The effect of trust, opportunism and experience on supplier-buyer joint value creation throughout the relationship life cycle

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The Effect of Trust, Opportunism and

Experience on Supplier-buyer Joint

Value Creation Throughout the

Relationship Life Cycle

Amsterdam, 26th June 2015 Supervised by Carsten Gelhard

Master Thesis by Fouad Ben Masoud, 6156665

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Statement of originality This document is written by Fouad Ben Masoud who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the

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Relationship development among suppliers and buyers is a complex and dynamic process. Key on understanding the supplier-buyer relationship is to comprehend the relationship phases that are characterized by different behaviors, processes and strategic orientations (Dwyer et al., 1987; Van de Ven, 1994). Ongoing research constructed the relationship life cycle by distinguishing three phases; the build-up, maturity, and decline phase (Dwyer et al., 1987; Ring & Van de Ven, 1994; Ellram, 1991). This life cycle provides powerful insight on how each phase requires different approaches to deal with different interests and conflict of the created value during the transaction period (Iacobucci & Zerrillo, 1997).

By augmenting value creation in the life cycle Eggert et al. (2006) conceptualized it further, since value creation is regarded as the raison d’être of collaborative supplier-buyer relationship (Lapierre, 2000). By synthesizing the relationship life cycle with the paradigms of value creation, the dynamic nature of value creation in the business relationship cycle became evident. In this context value creation is divided into three sources: (1) core offering, (2) sourcing process, and (3) customer operations. Throughout an empirical study Eggert et al. (2005) concluded that the sourcing process was the main value driver in their finding. Furthermore, the sourcing process is identified as crucial for value creation in the early stage of the life cycle. For the other two sources of value creation they did found explanatory power on the overall relationship, however, they were unable on assigning that to a certain life cycle stage (Eggert et al., 2005). An explanation for this ambiguity might be due to their limited conceptualization of the life cycle. In light of the constructs of the relationship life cycle, only measurements of expansion were incorporated in the survey to account for the build-up phase. For the maturity phase, a reversed proxy was

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used of the expansion construct, leaving the decline phase vacant. In a later paper (Ulaga and Eggert, 2006) did add the construct “leaving” in the framework with measureable items, however, shifted away from the topic of value co-creation. Secondly, no clear demarcation was made between the buyer value creation process, supplier value-creation process and the encounter process of interaction and exchange between the suppliers-buyers (Payne et al.2008). On this latter plane the buyer and supplier jointly manage the processes while relying on their own resources and capacity to share and integrate processes with respect to their own objectives (Grönroos, 2011). Aarikka-Stenroos & Jaakkola (2012) proposed that suppliers might take the roles as value option advisors, value process organizers, value amplifiers, and value experience supporters. And that buyers may influence the value proposition by contributing as co-diagnosers, co-designers, co-producers, and co-implementors. Furthermore, in their empirical findings it became apparent that managing value conflict a critical factor is in the joint co-creation of value in the encounter phase. They referred to it as the buyer being risk-averse on making a certain investment. Contemplating further on the work of Nooteboom (2004) on the pitfalls of transaction cost economics, value conflicts rises from bounded rationality and the ensuing information asymmetry. Factors like trust, and risk of opportunistic behavior strongly influence how suppliers and buyers manage value co-creation. Nevertheless, academic literature is concise on the topic of value conflict (Plé & Cáceres, 2010). Thus, this papers defines value conflict broadly as the act of one party unwilling or hesitating to contribute in the encounter plane of value co-creation.

The purpose of this study is to identify what kind of joint value is created in the encounter process plane for each stage in the life cycle. Since each party is restrained by its own objectives, the second purpose of this paper is to assess the value

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conflicts that might arise by investigating how each values-in-use are related to experience, trust and opportunism. By doing so, thresholds will become evident that might have explanatory power in managing value conflict between the suppliers and buyers.

The paper is structured as follows: the following section outlines a tentative framework of value co-creation, to provide background for the ensuing theoretical framework and related hypotheses. After a description of the research methodology, the results of the conceptual model test are provided. The study concludes with a discussion of the results, implications for researchers and practitioners, limitations and suggestions for further research.

2. Literature Review

2.1 Relationship lifecycle

Throughout the decades scholars have developed the relationship lifecycle continuously. Dwyer et al., (1987) introduced a lifecycle of five phases: awareness, exploration, expansion, commitment and dissolution. Which was later revised by Jap and Ganesan (2000) to the awareness, exploration, build-up, maturity, and decline. This study is drawing on the comprehensive conceptualization of the relationship life cycle by Iacobucci & Zerrillo’s (1997), who limit the lifecycle to build-up, maturity, and decline phase. Each phase is defined and demarcated as follows: the initial build-up phase is denoted as a period of strong growth with pro-active information sharing sand relation-specific investments. The buyer and supplier emphasize on understanding their intentions to develop a level of mutual knowledge, with the goal to build the foundation of a relationship. The sense of mutual achievement will encourage them to share resources, including capital, capabilities and information

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(Sheer and Stern, 1992). Thus increasing the level of interdependency, reinforcing the long term perspective, and diminishes the likelihood of opportunistic behavior (Buchanan, 1992). Trust is considered as a critical mean by which this is accomplished, and is largely determined by the reputation of both players (Jap, 2001). It serves as mitigation for perceived risk, but also increases the likelihood for the buyer and supplier to engage in higher-risk projects, such as investment in innovation and joint new product development. A high level of trust tends to result in perceiving conflict as a normal part of the collaboration, leaving opportunism out of the equation (Morgan and Hunt, 1994).

The ensuing maturity phase is characterized by little growth and it is considered tough to quickly shift to an alternative partner. Both parties have made a covenant to each other that they will commit resources in a consistent manner. A requirement for this phase is that the interests and goals of the buyer and supplier are aligned in the previous phase (Wilson, 1995). Trust has now shifted away from expectations and is no longer derived from reputation, but rather from actual accumulated experiences. Since trust acts as a variable instead as given, it reduces transaction costs and improves the production process (Morgan and Hunt, 1994). During this phase both parties may reconfigure the constructs of the relationship value to date, depending on the evaluation of individual performance (Jap, 1999).

A shrink of activities outlines the last phase of decline. Due to changes in either external or internal circumstances (e.g. technological change, government deregulation, economical change), affects the foundations of the relationship. Either the buyer or supplier are experiencing dissatisfaction, and are contemplating on repealing or decreasing the relationship, or are looking for alternatives and might already be starting to communicate this through. Intentions are short-termed

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orientated, concerned about individual outcomes and expectations, and may provoke opportunistic behavior. Conflicts or disagreements that have not been resolved during the earlier phases, may amplify negative outcomes. Depending on the level of trust among parties, the relationship may be saved for further collaboration, lead to an orderly dissolution processes or end up abruptly resulting in value destruction. Furthermore, due to a self-fulfilling expectation that the relationship is in decline, the players may obstruct cooperation and use resources for disputes and negotiations rather than trying to solve the underlying issue (Jap, 2000).

2.2 Value-in-use

Despite that the paradigm of relationship co-creation of value is relatively new, much has been written about this notion (Anderson et al., 1993; Ravald & Grönroos, 1996; Ulaga & Eggert, 2005; Dyer & Sing, 1998; Grönroos, 2010; Liem Ngo et al., 2007; Aarikka-Stenroos & Jaakkola, 2010; Andreu et al., 2010; Payne et al., 2008; Ramsay et al., 2009; Möller & Törrönen, 2002). Nevertheless, empirical research is considered as marginal and an under-researched topic (Wilson 1995; Lindgreen et al., 2009; Aarikka-Stenroos & Jaakkola, 2012). The conceptualization of co-value in contemporary literature leaves much space for ambiguity and no clear demarcations are present on what constitutes as co-value. Drawing on the work of Vargo & Lusch (2006a, 2008a), this paper construes value co-creation as value that can only be created when the user is involved in the process or by consumption. Hence, the perspective that the buyer and supplier roles are independent becomes incompatible with value co-creation. The buyer determines the value and the supplier is restricted to value propositions, making them interdependent in the collaborative process of value creation on a common goal. Opposing the traditional view that value

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stems from the outputs of the suppliers’ manufacturing process (Gummesson, 2007; Lusch & Vargo, 2008b; Vargo 2007). Suppliers and buyers must therefore match up resources and practices to manage their activities in order to co-create value (Grönroos, 2009; Mele, 2009).

The plane on which value is co-created is referred to as the encounter processes (Payne et al., 2008). Any final outcome is called the value-in-use and its value adheres to the buyers’ subjective perceptions and experiences (Aarikka-Stenroos & Jaakkola, 2012; Grönroos, 2011; Lapierre, 1997). Prior research exhibits unequivocal consensus on this matter. However, once further operationalization is required there is overlap and contradictions on notions. Table 1 provides an overview of the ongoing literature. An explanation for this wide variety of conceptualizing the values-in-use would be due to the context specific methodology. The interaction between suppliers and buyers are different across industries and one can assume that this might also be the case within industries, making generalization difficult. Hence, in order to achieve high explanatory power, this study demarcates its research to the service outsourcing relationship among suppliers-buyers. The buyers are indiscriminately represented by all types of industries, while the suppliers are limited to the knowledge intensive business services (Gummesson, 1789; Løwendahl, 2005). These are represented by IT, R&D, technical, and legal, financial, and human resources services. These knowledge intensive industries share three common features: knowledge intensity of provided service, problem-solving function, and the

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Table 1: Overview academic literature value-in use

Author(s) Journal Value-in-Use

Primary Foundation Industry

Conceptual Empirical Product Service

Ulaga (2003) Industrial Marketing Management

Product quality, service, know-how,

time-to-market, social benefits, process costs, price   

Tuli et al. (2007)

Journal of Marketing Suppliers diagnose of problems

   arikka-Stenroos (2012) Industrial Marketing Management

Reliability, compatibility future solutions, time

savings, decreased costs  

Lapierre (2000)

Journal of Business & Industrial Marketing

Problem identification, solution design,

implementation, cost reduction, better decision making, reduction accident rates

  

Liu (2006) Journal of Business & Industrial Marketing

Responsiveness, flexibility, reliability,

communication skill   

Bettencourt et al. (2002)

Nvt, book Technological information, market insight,

project objectives   

Olaru et al. (2008)

Journal of Business & Industrial Marketing

Robust and relevant applied knowledge,

procedures, facilities and equipment   

Grönroos (2011)

Industrial Marketing Management

Growth, revenue-generating, effect on

customers’ costs, effect on perception   

Sandström et al. (2008)

Managing Service Quality Journal

Service experience through total functional and

emotional value of a consumed service  

Macdonald et al. (2011)

Industrial Marketing Management

Service, relationship, network, and customer

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strong client related character of the provided service (Muller and Zenker, 2001). Thus, the first aim of this study is to identify the relevant value-in-use components that are significant in what stage of the relationship life cycle. Taking overlap of the value-in-use, empirical findings and industry focus into account, after extensive examination of previous academic research, this paper considers the following values-in-use as independent variables; service quality, service support, supplier know-how, time-to-market, flexibility, facility and capability, process cost, and innovation (Ulaga and Eggert, 2006; Eggert, 2005; Suhong Li et al., 2006; Choon Tan, 2001; Punniyamoorthy, 2011; Zhang et al., 2006; Ritter and Gemunden, 2004; Corsten and Felde 2005; Byrd and Turner, 2000).

Service quality refers to the performance, reliability and consistency of the delivered service. As firms outsource IT, HR, finance, legal and R&D departments to suppliers, expectations on quality are high considering the direct interactions with the buyers’ target group. The alignment of goals and required relation specific investment must therefore be of essential in the build-up phase. And due to the dynamic nature of the environmental market, significance of this value-in-use is also to be expected in the maturity phase. Components of the service support play an important role for suppliers to diversify from competitors and to add value for the buyer. A way to do so is by offering more service in the integrated systems, increasing the availability of information, and the speed of information. Consequently, these values are expected to be important during the offering period in the build-up phase. Suppliers’ know-how and time-to-market are expected to be significant in the maturity phase, for the reason that the buyers need to experience in dealing with the respective suppliers to fully comprehend and assess their value creating potential. It is expected that flexibility is crucial in the build-up phase in order to align the goals of both firms. Adjusting and

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disconnecting redundant resources to the needs of the counterparty enhances value co-creation. Facility and capability, and innovation are considered to be of importance in the maturity phase when a track record has been developed and players got to experience the level of trustworthy in another. Which lowers the threshold on initiating relation specific investments. As learning develops throughout joint problem solving, the significance is expected to be higher in the maturity phase. This is reinforced as trust increases throughout the relationship lifecycle. During the decline stage, costs are an important factor that can lead to termination of a relationship. It is expected that negative relationships exists between the decline phase and values-in-use like quality, support and innovation, since these are not in the interest of players.

The next chapter discusses how these co-created values are affected by different factors, illustrated by the conceptual model.

3. Conceptual Model and Hypotheses

In this section the research is conducted in two stages. The first stage is to link the identified values-in-use, to one of the three relationship lifecycle phase. The values-in-use that withstand the significance rigorously, are used in the next stage as dependent variables. The second stage of the theoretical framework is constructed to determine the role of experience, trust, and opportunism on the identified values-in-use. The model in figure 1 is based on the review of literature on social-psychological effect on inter-firm relationships and environmental conditions. The antecedent experience is taken as an independent variable. The buyers’ market dynamics and intensity of competitors serve as moderators, and trust and opportunism are taken into consideration as mediators. A strong negative correlation has been found between trust and opportunism, based on the literature review a relationship. Nevertheless, further examination on this correlation is beyond the scope of this study.

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This research will test the linkage among several constructs. The relationships among these constructs are hypothesized and the values-in-use are generalized into model 1. Thus, different models are tested on each value-in-use.

Figure 1: Theoretical Model

3.1 Seniority of Expertise

Drawing on the findings of Knight and Cavusgil’s born-global firms (2004), this paper also makes the distinction of two years before the median firm gains significant experience. These firms operate both domestically and internationally. Inexperienced buyers are considered to have insufficient knowledge to identify and determine their needs and problems in dept (Aarikka-Stenroos and Jaakkola, 2012). Making them more dependent on the suppliers’ degree of specialized knowledge and expertise. Secondly, due to their lack of track record and inexperience, it is difficult

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for these buyers to assess the proposed value of suppliers (Sharma and Patterson, 2000). Making it challenging to form a rational decision whether to trust the supplier or to assess the risk of opportunistic behavior. While experienced buyers already have the know-how and clear processes to understand some (unspoken) signals to assess the trustworthy of the supplier (Aarikka-Stenroos and Jaakkola, 2012). The same logic applies for the supplier. Experienced suppliers are more willing to share information, which in turn generally result in a better outcome, due to their competency and signaling of trust, honesty and benevolence (Petersen et al., 2003; Walter et al., 2003)

In addition to amount of years after inception as criteria for experience, the amount of senior managers to total staff and years of work experience of senior managers also contribute to the construct of experience (Lin, 2007). It is expected that experienced buyers are more able to assess whether to trust the supplier and at what level than inexperienced buyers. Moreover, the experienced firms and the senior management teams with a proven track record are less likely to behave opportunistically due to their reputation status. The following hypotheses thus are formulated:

Hypothesis 1: Seniority of experiences will lead to more co-creation of value.

Hypothesis 2: Mutual trust in honest and benevolent behavior will be greater

the more experienced the participants are.

Hypothesis 3: Likelihood that a participant will behave opportunistically is

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3.2 Trust

In the academic literature trust and control mechanisms are heavily intertwined since every control system involves some degree of trust (Langfield-Smith & (Langfield-Smith, 2003; Merchant, 1985). Drawing on the work of Ouchi (1979) we have a much better understanding of how the degree of output measurability and task programmability is related to behavior, outcome and social control mechanisms. Three definitions of trust relevant to the supplier-buyer relationship are contractual trust, competence trust and goodwill trust (Sako, 1992). The former is based on the moral standard of honesty, the second on the perceptions of ability and expertise, and the latter is defined as the perception of a partners’ intention to perform in accordance with the agreements (Van de Ven 1992; Nooteboom, 1996). The danger of putting up safeguards to protect one from opportunistic behavior, may lead to governance mechanisms that will convey mistrust and are likely to induce opportunistic behavior, resulting in a self-fulfilling prophecy (Ghoshal & Moran, 1996).

Therefor, in the business context, trust is defined as the confidence that one has in the trustee to behave integer and reliable (Anderson & Narus 1990, Morgan & Hunt 1994). Donay and Cannon (1997) define trust between credibility and benevolence. The latter represents the extend to which the partner is genuinely interested in the others’ welfare, and the former represents the expectance that the partner will commit to its statement. Trust ought to be treated as a variable instead as given since it may develop over time through processes of learning, thus strengthening the relationship between buyers and suppliers, making the relationship more sustainable that might reduce conflicts (Johanson & Mattsson, 1987). Moreover, trust leads to more information sharing, joint product and process development and

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hence increasing the relationship value (Ulaga & Eggert, 2005). Thus leading to the following hypothesis:

Hypothesis 4: Identified factors of value-in-use are positively affected by

trust, thus creating bigger value on the encounter plane

3.3 Opportunism

Opportunism is defined as “self-interest seeking with guile” (Williamsons, 1975, p. 6). Opportunists cannot be assumed to keep their promises, to fulfill their obligations, and to respect the interests of their trading partners unless safeguards are in place. It is not possible to know whether a partner is opportunistic ex ante, which leads to behavioral uncertainty under the assumption of bounded rationality. The traditional view on opportunism (transaction theory and agency theory) assumes that parties may act opportunistically if they are given the chance, granted that it is feasible and profitable (Eisenhardt, 1989; Williamson, 1985). Contemporary view made a more realistic view by incorporating relational contracts into the supplier-buyer interaction. It is considered wrong to assume that everybody is motivated by self-interest, since people exhibit different motives, as behavioral economists and social psychologists have proven (Bridoux et al., 2011; Ostrom, 2000). Since distrust breeds’ distrust and may even elicit opportunism, the assumption of opportunism may become self-fulfilling. Whether or not relation-specific investments ought to be made, depends on how easy capabilities and resources can be imitated, protected, or, alternatively supported by complements.

Nevertheless, fear of opportunistic behavior of the counterparty is realistic in the case of high uncertainty on performance and/or environment, the fear of

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renegotiation ex-post to initial investments, and conducting business on a low frequency rate (Williamson, 1975). All these factors negatively influence the possibility of co-creating value on the encountering panel. Thus leading to the formulation of the following hypothesis:

Hypothesis 5: Identified factors of value-in-use are negatively affected by

opportunism, thus limiting value creation on the encounter plane

3.4 Environmental moderators

Kohli and Jaworski (1990) defined market dynamics as changes in the composition of consumers and their preferences, and intensity of competitors as the degree of competition that a firm faces. A high value of these two factors leads to rapid fluctuations in consumers’ demand, difficulties to accurately predict the market and competitive environment. For firms to decide on outsourcing to a supplier, instead of incorporating the business unit internally, increases with increasing levels of environmental dynamism (Gilley and Rasheed, 2000). This logic stems from the “low-church” resource-based view that argues in favor of focusing on core competencies (Dierickx and Cool, 1989). No big technological investments are required that face the risk of becoming obsolesces in the near future for peripheral and near-core activities. In addition, in the event of new technologies emerging, firms can exploit changes in cost or quality by switching suppliers (Dess et al., 1995). Making it more interesting for buyers to interact closely with suppliers when task uncertainty and complexity increases. Thus, paradoxically, creating an environment that requires closer collaboration among buyers and suppliers, while it also positively affects the possibility that a buyer exhibit opportunistic behavior. Conversely, in more stable

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environments, the above-mentioned benefits are not applicable when technological changes less rapidly. Peterson et al. (2003) found out that in the case of technological uncertainty, suppliers and buyers are more likely to share information. The risk associated with this uncertainty is mitigated by a closer collaboration.

In the case of the buyer facing intensive competitors in a dynamic market, close collaboration on creating value-in-use can be considered as vital for either gaining or maintaining a competitive advantage. From an opportunistic point of view it is assumed that intensity of competition has a diminishing effect, and a reinforcing effect on trust.

Hypothesis 6: Dynamism of markets within a co-creation dyad positively

moderates the relationship between trust and value-in-use; i.e., the positive impact of trust on value-in-use is reinforced when the buyers’ market is considered dynamic.

Hypothesis 7: Dynamism of markets within a co-creation dyad negatively

moderates the relationship between opportunism and value-in-use; i.e., the negative impact of opportunism on value-in-use is reinforced when the buyers’ market is considered dynamic.

Hypothesis 8: Intensity of suppliers’ competitors within a co-creation dyad

positively moderates the relationship between trust and value-in-use; i.e., the positive impact of trust on value-in-use is reinforced when the buyer is facing fierce competition.

Hypothesis 9: Intensity of suppliers’ competitors within a co-creation dyad

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i.e., the negative impact of opportunism on value-in-use diminishes when the suppliers is facing fierce competition.

Table 2 provides an overview of the hypothesized paths.

4. Methodology

4.1 Data collection and sampling

The principal data collection method in this research will be conducted throughout a survey questionnaire, wherein each respondent is asked to answer the same set of questions in the same order. Respondents are selectively chosen depending on their job tittle and experience: higher-level consultants (senior managers and partners) who are employed at KPMG Management Consulting. The initial contact, through mail, which contains the survey, includes an introduction with relevant context and explanation of expected actions. The recipients who have yet to respond to the questionnaire will be called as a follow up to either respond by phone interview or through the initial mail. Around 30% of the respondents are located at the KPMG headquarters in the Netherlands, and the remaining respondents are picked randomly from the Western European offices. Respondents are assured that their

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information is handled in a highly confidential matter. In total, this study collected 114 responses. Despite several attempts on obtaining the figures, 11 questionnaires were not fully answered, and thus are assessed as unusable and withdrawn from the sample.

The unit of analysis for this research is the relationship between the buyers and suppliers. The present study aims to identify the underlying social-psychology dimensions of relationship value in business markets. The consultants, who act as mediators and facilitators between buyers and suppliers without participating actively in the negotiation, will be asked to describe their last assignment in the KIBS sector. Expectations are that these last assignments were mainly located in Western Europe. Another limitation that this research will include is the exclusion of small-sized firms from the sampling frame. Because of their small business activity, it is considered as unlikely for them to consult consultants. Common criteria for the classification of firms will be assessed through sales volume and/or number of employees.

4.2 Measures

All measurement items, shown in detail in the Appendix, construct the seven-point Likert scale (1 – strongly disagree to 7 – strongly agree). The guideline is to use well-validated measures with items reported in previous research. The survey structure composes three parts. The first part entails the current lifecycle phase that the buyer and supplier are engaged in. Respondents will then be asked which value-in-use is currently perceived as important. Finally, they will be asked how both social psychology and environmental factors affect the value-in-use. The measurement approach for each construct in the model is described briefly below. These items were retrieved from previous research that either described the case for suppliers or buyers.

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Since the unit of analysis for this paper is the combined relationship between these buyers and suppliers, some of the items have been slightly altered.

Trust and Opportunism. A total of 12 relevant items were found in the literature that enables the measurement of trust and opportunism among buyers and suppliers (Morgan and Hunt, 1994; Sanzo et al., 2003; Grimm and Ribbink, 2014; Stump and Heide, 1996; Cavusgil et al., 2004; Ulaga and Eggert, 2006). The items constitute the facets of trust, reliability, integrity, time horizon, and safeguards that were found in the literature of the conceptual model.

Relationship lifecycle. Distinction between the three phases of build-up, maturity and decline is operationalized by the factor growth. Based on the work of Ulaga and Eggert (2006), measurement of growth decline was used to identify the third phase. Unfortunately no item measurements were found in the literature in the context of relationship growth; nevertheless, Jap (2001) operationalized these items from the perspective of satisfaction. Drawing on the work of Jap (2001) and Ulaga and Eggert (2006), the same logic was used to assess the build-up and maturity phase. The latter indicates no future expansions are to be expected and to continue at the same rate. These classifications are used to assess which value-in-use are assigned to which phase.

Seniority of Experience. The 4 items that were found in the literature capture the relevant skills, and managerial and company experience which discloses information about the level of professionalism (Aarikka-Stenroos and Jaakkola, 2012; Hsiu-Fen Lin, 2007). And whether the buyer was able to assess the purchased services, and the seller was able on quickly comprehending the needs of the buyer.

Environmental moderators. The measure of market dynamics and intensity of competitors are developed based on the work of Gilley and Rasheed (2000) and

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Jaworski and Kohli (1993). Corresponding to these studies, the consultants were asked to answer these items solely from the perspective of the buyers. The market dynamics and intensity of competitors of the suppliers would create bias and is irrelevant since they deliver services and no commodity goods.

Value-in-use. The following constructs were used: service quality, service support, supplier know-how, time to market, flexibility, facility and capability, process cost, and innovation (Ulaga and Eggert, 2006; Eggert, 2005; Suhong Li et al., 2006; Choon Tan, 2001; Punniyamoorthy, 2011; Zhang et al., 2006; Ritter and Gemunden, 2004; Corsten and Felde 2005; Byrd and Turner, 2000). Consultants are asked which value-in-use is currently relevant for them.

4.3 Measurement validity

A non-response bias test will be used to assess whether the surveys show significant differences in response between the early and late waves of returned surveys (Armstrong and Overton, 1977). Secondly, a confirmatory factor analysis (CFA) will be used to assess the unidimensionality of the measures. Fit of the model is examined with the convergent and discriminant validity. The former holds in the case of highly correlated underlying items, and the latter when underlying items of different factors have a low correlation with the underlying items of other factors.

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5. Analysis and Results

5.1 Measurement validation

Different statistical tools were used to assess the validity, reliability, and dimensionality of the constructs. The validity of the measures is initially assessed by the factor intercorrelations. An overview of correlations between the variables is provided in table 3. Overall, the correlations are considered as low. The strongest relationship consists between trust and opportunism with a negative correlation of .668, which is significant at a 1% level. Nevertheless, it is still below the accepted cutoff value of .7 (Hair et al., 1998). Key properties of the measurement scales are reported in table 4 that exhibits Cronbach’s Alpha, standardized factor loadings, t-value, and the average variance extracted of each item. In the case of the former all constructs report figures higher than a .8, which indicate a high reliability between the items. The standardized factor loadings of all items show significant factor loadings greater than .55, and the average variance extracted exceeds .7, as Hairo et al. (1998) have set as guidelines for sample sizes of around 100. Altogether, these properties confirm reliability and convergent validity of the scales. The chi-square difference test and the Fornell and Larcker (1981) criterion are used to assess discriminant validity.

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Table 4: scale properties Measures Standardized Factor Loadings (t-value) Average Variance Extracted Expand (α = .937) .815

Players expect to expand business _{.75 (2.22)}

The supplier will receive a larger share of the business in the future _{.85 (2.91)} The frequency of business will be used more over the next few years than it is now _{.89 (3.01)} Players do not expect to increase the purchases in the future _{.81 (2.89)}

Leave (α = .934) .779

Chances of terminating the relationship within next six months .90 (3.86)

Chances of terminating the relationship within next year _{.72 (2.45)} Chances of terminating the relationship within next two year .82 (3.64)

Trust (α = .958) _.892

Players keep promises they make _{.77 (3.34)}

Players are genuinely concerned that the business relationship succeeds _{.70 (2.74)} Players consider each others welfare when making important decisions _{.62 (1.89)}

][]]]]]]] _{.83 (3.31)}

Players show commitment to one another _{.73 (2.62)}

Relationship is very important for the buyers business _{.79 (3.92)}

Opportunism (α = .883) _.830

Partners need to make relation specific investment to tailor requirements _{.90 (3.64)} There is much ambiguity about performance of relationship _{.90 (3.71)} There is much unpredictability of relevant technological becoming obsolete _{.87 (2.45)}

Players have a short time horizon _{.83 (3.21)}

Participants signal the perception of distrust to another _{.89 (2.46)} (In)tangible outputs of supplier are very important elements of the buyers’ end

product .78 (3.15)

Experience (α = .859) _.90

The buyer understood almost all aspects of the services purchased from the supplier _{.62 (2.12)} The seller quickly comprehended the needs of the buyer _{.76 (2.93)} The buyer conducted sufficient past outsourcing experience _{.72 (3.01)}

Players are in business for over two years _{.77 (2.83)}

Senior managers of both players encourage knowledge sharing and cooperation _{.82 (3.24)} Sufficient experienced senior managers are at place to coordinate the relationship _{.69 (2.32)}

Service Quality (α = .959) _.728

The supplier provides good service quality .83 (2.43

The supplier delivers the services due dates _{.86 (2.59)}

Quality of delivered services are better after buyers’ feedback _{.74 (3.12)}

Delivered service quality is consistent _{.90 (3.78)}

Service Support (α = .885) _.774

The supplier provides good services _{.87 (3.54)}

Players provide information when requested _{.73 (3.72)}

Players provide appropriate information when requested _{.82 (3.21)}

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Suppliers Knowhow (α = .952) .895

Supplier provides access to his know-how _{.87 (2.74)}

Supplier knows how to improve buyers existing services .90 (3.54)

Buyer incorporates supplier knowhow in decision-making _{.84 (2.74)} Supplier assists buyer in developing core capabilities .88 (2.43)

Time to market (α = .927) .788

Supplier helps to launch changes rapidly _{.66 (1.83)}

Suppliers assists in increasing buyers’ speed to market .71 (3.42)

Players time to market is considered lower than industry-average _{.75 (2.77)} Time-to-market is considered as a crucial part of the value chain .89 (2.88)

Flexibility (α = .946) .855

Players show flexibility during the process _{.85 (3.02)}

Supplier shows flexibility in volume variance from one period to another .68 (3.42)

Players are flexible on responding to unexpected changes _{.73 (1.85)}

Change in volume can be implemented swiftly _{.71 (2.93)}

Facility and Capability (α = .944) .801

Supplier has all the capabilities to facilitate the buyers’ need _{.73 (3.41)} Supplier allows extensive customization of output .88 (3.29)

Players are willing share sensitive information _{.79 (3.72)}

Process Cost (α = .851) _.727

Coordination efforts are costly .84 (4.32)

Buyer was willing to accept a higher cost _{.73 (2.82)}

Costs are higher in terms of time .84 (2.74)

Innovation (α = .868) _.759

Players consider innovation as a critical part in their relationship _{.87 (3.54)} Compared to competitors, implemented innovations have a better market response _{.79 (2.82)}

Players are willing to implement innovation _{.82 (2.21)}

Players are willing to invest in learning to improve practices _{.69 (1.77)}

Market Dynamics (α = .934) .728

The industry is considered as highly volatile _{.73 (1.89)}

There is a high chance that the realized outputs become obsolete. .82 (2.32)

Relevant technology is changing rapidly _{.88 (2.20)}

Buyers‘ customers tend to look for new opportunities all the time .86 (2.94)

Easy to predict future demand _{.71 (3.02)}

Intensity of competition (α = .804) _.843

Competition is considered fierce in the suppliers' market _{.84 (3.54)} Competitors in the suppliers' market compete mostly on price. _{.73 (3.21)} In the suppliers' market, players often make a competitive move/promotion wars _{.79 (3.03)} Supplier is not considered as strong compared to competitors _{.71 (2.61)} Supplier anticipates and responds to competitors move _{.86 (2.53)}

Table 5 reports the Fornell and Larcker criterion; the smallest average variance extracted exceeds the squared correlation between each pair of value sources. Table 6

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reports that all chi-square differences exceeds the minimum requirement of Δχ² > 3.8. Both of these tests indicate a satisfactory level of discriminant validity.

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5.2 Life cycle stages

Due to a miscommunication from the author, this study only succeeded in obtaining data on buyers and suppliers who wish to expand or leave their relationship. Thus, unfortunately, no data is retrieved on the maturity stage. This setback adds another limitation to the study that wishes to assess which values-in-use are relevant in one of the three life cycle stages. Nevertheless, sufficient data is obtained that allows statistical analysis on the build-up and decline phase. Table 7 exhibits an overview of

* = p < 0.1; ** = p <0.05; *** = p < 0.01; n.s. = not significant.

the two regressions. Service quality, time to market, flexibility and process cost are found significant in the build-up stage. The model shows overall a moderate fit with an R-square of .455. Process cost has a significant negative coefficient on expanding the relationship. For the decline phase a lesser fit is witnessed with an R-square of

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.319. And unlike the first regression on the build-up stage, process cost exhibits a positive coefficient. Suppliers’ knowhow, time to market, flexibility and process cost are found significant.

5.3 Values-in-use with high explanatory value

With convergent and discriminant validity successfully being established, structural equation modeling is used to asses the conceptual model. Since the dependent variable in the model (value-in-use) is meant as a substitute for the eight identified values-in-use, eight different models have been generated. Table 8 exhibits the coefficients and significances of the independent variables on each value-in-use. It becomes apparent that the selected independent variables have a weak explanatory power on service support, flexibility, facility/capability, process cost, and innovation. They’re characterized by low R-squares and most independent variables not being supported. The low R-squares, of respectively .135, .244, .122, and .318, do not indicate a good fit that can explain the total variance of the values-in-use, and not all first-order effects are significant. However, the path directions correspond with the hypothesized predictions. Opportunism has a consistent negative effect on the values. Nevertheless, due to the weak relationship, these four values-in-use were dropped from further analysis. The focus on hypotheses testing will be limited to service quality, suppliers knowhow, time to market, and process cost. A good fit is witnessed of respectively .642, .702, .582, and .708. Only intensity of competition in the service quality model, and trust in the process cost model were found as not significant. Like the weaker models, the path directions are as hypothesized. Showing a consistent negative relationship between the values-in-use and opportunism.

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5.4 Results main hypotheses testing

Standardized path coefficients for the model are shown in figure 2, 3, 4, and 5 with service quality, supplier knowhow, time to market, and process cost as dependent variable respectively. This paragraph will only discuss the main hypotheses of 1 till 5. The moderating variables, market dynamics and intensity of competition, hypotheses 6 till 9, will be further examined in the subsequent paragraph. They were included in these four models, but the figures are left blank on the model to make a clear demarcation on the moderating effects. The results in figure 2 indicate a good fit of the model; the ratio of chi-square to degrees of freedom is in an acceptable range. Hypotheses 1 through 4 are all supported and show the predicted path directions. Hypothesis 1, which predicted a positive relationship between experience and service quality, exhibits not only the biggest effect on the value-in-use, but also the highest significance value at a level of 1%. The path direction between opportunism and the value-in-use is not supported.

Figure 2: Assessment hypotheses, dependent variable service quality

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Figure 3 exhibits how all five hypotheses are supported with suppliers’ knowhow as a value-in-use. Experience exhibits again to have the highest significance at a 1% level, and all path directions are as predicted. Unlike service quality, suppliers’ knowhow is negatively affected by opportunism in a significant manner. The ratio of chi-square to degrees of freedom is in an acceptable range. The results of figure 4 show similar results with all standardized path coefficients being supported and thus supporting the hypotheses. Trust is seen as the variable that has the biggest effect on time-to-market.

Figure 3: Assessment hypotheses, dependent variable suppliers’ knowhow

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Figure 4: Assessment hypotheses, dependent variable time-to-market

χ² (102) = 67.22; * = p < 0.1; ** = p <0.05; *** = p < 0.01; n.s. = not significant.

And lastly, process cost in figure 5 is not significantly affected by trust, thus not supporting hypothesis 3. Other hypotheses are only supported at a 10% significance level, with a coefficient path that corresponds to the predictions. Like the other three models, the chi-square is found significant.

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Figure 5: Assessment hypotheses, dependent variable process cost

χ² (102) = 78.52; * = p < 0.1; ** = p <0.05; *** = p < 0.01; n.s. = not significant.

5.4 Moderating effects

The results of the moderating effects on the four values-in-use are summarized in table 9. It becomes even more apparent that, given the current sample, values-in-use are affected differently by the same independent variables. Intensity of competition only moderates the effect of trust on service quality and time to market significantly. Suppliers’ knowhow and process cost do no exhibit a significant relationship. The effect of trust on time to market and process cost are significantly moderated by market dynamics. For the relationship between opportunism and the values-in-use, only process costs exhibits to be moderated significantly by both market dynamics and intensity of competition. As predicted by hypotheses 9, the moderated effect of market dynamics is negative. Which is also witnessed at a 10% significance level on time to market. The path between opportunism and suppliers’ knowhow is only affected by intensity of competition at a significant level of 10%.

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Nevertheless, the majority of the hypotheses reveal to be not supported, each moderator is only found significant in four occasions.

6. Discussion and conclusion

The main underlying objective of this study is to examine the impact of seniority of experience on the values that are being created in the interaction between the supplier and buyer. These values-in-use were used as dependent variables in the conceptual model that took the notions of opportunism and trust, which are derived from transaction cost economics and the resource based view respectively, into consideration. Trust and opportunism are mediators in the model to act as explanatory variables between experience and the values-in-use. Throughout the literature review eight different values-in-use were identified with either a conceptual or empirical foundation: service quality, service support, suppliers’ knowhow, time to market,

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flexibility, facility/capability, process cost, and innovation. And lastly, control variables are included to test the relative impact of independent variables: total employees and location of the buyer and supplier, industry of the supplier, and duration of the relationship. The model was tested using data provided by consultants stationed in Europe.

6.1 Relationship Life cycle

The first priority was to test in which stage of the life cycle the values-in-use become significant. Unfortunately the maturity phase is left unanswered which is a setback for this study, nevertheless, meaningful results were obtained for the buildup and maturity stage. The literature review identified flexibility, service quality and support, and time to market as important for the buildup stage. Empirical results showed no statistical evidence that service support is significant in the buildup stage. While process cost is found to have a significant negative impact on expanding the relationship. Thus in the case of high costs, both players are unwilling to expand. Since the items were formulated as both coordination and output costs, no conclusion can be made whether it is the buyer or the supplier that wishes to stagnate the relationship. Evidently, the players perceive a stronger need for quality, time to market and flexibility in the early stage. Supplier’s knowhow and innovation are found to be not relevant for the players in the early stage, which is in line with previous conceptual research. For the decline phase, flexibility, time to market and suppliers’ knowhow contribute significantly on ending the relationship. Which probably means that despite the desire to end the relationship, players still enable co-creation of value. Hence, the wish to end the relationship is not due to a lack of these values-in-use, but another unknown reason(s). One of these reasons might be process

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cost. This value-in-use exhibits at a 5% significance level a positive effect on terminating the relationship. In the literature review it became apparent that value-destruction might occur when players end up their relationship abruptly, or that they might obstruct cooperation and use resources for disputes and negotiations. Based on this sample, there was no support for such claims. Players are actually acquiring value at this last stage.

6.2 Model assessment

The second step of this research was to test the relationship strength between the values-in-use and the independent variables. Applying the process regression for SPSS by A.F. Hayes, it became apparent that the models of service support, flexibility, innovation and facility/capability exhibited little explanatory power, and not supported independent variables. We can’t conclude whether a poor theoretical framework and causality reasoning caused the marginal explanatory power, or that the problem might be due to significance of these identified values-in-use. Table 1 provided an overview of academic literature on values-in-use, and these studies are mostly done conceptual. In the case of the theoretical framework, seniority of experience was found not significant in the case of service support, flexibility, and innovation. Resulting in hypothesis 1 as not supported for these values-in-use. Which is not in line with the findings of previous research that emphasized on the importance of experience to assess the needs of the buyer more effectively. Trust has been found significant for all values-in-use except for process cost, making it a central construct in creating additional value among suppliers and buyers. Thus hypothesis 4 is supported except for process cost. And lastly, the findings exhibit opportunism as not supported for flexibility and facility/capability, all others were found significant,

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supporting hypothesis 5. All consistently show the negative effect of opportunism on the values-in-use, which is consisted with findings in previous research. Nevertheless, this study is unable on explaining why process cost, service quality, flexibility, and facility/capability have been found not significant for trust on the former and opportunism on the remaining three. It might be explained due to the minimal size of the sample. Validation testing of the data did not provide any insight of inconsistency.

After eliminating the 4 values-in-use with little explanatory power, the model was further tested. In the case of service quality only moderator intensity of competition is found significant in positively effecting trust on service quality. Thus in a market environment characterized by many competitors, both players are more likely to trust each other, supporting hypothesis 8. However, in this same condition, there is no statistical evidence that intensity of competition diminishes opportunism, leaving hypothesis 9 not supported. The other moderator, market dynamics, had no significant effect on either trust or opportunism. Resulting in not supporting hypotheses 6 and 7. While the expectation was that market dynamics would either enhance trust or opportunistic behavior. Which is not in line with previous researches. Empirical studies did find a positive relationship between high uncertainty and players collaborating in a benevolent manner to increase joint value, or, in the absence of trust, a positive relationship between high uncertainty and players behaving opportunistically.

The same holds for suppliers’ knowhow, market dynamics was not significant in either enhancing trust in order for a supplier to share its knowhow to increase joint value creation, or for a supplier to behave opportunistic with its knowhow. Thus not supporting hypotheses 6 nor 7. Intensity of competition has a significant impact for a supplier to behave less opportunistic in sharing its knowhow, but not on trust. Only

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supporting hypothesis 9 and not 8. Which implies that the presence of high competition in the suppliers’ market, results in a supplier behaving less opportunistic in sharing its knowhow.

The effect of market dynamics on time to market exhibits to be significant both for trust and opportunism at a 1% and 10% level respectively. Resulting in a support of both hypotheses 6 and 7 for time to market. Given the data, this implies that players are more likely to behave trustworthy in delivering fast services when market conditions are uncertain. Not only has this path coefficient a higher significance, but also a bigger coefficient than opportunism. Intensity of competition is only found significant at a 5% level on trust, supporting hypothesis 8. Hypothesis 9 is found not significant as a moderator on the opportunism to time to market path. Thus, if suppliers are found in the context of heavy competition, trust becomes a bigger factor in creating mutual value in time-to-market. While the same is not witnessed in the case of opportunism.

The last value-in-use with a strong explanatory power is process cost. Like time to market, market dynamics is significant for trust and opportunism at a 5% and 10% level respectively. Players are willing to accept higher costs, both from a coordination and end-product perspective, in the context of trust when market uncertainty is high. Nevertheless, the effect of market dynamics has a higher significance and a bigger coefficient on opportunism than trust. Leading to a bigger diminishing effect on the value-in-use process cost. Hypotheses 6 and 7 are thus both supported. The other moderator, intensity of competition, exhibits to be significant on opportunism and not on trust. Thus if suppliers are experiencing heavy competition, they are more likely to behave opportunistically when experiencing high cost. Having only hypothesis 9 supported and not 8.

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The results indicate that the values-in-use cannot only be conceptually described, but also empirically verified. The constructs of values-in-use were developed and assessed with respect to validity and reliability. This research makes the contribution in three aspects: First, all empirical research so far have only investigated the dynamic joint value process solely from either the buyer or the supplier perspective. However, this study provides further insights from an objective third party that oversees this process. Thus, allowing for a better understanding how both parties perceive the interaction. Second, empirical date exhibits that trust and opportunism are not mutually exclusive. One can decide to trust another despite the high danger of opportunistic behavior of the other. Third, different values-in-use cannot be assessed by the same standards. Each interacts differently on experience, trust, opportunism, and market conditions like dynamics or competition. By aiming to identify these values-in-us and to specify the importance of trust and opportunism on these joint values, this study shifts away from the traditional view of transaction costs economics. Joint value creation is a collaborative process, and the risk of holdup problems does not withhold buyers and suppliers to interact with another. It should be mentioned, however, that additional values-in-use might be necessary to capture joint values in different business market conditions. From an academic perspective, the main innovative contribution of this research is having empirically proven the existence of a relationship between experience and different joint relationship values in a direct and indirect way.

6.3 Managerial implications

The main implication for managers is that values-in-use respond differently to trust, opportunism, and experience. A high level of trust is not always required,

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depending on the nature of the value-in-use. To enhance value creation different approaches are required depending on the life cycle of the relationship. For example, emphasis on innovation and the level of trust that it requires might not always be present in the early stage of the life cycle. While at the end of life cycle this data has proven that investing in values-in-use is relevant despite nearing the end of a relationship. A reason for this might be due to the fear of value destruction in the value chain, or damaging their own reputation. And finally, the included dimensions of market conditions exhibit that managers need to anticipate and respond to value changes, as relationships move along the life cycle.

6.4 Limitations and future research directions

The collected data was not obtained directly from suppliers nor buyers, but by consultants. This leads to two limitations: First, this might create a bias since the sample only includes firms that are willing to hire a consultant. Firms who do no wish to be represented or advised by consultants might exhibit different results. Second, another possible bias exists in the second-class data. Despite that consultants were asked to answer the items objectively, they might be stuck in their own dominant managerial logical and thus answers can exhibit different results than when the suppliers and buyers were approached directly. Another limitation is that the sample only consists of medium and big enterprises. The conclusion of this study might not hold for small firms. The consultants who provided this data are mainly interacting with bigger firms.

Many questions are left unanswered. First, the role of a relationship life cycle affecting the values-in-use should be explored more thoroughly. Collaboration between a buyer and supplier that has already been established for years might show

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different results than a collaboration of a few months. The same counts for inter-organizational learning: a strong learning intention on the relationship allows firms to developing collaborative know-how that is crucial for a success. Second, this study has narrowed its scope to the knowledge intense industry in Europe (i.e. IT, HR, R&D, legal, and finance). The identified values-in-use in this study might behave differently in another industry or geographical context. Third, the identified values-in-use are mostly conceptual assessed. More empirical validation is needed on whether these values-in-use are correct, and which other there might be. Furthermore, in the academic literature, the last decade exhibits a growth spur on the conceptualizing values-in-use. However, little empirical research has been done on validating them. Third, this study only took one relationship cost into consideration (process cost), all other values-in-use are relationship benefits. Further research should include both aspects to enhance the understanding of how supplier and buyer engage in value creation or destruction.

The intention of this study was to set a first step towards specifying the values-in-use in practice and to exhibit how they behave under different variable in the dynamic nature of value creation. More research is needed to gain a comprehensive view on how buyers and suppliers view value creation.

Acknowledgements

Special thanks to the University of Amsterdam for the academic tools, the supervisor for guiding me through this achievement, and Enaam Ahmed Ali for the moral support.

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Appendix

1. Survey

Constructs Item Formulation Sources

Expansion1 Players expect to expand business Ulaga and Eggert (2006)

Expansion2 The supplier will receive a larger share of the business in the future

Jap (2001)

Expansion3 The frequency of business will be used more over the next few years than it is now

Expansion4 Players do not expect to increase the purchases in the future

Leave1 Chances of terminating the relationship within next six months

Ulaga and Eggert (2006)

Leave2 Chances of terminating the relationship within next year Leave3 Chances of terminating the relationship within next two

year

Trust1 Players keep promises they make Grimm and

Ribbink (2014) Trust2 Players are genuinely concerned that the business

relationship succeeds

Morgan and Hunt (1994)

Trust3 Players consider each others welfare when making important decisions

Ulaga and Eggert (2006)

Trust4 Players trust that they keep each others best interests in mind

Sanzo et al. (2003)

Trust5 Players show commitment to one another

Trust6 Relationship is very important for the buyers business Opportunism1 Partners need to make relation specific investment to tailor

requirements

Stump and Heide (1996)

Opportunism2 There is much ambiguity about performance of relationship

Cavusgil et al. (2004) Opportunism3 There is much unpredictability of relevant technological

becoming obsolete

Walter et al. (2003) Opportunism4 Players have a short time horizon

Opportunism5 Participants signal the perception of distrust to another Opportunism6 (In)tangible outputs of supplier are very important

elements of the buyers’ end product Seniority of

Expertise

The buyer understood almost all aspects of the services purchased from the supplier

Sharma and Patterson (2000) Seniority of

Expertise2

The seller quickly comprehended the needs of the buyer Sharma and Patterson (2000) Seniority of

Expertise3

The buyer conducted sufficient past outsourcing experience

Seniority of Expertise4

Players are in business for over two years Knight and Cavusgil (2004) Seniority of

Expertise5

Senior managers of both players encourage knowledge sharing and cooperation

Hsiu-Fen Lin (2007)

The effect of trust, opportunism and experience on supplier-buyer joint value creation throughout the relationship life cycle