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Establishment of arm’s length but cooperative
relationships: A case study in a medium-sized company
Master thesis, MSc Supply Chain Management University of Groningen, Faculty of Economics and Business
DALMA PETRÁS Student number: 3050114
Supervisor/ university Dr. J.T. van der Vaart
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Establishment of arm’s length but cooperative relationships: A case study in a
medium-sized company
Abstract
The aim of this research is to investigate how attractiveness influences the level of relational posture in different types of arm’s length relationships within the context of small and medium-sized enterprises (SMEs). The study applies an in-depth single embedded case study where the unit of analysis is the buyer-supplier relationship. Data is gathered from a preliminary survey on the buyer side to select the cases. Further, semi-structured interviews are conducted on the buyer and the supplier side and an additional questionnaire is filled in by the interviewees on the topic of perceived expected value. Findings show that cooperative but arm’s length relationship can exist and awareness of attractiveness can enable the small firms to engage in relationships with larger suppliers. Lastly, new attributes as personal attractiveness and flexibility are identified that can be considered as one of the most important attributes of small firms. The originality and value of this research lies in analysing the dyadic aspect of attractiveness of a small company.
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Table of Content
1. Introduction ... 4
2. Theoretical Background ... 5
2.1. Relationships of SMEs ... 5
2.2. Characteristics of arm’s length relationships... 6
2.2.1. Transient Supplier – Arm’s length and adversarial ... 7
2.2.2. Gracious Supplier – Arm’s length but cooperative ... 8
2.3. Attractiveness in the relationship ... 8
2.3.1. Buyer-Supplier Attractiveness ... 10
2.4. Conclusion from literature ... 10
3. Methodology ... 11 3.1. Research Context ... 11 3.2. Case Selection ... 11 3.3. Data Collection ... 13 3.4. Data Analysis ... 15 4. Findings ... 17 4.1. Within-Case Analysis ... 17 4.1.1. Supplier A ... 17 4.1.2. Supplier B ... 19 4.1.3. Supplier C ... 20 4.1.4. Supplier D ... 22 4.2. Cross-Case Analysis ... 23
4.2.1. Gracious and Transient Relationships ... 23
4.2.2. Low and High Purchasing Power ... 24
5. Discussion ... 25
6. Conclusion ... 27
6.1. Managerial Implications ... 27
6.2. Limitations and Future Research ... 28
Acknowledgements ... 29
References ... 30
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1. Introduction
In recent literature researchers have focused on the high importance of long term, closely tied buyer-supplier relationships in gaining competitive advantage (Krause & Ellram, 2014). However, the special characteristics of small and medium-sized enterprises (SMEs) may mean that in their case long-term collaborations are not easy to achieve. Due to lack of resources, small companies can be dependent on larger suppliers and those suppliers may well dictate how close the relationship should be (W. J. Morrissey & Pittaway, 2006). These situations together with the low purchasing volume of the buyer may result in arm’s length buyer-supplier relationships. According to the cooperative-adversarial dichotomy, arm’s length relationships are associated with adversarial relationships (Dyer, Cho, & Chu, 1998; Zaheer, McEvily, & Perrone, 1998). However, in recent literature it has been assumed that arm's length relationships are distinct from adversarial relationships, showing that weak ties do not necessarily imply that a relationship cannot be cooperative. (Kim & Choi, 2015; Standing, Stockdale, & Love, 2007). With the possible existence of such cooperative arm’s length relationships, cooperation can also be achieved by small firms in order to gain access to necessary resources. Therefore, it is worth further investigating which factors characterize a cooperative arm’s length relationship. The question is how SMEs can attract larger suppliers to engage in these cooperative relationships.
The traditional adversarial model implies that buyers want to minimize their dependence on the suppliers while avoiding any form of cooperation (Dyer et al., 1998). On the contrary, recent literature discusses that firms tend to engage in relationships which are neither adversarial nor closely tied (Standing et al., 2007). To investigate this, Kim and Choi (2015) analyse the relationships of a big powerful buyer from the automotive industry and propose a new expanded typology with bringing two dimensions together. These two are relational posture – how the partners behave with each other – and relational intensity – how closely linked the daily operations of the partners are. Based on this classification, they differentiate between an adversarial and arm’s length relationship (transient) and an arm’s length but cooperative relationship (gracious). Nevertheless, they do not specify under which conditions these types of arm’s length relationships emerge.
5 to attract suppliers (Christiansen & Maltz, 2002), buyer-supplier attractiveness should be further analysed in the context of small firms. Accordingly, this paper will address the following research question:
How does attractiveness influence the level of relational posture in the different types of arm’s length relationships in SMEs?
In order to answer the research question, sub-questions will be addressed: 1) What are the attributes of buyer-supplier attractiveness?
2) How do the factors of buyer-supplier attractiveness influence different types of arm’s length relationships?
Answering these questions helps to understand the way in which these relationships emerge.
Within the scope of this research a case study of a medium-sized company in the medical device industry will be conducted. By answering this research question, the study makes important contributions. First, it reveals the existence of a cooperative but arm’s length relationship indicating that small firms can engage in such cooperative relationships to get access to key resources. Second, it contributes to the existing literature by analysing the influence of attraction on the level of relational posture in arm’s length relationships. Especially, by providing insights into what makes a small firm sufficiently attractive to establish a cooperative relationship with a supplier. Finally, it extends the current knowledge by revealing new factors of attractiveness playing an essential role in the relationships of small firms.
The rest of the paper is structured as follows: In the next section the existing literature about buyer-supplier relationships and attractiveness will be reviewed. Research method and data collection will be described in the third section. The data from the conducted interviews will be analysed and findings will be presented in the fourth and fifth section. At last, a discussion and conclusion with managerial implications will be highlighted.
2. Theoretical Background
2.1.
Relationships of SMEs
6 company with more power may dictate the closeness of the relationship (W. J. Morrissey & Pittaway, 2006). Due to lack of purchasing power, small buyers can be considered as unimportant and therefore get low priority from the supplier (Mudambi, Schründer, & Mongar, 2004). Furthermore, in a closely tied relationship, the occurrence of opportunistic behaviour is more likely. Opportunism in case of SMEs can be risky and harmful since their scarce resources should be spread in order to create proper safeguards (Jap & Anderson, 2003). Thus, the choice of a closely tied relationship needs to be reconsidered. Moreover, SMEs tend to have concerns about closely tied relationships, as they can easily become vulnerable. However, the loss and the vulnerability can be reduced by building trust in the relationship (W. J. Morrissey & Pittaway, 2006). Frequent and honest information-sharing can increase the level of trust between the partners (Gullett et al., 2009), but SMEs tend to have rather poor communication with their partners since they fear losing important resources and knowledge (Mudambi et al., 2004). Their perception that suppliers cannot be trusted makes them even sceptical about cooperation (B. Morrissey & Pittaway, 2004). All in all, based on the existing literature, one can see that most of the small firms are not likely to prefer closely tied relationships because of their low power and reluctance to be dependent on the partner. However, cooperation is prompted in cases of resource scarcity and thus cooperative relationships would be necessary for SMEs to gain access to essential skills and resources (van Gils & Zwart, 2009).
2.2.
Characteristics of arm’s length relationships
7 between parties was often explicit, although communication was rarely about performance (Schultze & Orlikowski, 2004).
Figure 2.1: Expanded buyer-supplier relationship typology (Kim & Choi, 2015)
Previous literature (Dyer et al., 1998; Zaheer et al., 1998) considered adversarial and arm’s length buyer supplier relationships the same. However, Kim and Choi (2015) propose that these two types in fact have different characteristics. The prevailing cooperative-adversarial typology is rather limited to properly measure the relationalism and thus fails to “capture the emerging dynamics of buyer-supplier relationships” (Kim & Choi, 2015, p. 63). Their new typology combined relational posture – how the partners behave towards each other – and relational intensity – how closely linked the daily operations of the partners are (see Figure 2.1). The results are four distinct archetypes: deep (closely tied and cooperative), sticky (closely tied but adversarial), transient (arm’s length and adversarial) and gracious (arm’s length and cooperative). This new classification implies that it may become possible even for SMEs to form a cooperative relationship. Due to the fact that SMEs maintain mostly arm’s length relationships, the next sections focus on the two types of arm’s length relationships.
2.2.1. Transient Supplier – Arm’s length and adversarial
8 information-sharing and discrete transactions, ambiguity characterizes the transient type, and the occurrence of opportunism is common in the relationship. However, Kim and Choi (2015) found this type to be the most flexible one. Since the partners do not work closely together and do not invest in the relationship, it is easier to remain strategically adaptable and flexible, which is important when operating in a highly uncertain environment (Zahra & Filatotchev, 2004). All in all, it is relatively straightforward to see what the partners expect from each other, although they do not know a lot about the other partner’s business since they do not collaborate (Kim & Choi, 2015). Considering the characteristics of the transient relationship, it implies that being adversarial and at arm’s length equals the traditional adversarial relationship.
2.2.2. Gracious Supplier – Arm’s length but cooperative
Kim and Choi (2015) describe the other relationship type with low relational intensity as arm’s length but cooperative. The partners are contracted for the short term, although the transactions take place infrequently but intermittently. Due to the weak tie between the parties, the buyer lacks control over the supplier. However, gracious relationship differs from the traditional adversarial relationship. The relationship is characterized by cooperative features. The partners maintain an amicable and trusting relationship. One may find this counter-intuitive since trust requires a long time to evolve. McKnight, Cummings and Chervany (1998) propose that trust does not develop after one transaction, it needs a longer period of collaboration. Therefore, in order to understand the establishment of a gracious relationship, one should further examine the emergence of this goodwill. Kim and Choi (2015) found that the interaction in a gracious relationship is not frequent, but it can be a potential source for innovation. They based these findings on the fact that suppliers may collect and provide more innovative ideas from the wide network connections. Levin and Cross (2004) discuss the higher utility of information and knowledge gathered from weak ties in a trustful environment. It can contribute more to success than knowledge received from strong ties because these sources are more likely to provide non-redundant information.
However, the high level of relational posture in this relationship requires further investigation. Since the factors of this dimension (e.g. trust, commitment or relational norms) are dependent on the intensity and the strength of the relationship (Autry & Golicic, 2010; Dyer et al., 1998), one may ask how it can emerge in an arm’s length relationship where these factors are low. Moreover, the innovativeness of these suppliers is also uncertain because innovative ideas are seen as emerging rather in closely tied relationships (Schiele, Veldman, & Hüttinger, 2011). Therefore, the existence of a gracious relationship is questionable due to its counter-intuitive features.
2.3.
Attractiveness in the relationship
9 relatively new and has appeared mostly in marketing journals. Attraction has been mentioned in the literature intermittently since the 1980’s, although, due to several reasons, there is no uniformity in the explanation of this concept (M. Mortensen & Arlbjørn, 2012). It has been discussed in relation to social psychology, social exchange and nowadays business relationships (Ellegaard & Ritter, 2007). Since there are several different definitions for the concept of attractiveness, it is still not sure what makes a buyer or supplier more attractive than another one. In order to better understand this problem, a closer look at the existing literature about the concept should be taken.
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2.3.1. Buyer-Supplier Attractiveness
In order to initiate a relationship both parties have to consider each other as attractive. This mutuality makes it possible for the buying company to choose a supplier and to be chosen by this particular supplier. Therefore, Ellegaard and Ritter (2007, p. 4) differentiate between two perspectives of attraction: 1) attractiveness of the supplier perceived by the customer and 2) attractiveness of the customer perceived by the supplier. Since mutuality is essential, it is important to investigate them together to see how it can be developed. Moreover, as mentioned earlier, attraction is described by perceptions indicating that the way the counterpart notices attractiveness is crucial (Ellis, Henke, & Kull, 2012). If a buying company is perceived as an attractive customer, it may influence the supplier according to its wishes (Ellegaard et al., 2003) and may provide motivation for the supplier to favour it over the competitors (Hald et al., 2009). It is important to know which suppliers can be perceived as attractive in the eye of the buyer. Therefore, supplier attractiveness should also be closely examined in order to understand how buyer and supplier can appeal to each other. However, Makkonen, Vuori, and Puranen (2016) highlight that supplier attractiveness is only a built-in feature in buyer attractiveness referring to the fact that the formation of a relationship is the choice of the buyer and they should be appealing to those suppliers which they see attractive. In the literature forming buyer-supplier relationships has been discussed as being mostly the buyer’s decision (e.g. Christiansen & Maltz, 2002). However, in cases where the buying firm has no leverage on the supplier, it may differ. A small firm cannot provide high volume or profit for the supplier or suppliers might not even know about the existence of such small firms (Schiele, Calvi, & Gibbert, 2012). It should create other possible ways to attract the larger supplier and become interesting for even large suppliers. Several studies show that even relatively small companies can develop successful relationships with large suppliers if they understand their strengths and become aware of the factors that may make them appealing to these suppliers (Christiansen & Maltz, 2002; Ellis et al., 2012; Tanskanen, 2015).
2.4.
Conclusion from literature
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3. Methodology
3.1.
Research Context
As the topic of how arm’s length relationships emerge in SMEs remained relatively unexplored, an in-depth explorative study is used in this research. In order to answer the research question, a case study is the most suitable method to build up a theory from the rich data gained from the cases (Eisenhardt & Graebner, 2007). With this method, one can explore in-depth the underlying mechanisms in their natural environment. Case studies include collecting a large amount of qualitative data which establishes the possibilities for theory building (McCutcheon & Meredith, 1993). Theory is developed by recognizing patterns and underlying logic in their natural environment (Eisenhardt & Graebner, 2007). Furthermore, a single firm is used to provide a basis for the cases in order to gather data in more detail (Voss, Tsikriktsis, & Frohlich, 2002). It is known from literature that SMEs are reluctant to engage in cooperative relationships, nevertheless, this research wanted to examine also the arm’s length but cooperative relationships. Therefore, it was important that the company chosen for the settings of this study could provide sufficient cases. The medical device and instrument industry is a highly competitive and technologically dynamic field, therefore firms have to cooperate with other companies and suppliers in order to keep up with the pace in the industry (Szycher, 1996). Besides the competitive feature of the industry, it is crucial to keep in mind that all the products affect the customers’ health. Therefore, the possibility of harm is enormous. Companies have to ensure device safety and suppliers play a significant role in avoiding failures of medical devices. Due to the importance of the suppliers in this industry, it is a good reason to choose a company from this field for the setting of this research. The chosen Central and Eastern European firm is a market leader in its country in the production of surgical implants, which could establish the environment for a cooperative relationships. The unit of analysis derived from the research question is the buyer-supplier relationship. Choosing the relationship as the unit of analysis makes this research a single embedded case study, which includes multiple levels of analysis within a single case (Yin, 2003).
3.2.
Case Selection
12 the researcher of this study. These referred to the frequency of joint activities running currently and in the past within the relationship. This decision was made because no relevant literature had been found on the topic of multiplexity in buyer-supplier relationships. Additionally, one of the questions concerning multiplexity was eliminated due to its irrelevance since the original research was conducted in the automotive industry. Some questions were difficult to adapt, hence other existing scales were chosen from the literature on asset specificity and interaction frequency (Adams et al., 2012; De Vita, Tekaya, & Wang, 2010; Terpend & Krause, 2015). Similarly to Kim and Choi (2015), 6-point Likert scales were used throughout the survey. Ranges for interaction frequency were refined because the researcher of this study wanted to make them more concrete to receive more exact outcomes. The new ranges were changed to 1=once per year to 6=once per day or more (see Appendix A). By mapping the suppliers, extreme cases could be revealed and chosen for further analysis since a single case with extreme examples offers opportunities to explore a significant phenomenon and thus describes its existence (Eisenhardt & Graebner, 2007). To answer the research question, four in-depth cases have been chosen for further analysis. Purchasing power was chosen as selection criterion because the aim of this study is to investigate how a small firm attracts larger suppliers. The buyer’s purchasing power was determined on the basis of experience and knowledge of the Logistics and Purchasing Department at the buyer. One relationship characterized by low buyer’s purchasing power and one by high buyer’s purchasing power were chosen for each arm’s length type (see Table 3.1). Additionally, another selecting criterion was the access to data. Since it was important to collect data from the supplier side, those were excluded from the population which were considered to be unwilling to take part in the research. These exclusions were confirmed with the main contact person of the focal firm.
Transient Relationship Gracious Relationship
Buyer’s Purchasing Power Low High Low High
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3.3.
Data Collection
Data collection started with the buying firm filling in the preliminary survey. Those relationships where the partners had at least two transactions in the last year were selected for assessment. Furthermore, the focal firm narrowed down the list of the suppliers to be evaluated by choosing those relationships that are on their list of approved and active suppliers. Due to time restrictions, 50 suppliers were assessed only by one of the purchasing representatives at the company. This implied that the outcomes could not provide statistical significance. After having received the completed surveys, a simple average analysis was done to evaluate and locate the suppliers on the matrix (see Figure 3.1). The scores of each construct were averaged and the average of each construct gave the final score of the relational posture and
relational intensity. However, due to the lack of statistical analysis, further information was needed to select the cases. The head of the Logistics and Purchasing Department provided additional information about the relationships which are considered to be relevant based on the outcome of the survey. With his assistance, the four suitable cases were chosen (see Table 3.2).
14 Transient Relationship Gracious Relationship
Purchasing Power Low High Low High
Name of the Supplier Supplier A Supplier B Supplier C Supplier D
Value of Rel. Posture 3,28 3,47 3,97 3,85
Value Of Rel. Intensity 3,35 3,21 3,38 3,13
Interviews Purchasing Manager A1 Purchasing Manager B1 Purchasing Manager C1 Purchasing Manager D1 Account Manager A2 Purchasing Representative B2 Sales Representative C2 Purchasing Representative D2 - Sales Representative B3 - Sales Representative D3
Table 3.2: Overview of Case Selection
After selecting the relevant cases, in-depth interviews were performed both on the buyer and the supplier side as the main source of information supplemented by document analysis (e.g. supplier satisfaction survey, approval of new supplier). Face-to-face interviews were conducted on the buyer side within the Logistics and Purchasing Department, while on the supplier side employees from the Management or Sales Department were questioned via telephone calls each taking approximately 25-35 minutes (see Table 3.2). Interviews were semi-structured and carried out only by one researcher which could affect the triangulation of evidence in the study. However, the developed case study protocol improved the validity and the reliability of this research (see Appendix B). In the beginning of each interview, the interviewees needed to give permission to the researcher to record the interviews. These recordings helped to properly transcribe the interviews which increased the reliability of this study. Moreover, after transcription the interviewees had the chance to read through the transcript in order to validate the collected data. The aim of the interviews was to collect information to be able to answer the research question and to gather additional information about the relationships. The interviews included the following sections: general information about the interviewee, attributes and awareness of attractiveness, expected value, and perceived trust (see Table 3.3).
Topic Main Question Sub-Questions
Introduction What are the main goals of the relationship?
E.g. What was the reason for initiating this relationship?
Attributes of Attractiveness
What are the specific factors that make this customer/supplier attractive to your company?
E.g. Generally how crucial is attractiveness in forming a buyer-supplier relationship? What makes the customer/supplier attractive in your company’s eye?
Awareness of Attraction
How do you perceive the attractiveness of your company?
E.g. How does your company stand out from your competitors?
Expected Value What is the expected value of this relationship?
E.g. What can your firm get and learn from this relationship?
What are your future expectations?
Perceived Trust How do you perceive trust in this relationship?
E.g. How crucial is trust in your relationship?
Additional Questionnaire
Perceived expected value E.g. Innovativeness, cost reduction
15 Moreover, at the end of the interviews conducted on the buyer side, the interviewee was asked to fill in an additional questionnaire about perceived value (see Appendix C). Since the interviews on the supplier side were conducted via telephone calls, the additional statements about perceived value in the relationship were sent to the suppliers via e-mail. The statements referred to how the interviewees perceived the value of the relationship and how they thought the other parties did so. This additional questionnaire was developed based on the existing literature (Aminoff & Tanskanen, 2013; Hald et al., 2009; Tanskanen, 2015; Ulaga & Eggert, 2006). The statements should be evaluated on a scale from 1= ‘Strongly disagree’ to 5=’Strongly agree’. The interview questions were formulated in a way to leave enough room for emerging discussions. Additionally, the interviewees were permitted to ask any clarification questions throughout the interview. Reliability and validity of the research were increased by using several different sources when it was possible (Voss et al., 2002). To provide the triangulation of the data, available documentation was used as supplementary information next to the data gathered from the interviews. Moreover, the data was enriched by additional informal conversations at the focal company to gain understanding of activities, ideas or meanings (Eisenhardt, 1989).
3.4.
Data Analysis
The interviews were recorded and transcribed to make data analysis easier and more reliable (see Figure 3.2). An abductive approach was used to code the data which is useful when the aim is to discover new variables (Kovács & Spens, 2007). This approach combines theoretical and empirical data analysis since it is crucial that data is not forced to fit the pre-existing categories (Dubois & Gadde, 2002). According to abduction, second-order codes were first developed based on the literature and the transcripts were reduced (first-order codes).
Second-order codes based on literature E.g.: Innovation capability,
price, quality
Data reduction – First-order codes
Aggregate dimensions – Third-order codes E.g.: economic-based
attributes
Link to main relationship type
Link to connected level of relational posture Data reduction – First-order
codes
Second-order codes E.g.: Flexibility, Personal
attractiveness
Figure 3.2: Coding Process
16 were expanded where it was necessary. The example of the coding tree can be found in Table 3.4, while Appendix D provides a more detailed code tree. The additional questionnaire, supplementary documents and the informal conversations were not coded, they only provided additional insights into the topic.
Second-Order Codes First-Order Codes Third-Order Codes
Personal Attractiveness
"...you want to work with those people who are attractive to you, you like them." D1
"...that personal attractiveness is important when there are similar firms" B1
"…after this comes the several personal feelings." C1
"...and you can easily work with these employees" C2 Behaviour-based attributes
Commitment
"They are always open to our problems, issues or demands what we want to change." D1
"It stands out that they want to do us everything what they can." B1
Table 3.4: Example of Coding
The coded data were used to answer the research question. Looking into all four in-depth cases, within-case analysis was conducted in order to gain insight into the characteristics and patterns of each within-case (Eisenhardt, 1989). Within-case analysis was used to search for the attributes of attractiveness from both supplier and buyer side. Furthermore, the analysis provided answer to the question of the parties’ awareness of attractiveness in the relationship. The attributes identified on the buyer and the supplier side were compared to each other to see how well they know what makes their company attractive. Further cross-case analysis provided insights into attractiveness in the different relationship types and also in case of the different levels of purchasing power. With the help of the comparison, possible differences in the relationships could be revealed that helped to understand more the attractiveness in cooperative relationships. Moreover, the additional questionnaire provided data about the level of perceived expected value in the relationship. The outcome of the questionnaire was augmented by the data gained from the interviews. To ensure data quality throughout this study, various safeguard measures were taken to ensure the validity and reliability (Yin, 2009) (see Table 3.5).
Quality And Validity Taken Measures
Construct validity Semi-structured interviews
Revision of transcripts by interviewees (Follow up) Using multiple sources
Internal validity Pattern matching
External validity Existing theory formed the basis of the research Reliability Case study protocol
Case study database Transcripts
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4. Findings
4.1.
Within-Case Analysis
4.1.1. Supplier A
Supplier A is located in Western-Europe and has multiple connections with the focal firm. This study takes only into account that part of the relationship where the supplier sells stainless steel and titanium to the buying company. This relationship started eight years ago, with the supplier having approached the focal company in order to extend its business in the Eastern part of Europe. The buyer’s strategic intent of this relationship was to have high quality supplies. The bigger production capability of the supplier was also appealing since the growth of the buyer required a reliable and continuous supply. Supplier A is a major partner of the focal company and due to the importance of these components, the buyer is highly dependent on this supplier. Nevertheless, the supplier usually has bigger customers and the amount purchased by the buyer is rather small. Therefore, there is no mutual dependence in this relationship. Based on the survey outcome, trust is relatively high in the relationship since they contracted for a consignment stock located in the buyer’s warehouse. However, information sharing is formal and restricted only to the pre-specified agreements between the pre-specified contact persons and therefore, resulted in low scores in the survey. The partners want to have a long-term relationship, but they do not have the intention to deepen or move it to a strategic level (the overview of the outcome of the survey can be found in Appendix E).
Figure 4.1 shows the most important findings gained from the interviews, while more details about the cases can be found in Appendix F. Based on the coded data, economic-based attributes were listed as the most common drivers of attractiveness in this relationship. Interviewees from both sides mentioned short-term goals, such as price, quality, reliable payment or bigger purchasing value. The latter referred
18 to the fact that there is a big difference in size between the two firms and the supplier is continuously expecting a bigger amount purchased from the buyer. Resource-based attributes which emerged during the interviews pointed out the innovation or production capabilities of the firms but it does not refer to joint development projects. This in fact implied a potential growth of the relationship, either as a bigger purchasing volume or a bigger capacity.
“But I would rather say that this is not common, that we receive innovative ideas from them. This relationship is not about innovative projects together.” (Purchasing Manager A1)
“Well, I think it is the bigger amount ordered. I don’t think that we would expect anything else from this customer.” (Account Manager A2)
Besides, each interviewee mentioned the aspect of personal attractiveness. Based on the existing literature, this driver was not originally part of the classification discussed by Tanskanen and Aminoff (2015), they only discuss personal relations, that is, the existing personal ties in the relationship. In this research, personal attractiveness explained the irrational or subjective part of a decision: In cases when there are two companies with really similar capabilities, personal attractiveness will influence the decision. The researcher of this study decided to label this as behaviour-based attribute because it is related to personal relations which belong to this group of drivers.
“Or the other possibility is during on the negotiations or better to say during the evaluation phase, we experience that the employees from one of the firms are easier to work with…so they are more sympathetic.” (Purchasing Manager A1)
19 partner’s performance. They found each other attractive enough and did not list anything that could improve their relationship.
4.1.2. Supplier B
Supplier B is a small local company operating in the same town as the buyer. They supply tools for the production of implants. The relationship was formed ten years ago, and the purchased volume is quite high for both sides compared to other tool suppliers and customers. The focal company is dependent on this supplier since they are the only available source for the necessary drilling and milling tools of a specific brand in the region. On the other hand, the supplier is also dependent on the buyer because they need all those orders from the buying company to be profitable. The tool industry is quite innovative which results in the fact that Supplier B is perceived as an innovative firm. Nevertheless, joint innovation projects are not performed, only the supplier provides brochures with the new tools and offers free tests to the buyer.
“Sure, they always bring new technological ideas. If a new tool, milling cutter, auger or a new drilling tool are launched on the market… They try to convince the technologists either with tests or the local experiment.” (Purchasing Representative B2)
The relationship operates with relatively low intensity. The reason behind this can be that the focal company has a so-called consignment stock in their own warehouse and they pay for the usage declared each month. Therefore, the interaction is not that frequent. However, the relational posture scored relatively high in the survey, which can also be induced by the fact that the product supplied by the company is important for the focal firm. Nevertheless, it is clear for the buyer that the supplier is
20 dependent on them and they use this power. Due to their mutual dependence, both sides plan a long-term relationship.
Supplier B is favoured by the buying company mostly because this is the only way in the region to procure the specific tools required for the production. As these products are important, it was crucial to have a supplier nearby in order to be able to deliver quickly. Besides the proximity factors, economic-based attributes were common during the interviews (see Figure 4.2). Since the relational posture in this relationship was evaluated as being fairly high, trust and personal attractiveness were mentioned more frequently than in case of Supplier A. However, the buyer listed price as one of the most important factors of attractiveness implying that they can only be chosen if their bid is the lowest at the renegotiation of the contract. Furthermore, new possibilities and the growing relationship were mentioned as attractiveness in the relationships. These drivers meant new learning opportunities or further growing potentials which increase the expected value of the relationships. These factors were aggregated in one new group by the researcher of this study. Both the buyer and the supplier were aware of the mutual dependence in the relationship. The supplier was conscious that their competence, low prices and the closeness are important in the relationship. While the buyer knows that the growing possibilities they offer for this supplier is attractive. That is, their innovation capability and increasing production capability create newer and newer business possibilities to the supplier. Additionally, both partners were satisfied with the other partner and could not mention further attributes to improve the attractiveness in the relationship.
4.1.3. Supplier C
21 Supplier C is a globally operating company, supplying plastics for the implants. The relationship was formed six years ago, with the strategic intent of the supplier to expand its business and to have customers from Eastern Europe, whereas the buying company needed a supplier with a bigger capacity and continuous and high quality. Besides steel and titanium, plastics are the most important components of the implants, therefore it is crucial for the focal company that the supplier provides the best quality, and the products are continuously available for manufacturing. Despite the fact that the supplier has power over the buyer, their relationship is quite cooperative. It is common that the supplier helps the focal company to develop new components which fit their newly planned products. Showing the new plans for implants to the supplier, it can develop the new prototypes in-house with the assistance of their own technologists. The relational posture of this relationship is the highest of all four suppliers chosen for this study. Based on the survey outcome, mostly trust and conflict resolution contribute to this high score, although, based on the interviews, conflict is not common in the relationship. Furthermore, the buyer believes that they have devoted quite a large amount of assets to this relationship. Both sides plan a stable, long-standing relationship in the future.
For the relationship with Supplier C, each interviewee listed resource- and behaviour-based attributes with similar frequency (see Figure 4.3). Next to the short term economic goals such as price or reliable payment, more emphasis was put on trust, good communication or competences by the interviewees.
“But of course, we are satisfied how they communicate with us. We always receive every information on time, they provide eligible forecasts.” (Sales representative C3)
Furthermore, larger production capacity was favoured by the buyer since the produced plastic is a crucial component of the implants. On the other hand, the market leader position and thus the growing potential was attractive enough to the supplier for forming the relationship. Moreover, since it is common that the buyer develops a new product which requires a new type, size or form of plastic and it is easier for them to make the supplier develop these new components, innovation capability was also listed as important attribute of attractiveness. Here, reliability referred to trustworthiness, that is, what the parties agree on, it will be done on both sides.
“We can work together easily and without any conflicts. They can trust us and we can trust them. If we agree on something, both partners know that it will happen.” (Sales representative C2)
“Well, as I mentioned, their attractiveness is really high, so we are satisfied with what we get from this supplier. Actually, what we ask for, they always do in a proper way.” (Purchasing Manager C1)
22 interviewees, which together with the good communication in the relationship can explain the high level of trust between the two companies. Furthermore, both partners found it important that the other is capable of developing or learning in the relationship. It is considered to be crucial since they plan to have a long-standing relationship which can be moved to a strategic level.
4.1.4. Supplier D
Supplier D is operating in the press and paper industry and locally is one of the three biggest companies in its field. They supply several packaging materials, booklets and additional products for packaging. Furthermore, they have contact with the Marketing Department of the focal company but only the part of the relationship has been evaluated which concerns the manufacturing process. The relationship regarding manufacturing is relatively new, started only two years ago, but since the Marketing Department has contact with this supplier, there is a common history prior to these two years. Due to changes in the press industry, the supplier started to approach and to do business with companies who cannot offer big purchasing volumes. Thus, they started supplying packaging materials to the buying company. The buyer’s strategic intent was to have a supplier with sufficient production capacity which was not available before. The relationship is continuously developing, more and more new products are moved to this supplier. Despite the fact that the purchasing volume is not significantly high, it still puts the focal company among the top 20 per cent of the supplier’s customers. Due to the above-mentioned factors, the buyer has a relatively high power in this relationship. Relational intensity was rather low, although the interaction between the firms take place quite frequently. Frequent communication, common history and the amicable relationship between the management could establish a trustworthy atmosphere. This resulted in high scores for trust in the survey. Since the relationship works without any disturbance, the partners expect a closer relationship in the future.
23 Despite the cooperative feature, economic-based attributes are the most common drivers of attractiveness in the relationship (see Figure 4.4). Both the supplier and the buyer focus on short-term goals such as quality, price, cost reduction or reliable payment. The reason for this short-term focus might be that this relationship is fairly short. Next to the economic-based attributes, the resource-based drivers were in majority. However, these attributes emerged at different phases of the relationship. On the one hand, the buyer’s biggest reason for forming this relationship was that the supplier is capable of providing the required production capacity since the previous supplier was not suitable for this requirement. On the other hand, the supplier believes that the innovative capability of the buying firm can create a bigger production capability, which can bring growth in the relationship. Furthermore, Supplier D is a relatively innovative firm and it is willing to share this knowledge with the buyer. However, joint projects are not common, both companies work alone on the development and share only the final plans with the other partner.
“Well, we have a conception, we introduce it and they bring us several variations for the solution. They develop it with their own technologists, they do what is possible for a good price and of course it is corresponding to our expectations and plans.” (Purchasing Manager D1)
Trust, communication and commitment were mentioned frequently on both sides. Communication was evaluated as formal but frequent and both partners were satisfied with the quality of the information shared in the relationship. Finally, bridging-based drivers were also mentioned concerning this relationship. The interviewee from the supplier side put more emphasis on the fact that they could get access to new customers through the buyer. In the case of the buying firm, these examples resulted in a higher level of trust in the relationship since they do not have the corporate goal to expand the firm’s supply chain with more tiers.
“Having the relationship with your company, we could look for and get other business partners as well several times.” (Sales representative D3)
Both partners were aware of the factors that can make their firm attractive in the other partner’s eyes. Personal attractiveness and the common history were quite important for both companies. Additionally, this led to a higher level of trust which was acknowledged on both sides since both companies believe that they are reliable. Furthermore, both the buyer and the supplier think that they are capable of satisfying the short-term economic goals.
4.2.
Cross-Case Analysis
4.2.1. Gracious and Transient Relationships
24 important component to build a buyer-supplier relationship. On the one hand, economic-based attributes of attractiveness were mentioned by each interviewee on both sides but were highlighted more in the relationships which are more transient in nature. However, it can be considered as a characteristic of SMEs rather than typical only of relationships with low intensity since, for instance, the selection process of the focal company puts emphasis on these short-term factors.
“Yes, price, capacity, payment conditions and quality. And tests. Basically, we decide based on these factors.” (Purchasing Manager B1)
On the other hand, resource-based attributes were listed more in the relationships with more gracious characteristics than in the transient ones. The reason behind this is that in the relationships that are more gracious in nature the innovativeness of both partners was important. The suppliers had innovations, new developments based on the demands of the buyer, although these projects are not joint ones.
“So basically, it is a more or less new packaging type which they currently could not produce in the way we expected and wanted. So it is under development, but they involve their own technologists. They are doing it based on our plans … Their own technologists are giving advice how it is the best to develop this new packaging.” (Purchasing representative D2)
4.2.2. Low and High Purchasing Power
In case of low purchasing power, a small firm has to offer other aspects than big purchasing volumes or profits in order to attract and get into contact with big firms. Supplier A and C started business with the buying company because they wanted to penetrate a new market. This is how they wanted to expand and increase their revenues. Nevertheless, the buyer being a market leader in its country and claiming itself innovative could create a sufficient level of attractiveness for the suppliers.
“We were expanding our business in Eastern Europe and looking for new opportunities. We contacted the buyer. They are the market leader in their country.” (Account Manager A2)
This implies that economic- and resource-based attributes of attractiveness were appealing to the suppliers. Furthermore, interviewees from the supplier side mentioned that all these aspects meant growing potential in the relationship which may imply a bigger purchasing volume. On the one hand, the buyer could attract the big suppliers with its innovative capability and growing potential but, on the other hand, based on the data gained from the interviews, big purchasing volume is still the most important driver for these firms.
25 respected. Additionally, both suppliers listed further possibilities with which they can become more attractive to the buyer and it is crucial that they can grow due to this new opportunity.
“It depends on the opportunities. Actually, I would think that an opportunity should be raised which we maybe cannot accomplish properly and then we can make changes.” (Sales representative B3)
5. Discussion
26 more trust and cooperation (Szycher, 1996) than in the automotive industry. Concluding, the findings of this study revealed that economic-based attractiveness characterizes the relationships which are more transient in nature, whereas gracious ones are characterized by resource-based attractiveness. Therefore, it is proposed that attributes of attractiveness can explain the different characteristics of different arm’s length relationships.
In social exchange theory, it is discussed that attractiveness should be mutual to pull partners towards each other (Blau, 1964). It is crucial that the buyer finds the suppliers attractive and even these suppliers find the buying company attractive. Tanskanen (2015) found that a high level of awareness of the factors that make the firm attractive to the other partner enables the company to use this knowledge strategically. The findings of this research are in line with the existing theory since the medium-sized buyer has a good strategy for communicating its own attractiveness and thus making the suppliers aware of its attractiveness. This can be seen from the fact that both smaller and bigger suppliers perceived almost the same drivers as attractive. Furthermore, the buying company was aware that their innovation capability and the market leader position make them attractive, which enabled them to use this knowledge and form a relationship even with bigger suppliers. It can be proposed that awareness of attractiveness enables small companies to engage in relationship with large suppliers. However, there was no relevant difference in the awareness and the perceived attractiveness in the different types of arm’s length relationships. This indicates that the level of awareness does not explain the different levels of relational posture. That is, companies do not use their knowledge to specifically engage in a cooperative relationship.
27 The findings of this research revealed two possible attributes, which can be considered as an important driver of SMEs. In the literature personal relations are considered to be part of attractiveness, since well-developed personal ties help to maintain good communication and develop trust (Tanskanen & Aminoff, 2015). In their model only existing relationships between individuals are taken into account. On the contrary, the findings of this research show that personal attractiveness - a person is sympathetic to another one - influences the decision-making process of small firms. This attribute can explain the irrational part of a decision when the small firm has to choose from two companies with similar competencies. Moreover, another aspect of attractiveness emerged in this study which does not appear in existing literature about attractiveness. Flexibility is considered to be quite important in the context of small companies. Not just the buyer should fulfil this requirement but it is expected from the suppliers, as well. Therefore, it is proposed that in case of small firms the model of Tanskanen and Aminoff (2015) should be extended by personal attractiveness and flexibility, which can be aspects of behaviour-based drivers.
6. Conclusion
As this study is one of the first to analyse the attributes of attractiveness on both the supplier and buyer side within the context of an SME, it can determine what the most important drivers of attractiveness are that influence relational posture and how a small firm can attract larger suppliers to engage in a cooperative relationship. The research findings showed that the special characteristics of the different arm’s length relationships are reflected in the attributes of attractiveness. The relationships that are transient in nature are characterized by short-term economic-based drivers, such as cost reduction, delivery or quality, while in the relationships that have gracious characteristics, innovation and production capability, which implies that the resource-based attributes are favoured by the partners. The attributes of trust, commitment or good communication which are similar to the factors of relational posture are found to be similarly important in each type of arm’s length relationship, thus do not explain the different levels of relational posture in the relationships. Furthermore, the study revealed that both suppliers and the buyer were quite aware of their attractiveness. Therefore, awareness cannot explain the level of cooperativeness in the relationship, but, on the other hand, it enables the smaller buyer to form a relationship with a bigger supplier. Nevertheless, SMEs should focus on specific attributes which they develop and thus, they can attract suppliers to engage in relationships with this emphasized uniqueness. Finally, the findings showed that personal attractiveness and flexibility can be one of these important attributes for small firms.
6.1.
Managerial Implications
28 attractiveness can create the requisites for SMEs to provide alternatives to big suppliers. Not just awareness but the proper communication of this attractiveness, that is, the strategic use of attractiveness can pull towards large suppliers. Furthermore, it is found that short-term economic drivers are quite crucial and managers should not underestimate the importance of reliability implying that they will do what the partners have agreed on. Additionally, it is critical to realize that innovation capability is one of the most attractive capabilities for suppliers because it can enable smaller firms to further develop their business. Lastly, management should not forget that attractiveness of the company can change in every stage of the relationship and therefore, they should constantly revise what makes them attractive and how the suppliers perceive their attractiveness.
6.2.
Limitations and Future Research
29
Acknowledgements
30
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Appendix
Appendix A
Dear Participant,As a Master student of the University of Groningen, I am conducting research on buyer-supplier relationships. I would like to note that all information given will be only used for research purposes and will be held anonymously. Thank you in advance for you time and effort!
Q1 What is your function in the company (title)? Q2 Company Name of the Supplier
Q3 Length of the relationship (years)
<5 (1); 5-10 (2); 11-15 (3); 16-20 (4); 21-30 (5); Over 30 (6) Answer If Does your company has multiple plants? Yes Is Selected
The following questions are based on your relationship with the supplier in the last year.
Questions Once per
year (1) 2-4 times per month (2) 5-10 times per month (3) 1-3 times per week (4) 1-4 times per week (5) Once per day or more (6) Frequency of face-to-face communication. How
often does your firm interact with the supplier? a Frequency of telephone communication. How often does your firm interact with the supplier? a Frequency of written communication. How often does your firm interact with the supplier? a Frequency of delivery. How often does your firm order products or components from the supplier? a
All in all, how often does your firm interact with the supplier (on average over the past 3–5 years)?
Questions Strongly Disagree (1) Disagree (2) Somewhat Disagree (3) Somewhat Agree (4) Agree (5) Strongly Agree (6)
Any change in our firm’s production will have a significant impact on the supplier's day-to-day operations.
It would be relatively easy for the supplier to find another customer for the components/items our company buys.
The supplier is highly dependent on our firm. b Our operational goals assume a continued relationship with the supplier.
Our company has extensively invested in production equipment with the supplier to do work for us exclusively. b
Our firm has committed significant time and resources to train and develop the supplier's personnel. b
We have invested capital and/or resources in this the supplier’s production system to enable them to make products specifically for us. b
34 Questions Very limited (1) Limited (2) Somewhat Limited (3) Somewhat Extensive (4) Extensive (5) Very extensive (6) How extensively has your company been engaged
in joint activities with the supplier? c
How extensively does your company have joint activities with the supplier above and beyond regular exchange?
How extensively does your company have contact with the supplier in contexts other than the regular business exchange? c Questions Strongly Disagree (1) Disagree (2) Somewhat Disagree (3) Somewha t Agree (4) Agree (5) Strongly Agree (6)
Our company trusts the supplier to keep its promises.
The supplier puts confidence in what our company says.
The supplier has always been fair in its negotiations with our firm.
The supplier trusts that our firm would not take advantage of our relationship and try to profit at their expense.
The supplier is a trustworthy company.
Our company on occasion makes sacrifices to help the supplier.
Our firm’s relationship with the supplier goes beyond the letters of the contract.
Both our company and the supplier often go out of our way to help each other.
Our company is just another customer with which the supplier does business.
The supplier expects its relationship with our firm to strengthen over time.
If either our firm or the supplier experiences a problem in our relationship, we can count on each other to find a solution.
The supplier always reciprocates the favours we do for them.
Our firm receives a fair compensation from the supplier for what we put into our relationship. The supplier favours options that benefit both of our firms rather than ones that just benefit them. Even in adverse situations, both our firm and the supplier will stay together.
Both our company and the supplier share information that might benefit the other party. Our firm regularly shares its proprietary information with the supplier.
In our firm’s relationship with the supplier, information exchange occurs informally and often outside pre-specified formal channels.
The supplier regularly shares its proprietary information with our company.
When there are disagreements, my firm and the supplier tend to blame each other.
There are lingering feelings of resentment and frustration about unresolved issues with the supplier.
When there is a problem, all facts are assessed to try to reach a mutually satisfactory solution. When there are particularly difficult problems, the supplier sometimes notifies our company that they can take their business elsewhere.
a Scale adapted
b Questions adapted based on the existing literature
