation intensively through close working relationships. These and other authors maintain that socialization processes drive the creation of relational capital, or a "bank of goodwill," which enables further collaboration and performance benefits.
The results suggest that context-specific socialization mechanisms may also be required. This future avenue for research may provide some key insights for the extant body of supply chain theory. For example, companies we interviewed in Japan and China emphasized the importance of aligned norms and culture that were only obtained through informal gatherings outside of the workplace. At one Japanese company we interviewed, a supplier noted that:
Because my business is so close to the customer [a large electronics manufacturer] we would often work late and then go to dinner. I was part of the customer's product development team working to reduce and meet the target cost objectives. The meetings at the company were often highly structured, with intense negotiations. Often when we went to dinner, our informal discussions would revolve back to creative thinking on how we could reduce the cost through re-designing the product, using alternative materials, or other means. We often came up with our best ideas over dinner!
Indeed, many of the socialization practices established in Asian business environments are being adopted by western companies seeking to benefit from "relationship-based procurement," a new term, which many executives are discussing. Western norms present a problem in this regard. For example, conflict of interest issues are often raised as a barrier to socialization with suppliers (Handfield and Baumer 2005). After establishing policies regarding appropriate purchasing agent-supplier interaction, increased forms of socialization should perhaps be encouraged as a means of creating innovative forums for creative thinking and relational capital.
Despite the challenges posed by Western norms related to "informal socialization," our results provide support for a direct relationship between these exchanges, and creation of norms that lead to "customer of choice" benefits. Such benefits can appear in the form of early insights into new technologies and innovation platforms (Monczka et al. 2000); reduction in normal order fulfillment cycle times, and improved on-time delivery responsiveness (Handfield and Bechtel 2002); improved collaboration leading to lower product cost in the product development stage (Cooper and Yoshikawa 1994); and improved ongoing continuous improvement in postcontract production, quality, and cost targets (Krause et al. 1998). Moreover, the results point to the fact that "trust" is a term that is best developed through strong-interpersonal discussion on specific projects, which leads to a stable forum for discussion of issues, problems, and opportunities. This result is becoming more entrenched in Western organizational thinking, but still has a long way to move before becoming a true norm (Cai and Yang 2008).
Hypothesis 5: Supplier Integration and Relational Capital
We found support for Hypothesis 5 that supplier integration is associated with the development of relational capital. However, the most important theoretical contribution is that a buyer's dependence on a supplier is associated with an increased use of socialization mechanisms, which in turn drive integration and relational capital. The fact that socialization is such an important mechanism in the interplay between dependence, and the desired outcome (relational capital) is critical. While we know that relational capital produces many desired financial outcomes (Cousins et al. 2006), the real impact of this research is the insight into how firms get to the desired state of a truly cooperative relationship. Our research suggests that the critical role of socialization processes used by a buyer to manage the supplier relationship when the buyer is relatively more dependent on the supplier cannot be overlooked. Given the strong relationship between a buyer's dependence on the supplier, and the mediating impact of socialization on buyer-supplier relational capital there is strong support for the observation that buyers may be missing an important opportunity to manage the buyer-supplier relationship in the instance where they are relatively less dependent on the supplier. When the buyer is less dependent on the supplier (i.e., has more power), the buyer may tend to use power to manage the buyer-supplier relationship. Perhaps the buyer should conduct a more careful review of the mix of power and socialization that is employed to manage a buyer-supplier relationship instead of employing socialization only in the instance when power is relatively unavailable.
This finding provides an interesting avenue for additional theory development along the lines of marketing channel relationships (Cannon et al. 2000), as well as additional explorations of the dynamics of power-dependence relationships in current market environments (Emerson 1962). Indeed, the supply management field can borrow many of the theoretical paradigms to explore this avenue of thinking from such diverse fields as resource dependence (Pfeffer 1981), social capital (Coleman 1988), economics (Granovetter 1985), and strategic alliances (Kogut 1988).
We noted in several interviews with buyers that conditions during the last 5 years have changed the playing field for supplier relationships dramatically, in terms of the ability of the buying company to hold the upper hand in the relationship. A senior procurement executive noted:
We saw price increases in resins, steel, natural gas, rare earths, catalysts, chemicals, and across the entire spectrum of our commodities! In 2003, as buyers, we strutted and believed we were in control of our suppliers. [In the end,] we had no control over supplier price increases, because they were able to extract them due to market demand exceeding supply. If we didn't pay those prices, someone else would. By the end of 2004, we went from being proud to simply being embarrassed. We suspected prices would increase, but we did nothing--and we paid the price dearly.
Moreover, some of the more progressive organizations understood that they were less dependent on a supplier (potentially giving them increased power) and perhaps the best use of power is not to use it at all! This result supports prior research suggesting that trusted exchange partners can be called upon for resources and support (Ahuja and Lampert 2001), despite the potential for the use of power in the relationship. Our results clearly support this contention, indicating that buyers who were more dependent on a supplier in a relationship were able to derive improved results in the form of greater relational capital, which could be banked and "saved" for a different environment down the road when conditions might change and not be in their favor. As one buyer noted:
Our organization went through a period of severe financial distress, after the events of 9/11 impacted the airline industry. We were very close to bankruptcy, and in the supply management function, we had fortunately created a bank of goodwill with our suppliers because of our excellent relationships in better times, when we could have extracted price pressure on our supply base. So when we went to them and asked if they would extend our credit despite our financial problems--they agreed to do so. They recognized that we were a preferred customer, and would come back when conditions improved. Our restraint of power in our supplier relationships in the end saved us from going under.
CONCLUSIONS AND DIRECTIONS FOR FUTURE RESEARCH
The results of the study suggest that dependency, socialization processes, supplier integration, and relational capital have a more complex set of interrelationships that form a rich and dynamic context for the study of buyer-supplier relationships. There are likely different scenario planning implications, for both short- and long-term relationship management processes that organizations need to think through and plan for. This study represents an initial foray that explores some of these preliminary dynamics, and emerges with some important foundational elements for further study.
No research is without its limitations, and there are some cautions in interpreting the results of our study. First, this study was based on a sample of companies in the CIPS database. Although a wide range of sectors were represented in this sample, the results may not be generalizable to all companies. Replication across other industries, including services, would also increase our understanding of the issues. Second, a number of mediating variables were not accounted for in our analysis. Factors such as the length of the relationship, the importance of the commodity, the degree of supply risk, and other mitigating variables such as power and trust would surely play a role in determining how relational capital is created and its impact on performance. These and other elements should be pursued as further research in other studies that would also ideally identify bi-lateral assessments of the social mechanisms present in the relationship. Finally, supplier relationships change over time, with the importance of socialization processes and relational capital also evolving. The current study is limited to cross-sectional data. Future research could use longitudinal data to help understand the dynamic nature of these variables and the interactions between them.
The findings of this study have important implications for managers responsible for managing supplier relationships in their organizations. Building on prior oranizational theory on socialization processes and relational capital, we linked these concepts and applied them to buyer-seller relationships. The results of our empirical analysis suggest that both buyer dependency (on a supplier) and socialization mechanisms play an integral role in shaping and creating relational capital. The results also point to the need for additional research on the specific linkages between socialization mechanisms, shifting power and dependency asymmetries, and identification of different circumstances under which relational capital is created. The implications also suggest that the need for greater socialization may conflict with opportunistic behaviors and competencies for buyers to restrict their application of power in such relationships.
Ahuja, G. and C.M. Lampert. "Entrepreneurship in the Large Corporation: A Longitudinal Study of How Established Firms Create Breakthrough Inventions," Strategic Management Journal, (22:6-7), 2001, pp. 521-543.
Ancona, D.G. "Outward Bound: Strategies for Team Survival in An Organization," Academy of Management Journal, (33), 1990, pp. 334-365.
Ancona, D.G. "The Classics and the Contemporary: A New Blend of Small Group Theory." In J.K. Murnighan (Ed.), Social Psychology in Organizations: Advances in Theory and Practice, Prentice-Hall, New York, 1993: 225-243.
Anderson, J.C. and J.A. Narus. "A Model of Distributor Firm and Manufacturer Firm Working Relationships," Journal of Marketing, (54:1), 1990, pp. 42-58.
Armstrong, S.J. and T.S. Overton. "Estimating Non-Response Bias in Mail Surveys," Journal of Marketing Research, (14:August), 1977, pp. 396-402.
Bagozzi, R.P. and Y. Yi. "On the Evaluation of Structural Models," Journal of the Academy of Marketing Science, (16:1), 1988, pp. 74-94.
Benton, W.C. and M. Maloni. "The Influence of Power Driven Buyer/Seller Relationships on Supply Chain Satisfaction," Journal of Operations Management, (23:1), 2005, pp. 1-22.
Burt, R.S. "The Network Structure of Social Capital." In R.I. Sutton and B.M. Staw (Eds.), Research in organizational behavior, JAI Press, Greenwich, CT, 2000: 3345-3423.
Cai, S. and Z. Yang. "Development of Cooperative Norms in the Buyer-Supplier Relationship: The Chinese Experience," Journal of Supply Chain Management: A Global Review of Purchasing & Supply, (44:1), 2008, pp. 55-70.
Cannon, J., R. Achrol and G. Gundlach. "Contracts, Norms, and Plural Form Governance," Journal of the Academy of Marketing Sciences, (28:2), 2000, pp. 180-194.
Cannon, J. and W.D.J. Perreault. "Buyer-Seller Relationships in Business Markets," Journal of Marketing Research, (36:4), 1999, pp. 439-460.
Chalos, P. and N.G. O'Connor. "Management Controls in Sino-American Joint Ventures: A Comparative Case Study," Managerial Finance, (24:5), 1998, pp. 53-72.
Chung, S.A. and G.M. Kim. "Performance Effects of Partnership between Manufacturers and Suppliers for New Product Development: The Supplier's Standpoint," Research Policy, (14:4), 2002, pp. 1-17.
Chung, S.A., H. Singh and G.M. Lee. "Complementarity, Status Similarity and Social Capital as Drivers of Alliance Formation," Strategic Management Journal, (21:1), 2000, pp. 1-22.
Coleman, J.S. "Social Capital in The Creation of Human Capital," American Journal of Sociology, (94), 1988, pp. S95-S120.
Cook, T. and D. Campbell. Quasi-Experimentation: Design & Analysis Issues, Rand McNally, Chicago, 1979.
Cooper, R. and T. Yoshikawa. "Inter-Organizational Cost Management Systems: The Case of The Tokyo-Yokohama-Kamakura Supplier Chain," International Journal of Production Economics, (37:1), 1994, pp. 51-62.
Cousins, P.D. "A Conceptual Model for Managing Long-Term Inter-Organisational Relationships," European Journal of Purchasing and Supply Management, (8:2), 2002, pp. 71-82.
Cousins, P.D., R.B. Handfield, B. Lawson and K.J. Petersen. "Creating Supply Chain Relational Capital: The Impact of Formal and Informal Socialization Processes," Journal of Operations Management, (24:6), 2006, pp. 851-863.
Cousins, P.D. and B. Menguc. "The implications of socialization and integration in supply chain management," Working Paper, Queen's University Belfast, 2005, pp.
Cronbach, L. "Coefficient Alpha and the Internal Structure of Tests," Psychometrika, (16), 1951, pp. 297-334.
Doz, Y.L. and G. Hamel. Alliance Advantage: The Art of Creating Value Through Partnering, Harvard Business School Press, Boston, 1998.
Dwyer, F., P. Schurr and S. Oh. "Developing Buyer-Seller Relationships," Journal of Marketing, (51:2), 1987, pp. 11-27.
Dyer, J.H. "Effective Interfirm Collaboration: How Firms Minimize Transaction Costs and Maximise Transaction Value," Strategic Management Journal, (18:7), 1997, pp. 535-556.
Dyer, J.H. and K. Nobeoka. "Creating and Managing a High-Performance Knowledge-Sharing Network: The Toyota Case," Strategic Management Journal, (21:3), 2000, pp. 345-367.
Dyer, J.H. and H. Singh. "The Relational View: Cooperative Strategy and Sources of Inter-organizational Competitive Advantage," Academy of Management Review, (23:4), 1998, pp. 660-679.
Emerson, R. "Power Dependence Relations," American Sociological Review, (27), 1962, pp. 31-41.
Forza, C. "Survey Research in Operations Management: A Process-Based Perspective," International Journal of Operations and Production Management, (22:2), 2002, pp. 152-194.
Frazier, G., J. Gill and S. Kale. "Dealer Dependence Levels and Reciprocal Actions in a Channel of Distribution in a Developing Country," Journal of Marketing, (33:1), 1989, pp. 50-69.
Granovetter, M.S. "Economic Action and Social Structure: The Problem of Embeddedness," American Journal of Sociology, (9:3), 1985, pp. 481-510.
Gupta, A.K. and V. Govindarajan. "Knowledge Flows within Multinational Corporations," Strategic Management Journal, (21), 2000, pp. 473-496.
Handfield, R. and D. Baumer. "Managing Conflict of Interest in Purchasing," The Journal of Supply Chain Management, (42:3), 2006, pp. 41-50.
Handfield, R. and C. Bechtel. "The Role of Trust and Relationship Structure in Improving Supply Chain Responsiveness," Industrial Marketing Management, (31:4), 2002, pp. 367.
Handfield, R. and E. Nichols. "Issues in Global Supply Base Management," Industrial Marketing Management, (32:8), 2003.
Heide, J. and G. John. "Alliances in Industrial Purchasing: The Determinants of Joint Action in Buyer-Supplier Relationships," Journal of Marketing Research, (27:1), 1990, pp. 24-36.
Hunt, S.D. and D.F. Davis. "Grounding Supply Chain Management in Resource-Advantage Theory," The Journal of Supply Chain Management: A Global Review of Purchasing and Supply, (44:1), 2008, pp. 10-21.
Ireland, R.D. and J.W. Webb. "A Multi-Theoretic Perspective on Trust and Power in Strategic Supply Chains," Journal of Operations Management, (25), 2008, pp. 482-497.
Joreskog, K.G. and D. Sorbom. Systems Under Indirect Observation, Part I and Part II, North-Holland, Amsterdam, 1982.
Kale, P., H. Singh and H. Perlmutter. "Learning and Protection of Proprietary Assets in Strategic Alliances: Building Relational Capital," Strategic Management Journal, (21:3), 2000, pp. 217-237.
Klassen, R.D. and J. Jacobs. "Experimental Comparison of Web, Electronic and Mail Survey Technologies in Operations Management," Journal of Operations Management, (19:6), 2001, pp. 713-728.
Kogut, B. "Joint Ventures: Theoretical and Empirical Perspectives," Strategic Management Journal, (9:4), 1988, pp. 319-332.
Krause, D., R. Handfield and T. Scannell. "An Empirical Investigation of Supplier Development: Reactive and Strategic Process," Journal of Operations Management,, (17), 1998, pp. 39-58.
Lambert, D., M. Emmelhainz and J. Gardner. "Building Successful Logistics Partnerships," Journal of Business Logistics, (20:1), 1999, pp. 165-181.
Lee, H. "The Triple--A Supply Chain," Harvard Business Review, (82:10), 2004, p. 102.
Levine, D.N. "Simmel and Parsons Reconsidered," American Journal of Sociology, (96), 1991, pp. 1097-1116.
Liker, J. and T. Choi. "Building Deep Supplier Relationships," Harvard Business Review, 2004, pp. 104-113.
Maloni, M.J. and W.C. Benton. "Power Influences in the Supply Chain," Journal of Business Logistics, (21:1), 2000, pp. 42-73.
Medcof, J.W. "Resource-Based Strategy and Managerial Power in Networks of Internationally Dispersed Technology Units," Strategic Management Journal, (22:11), 2001, pp. 999-1012.
Monczka, R., R. Handfield, D. Frayer, G. Ragatz and T Scannell. New Product Development: Supplier Integration Strategies for Success, ASQ Press, Milwaukee, 2000.
Monczka, R.M., K.J. Petersen, R.B. Handfield and G.L. Ragatz. "Success Factors in Strategic Supplier Alliances: The buying company perspective," Decision Sciences, (29:3), 1998, pp. 553-577.
Narasimhan, R. and S.W. Kim. "Effect of Supply Chain Integration on the Relationship between Diversification and Performance: Evidence from Japanese and Korean firms," Journal of Operations Management, (20:3), 2002, pp. 303-323.
Nelson, D., P.E. Moody and J.R. Stegner. "The 10 Procurement Pitfalls," Supply Chain Management Review, (9:3), 2005, pp. 38-45.
Parkhe, A. "Strategic Alliance Structuring: A Game Theoretic and Transaction Cost Examination of Interfirm Cooperation," Academy of Management Journal, (38:4), 1993, pp. 794-829.
Petersen, K., R. Handfield and C. Ragatz. "A Model of Supplier Integration into New Product Development," Journal of Product Innovation Management, (20:4), 2003, pp. 284-299.
Pfeffer, J. Power In Organizations, Pitman, Marshfield, MA, 1981.
Pfeffer, J. and G. Salancik. The External Control of Organizations, Harper and Rowe, New York, 1978.
Provan, K. and S. Skinner. "Interorganizational Dependence and Control as Predictors of Opportunism in Dealer-Supplier Relations," Academy of Management Journal, (32:1), 1989, pp. 202-212.
Reinertsen, D.G. and P.G. Smith. "The Strategist's Role in Shortening Product Development," Journal of Business Strategy, (12:4), 1991, pp. 18-22.
Ro, Y.K., J.K. Liker and S.K. Fixson. "Evolving Models of Supplier Involvement in Design: The Deterioration of the Japanese Model in U.S. Auto," IEEE Transactions on Engineering Management, (55:2), 2008, pp. 359-377.
Sabel, C. "Studied Trust: Building New Forms of Cooperation in a Volatile Economy," Human Relations, (46:9), 1993, pp. 1133-1170.
Sivadas, E. and R.E Dwyer. "An Examination of Organizational Factors Influencing New Product Success in Internal and Alliance-Based Processes," Journal of Marketing, (64), 2000, pp. 31-49.
Smith, A. and H. Aldrich. The role of trust in the transaction cost economics framework: Transaction contexts and governance structures in U.S. manufacturer-supplier relations. Academy of Management Meeting. Miami, FL 1991.
Sobek, D.K. II, J. Liker and A. Ward. "Another Look at How Toyota Integrates Product Development," Harvard Business Review, (76:4), 1998, pp. 36-49.
Williamson, O.E. The economic institutions of capitalism.: Firms, markets, relational contracting, Free Press, New York, 1985.
Kenneth J. Petersen (Ph.D., Michigan State University) is an associate professor and the First Community Bank Faculty Fellow at Colorado State University, Fort Collins, Colorado. He is also Visiting Senior Fellow at Manchester Business School in Manchester, England. Before joining Colorado State University, Dr. Petersen was on the faculty at Arizona State University and the University of Oregon. He has authored over 50 articles, reports and book chapters and has consulted with numerous firms in strategic sourcing and supply management. He currently conducts research and teaches in the graduate, honors undergraduate and undergraduate programs in the areas of supply chain management and sustainability.
Robert B. Handfield (Ph.D., University of North Carolina at Chapel Hill) is the Bank of America University Distinguished Professor of Supply Chain Management at North Carolina State University, in Raleigh, North Carolina. He is also the Director of the Supply Chain Resource Cooperative, an industry-university partnership established in the College of Management at North Carolina State University. Dr. Handfield also serves as Consulting Editor for the Journal of Operations Management and has published numerous studies on supply base management, supply risk management and market intelligence. He has published several books and textbooks in the field of supply management.
Benn Lawson (Ph.D., University of Melbourne) is senior lecturer in operations management in the School of Management at Queen's University Belfast, in the United Kingdom. He is also a Visiting Senior Fellow at Manchester Business School and a CIPS Research Fellow, United Kingdom. Dr. Lawson's research interests include sourcing strategy, supplier relationship management and innovation within the supply chain. He currently has research projects underway in early supplier involvement and socially sustainable supply chains, and his publications have appeared in Journal of Operations Management, Journal of Product Innovation Management and Research Technology Management.
Paul D. Cousins (Ph.D., University of Bath), is a professor of management and the CIPS Professor of Supply Chain Management at the Manchester Business School, University of Manchester, in the United Kingdom. His research interests include interfirm relationships and exchange mechanisms, environmental SCM and strategic supply management problems.
KENNETH J. PETERSEN
Colorado State University
ROBERT B. HANDFIELD
North Carolina State University
Queen's University Belfast
PAUL D. COUSINS
The University of Manchester…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Buyer Dependency and Relational Capital Formation: The Mediating Effects of Socialization Processes and Supplier Integration. Contributors: Petersen, Kenneth J. - Author, Handfield, Robert B. - Author, Lawson, Benn - Author, Cousins, Paul D. - Author. Journal title: Journal of Supply Chain Management. Volume: 44. Issue: 4 Publication date: Fall 2008. Page number: 53+. © 2009 National Association of Purchasing Management, Inc. COPYRIGHT 2008 Gale Group.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.