“THE IMPACT OF TRUST, INTERDEPENDENCE AND
POWER ON THE INTERACTION BETWEEN
RELATIONAL AND CONTRACTUAL GOVERNANCE IN
BUYER-SUPPLIER RELATIONSHIPS”
6
thof July 2015
Author: Hazar Turkmen
Studentnr: S1895273
Tel: +31(0)648245088
h.turkmen@student.rug.nl
Master thesis MSc. Supply Chain Management
First Supervisor: Prof. Dr. Ir. Kees Ahaus
Second assessor: Dr. J.T. van der Vaart
University of Groningen, Faculty of Economics and Business
P.O. Box 800, 9700 AZ Groningen
Acknowledgements: My gratitude goes to everyone who were part of this thesis, from company representatives who participated to fellow group students Derk and Arjen, who made this period more fun and especially my family who provided unconditional support during good and bad times. I would like to specially thank my supervisor for his useful comments and guidance throughout the thesis, giving me the confidence and motivation to achieve my objectives.
Abstract:
Purpose-‐ This thesis is aimed towards enhancing the understanding of the
interaction between relational and contractual governance with trust, interdependence and power as influencing factors.
Design/methodology/approach-‐ An explorative multiple-‐case study is
conducted and four cases are selected from the metal assembly and processing industry in the Netherlands.
Findings-‐ The interaction of relational and contractual governance is
complementary, because trust overcomes the rigidness of contracts and contracts reduce ambiguity created through informal mechanisms. Interdependence positively moderates the relationship between relational and contractual governance but the negative understanding of interdependence by managers limits this interaction. Finally, power imbalances undermine trust and commitment and imbalanced relationships therefore lack the appropriate setting for relational governance to complement contracts.
Practical implications-‐ Results indicate that the interaction between relational
governance and contractual governance is volatile and complex. An enhanced understanding can help managers in making appropriate governance decisions, saving costs and creating synergies.
Originality/value-‐ This study is the first study to incorporate interdependence
and power into the discussion of relational and contractual governance. In addition, this study is one of the few studies that provide empirical evidence for the interaction between relational and contractual governance.
Contents
1. Introduction ... 3
2. Theoretical background ... 5
2.1 Inter-‐organizational relationships ... 5
2.2 Interdependence and power ... 8
3. Methodology ... 10
3.1 Sample selection ... 11
3.2 Data collection ... 12
3.3 Development interview protocol and document study
... 13
3.4 Data analysis ... 14
4.Results ... 16
4.1 Within-‐case analysis ... 16
4.2 Cross-‐case analysis ... Error! Bookmark not defined.
5.Discussion. ... 27
6. Conclusion ... 31
References ... 33
Appendix I: Interview protocol ... 38
Appendix II: Document study ... 39
1. Introduction
contractual governance. We have chosen interdependence and power because these concepts are found to significantly impact the management of a buyer-‐ supplier relationship and therefore have the potential to reveal how relational and contractual governance interact, given a certain dependency or power position in a relationship (Anderson and Weitz, 1989; Wagner and Johnson, 2004; Caniels and Gelderman, 2007). From a perspective wherein power (im) balances and mutual dependencies explain the causes and effects on governance types, we contribute to the body of literature on buyer-‐supplier relationships by adding new variables to the framework of Cao and Lumineau (2015) to better understand how relational and contractual governance interact.
Alongside interdependence and power, special attention is paid to the concept of trust since there is an increased ambiguity of how trust is perceived and actually adopted in practice (Donney and Cannon, 1997; Johnston et al. 2004). More importantly, by closely examining the role of trust in a relationship we hope to find the underlying mechanisms of trust that lead to a substitution or complementary effect on contracts. Contractual governance is indicated through the extensive use of contracts and monitoring efforts (Sako, 1992). In the end, we shed light on the discussion of relational and contractual governance as substitutes or complements by incorporating the influence of interdependence, power and trust to the model. We do this by answering the following research question:
How do trust, interdependence and power influence the emergence and interaction of relational and/or contractual governance in buyer-‐supplier relationships?
After having answered the research question we fill the gap in literature by: a) Providing empirical evidence for the interaction between relational and contractual governance from an interdependence and power perspective and hence react to the lack of empirical data and incompleteness on the influence of external factors on these governance mechanisms in literature.
b) Depicting when and how trust substitutes or complements contractual governance and identify the conditions for this effect with data from practice and therefore eliminate some of the ambiguity on the role of trust as being a substitute or complementary to contracts.
the findings to the findings in literature and a conclusion is drawn at the very end with managerial implications and the contribution to academic literature.
2. Theoretical background
In the theoretical background we dive into literature and establish a conceptual structure for the analysis in order to answer our research question. First we distinguish two types of inter-‐organizational relationships, which characterize relational governance and contractual governance. This is necessary in order to understand how these two mechanisms differ from each other but also to identify conditions where they can substitute or complement each other. The concept of trust is included in the theory of relational governance, because trust is the main component of this relationship type. Subsequently, literature on interdependence and power are depicted to understand why these concepts are interrelated and how this influences the buyer-‐supplier relationship.
2.1 Inter-‐organizational relationships
Many different types of inter-‐organizational relationships exist between firms that exchange resources and information. These relationships are also recognized as buyer-‐supplier, customer-‐distributor or customer-‐supplier relationships but for the sake of simplicity this paper will use the buyer-‐supplier concept. Most of these inter-‐organizational relationships can be categorized into two different types: Arm’s Length Contractual Relation (ACR) and Obligational Contractual Relation (OCR) (Sako, 1992). A typical ACR is managed by explicit contracts that contain each party’s tasks and duties in every conceivable eventuality. Unforeseen contingencies are resolved with legal actions or normative rules. The high level of contractual governance in this relationship may reduce opportunism and safeguard inter-‐organizational relationships (Williamson, 1985). ACRs have independence as a guiding principle, which often requires not disclosing much information to existing and potential buyers and suppliers. This strategy enables firms to obtain competitive prices through hard negotiations and by exploiting a position of power. However, contracts are subject to some limitations (Sako, 1992). First, a contract may be incomplete because of human being’s bounded rationality and can therefore leave space for opportunistic behaviour on unanticipated events or clauses (Lewis and Roehrich, 2009; Luo, 2002). Second, people may perceive contracts as a lack of trust, which can harm a cooperative relationship (Poppo and Zenger, 2002). Third, a possible mismatch can occur in contract application wherein one contracting partner uses contract terms more rigidly and the other uses the terms more flexibly. The mismatch in interpretation and/or application is likely to cause conflicts. These limitations constrain the effective use of contractual governance in inter-‐ organizational relationships (Cao and Lumineau, 2015).
process that stimulates both parties to deviate from the contract specifications and to do more than expected by the trading partner. Trust refers to the partner’s integrity, credibility and benevolence in a risky exchange environment. (Zaheer et al., 1998, Cao and Lumineau, 2015). In an environment of high mutual trust, partners are less likely to exploit any adverse situation because they consider their partner’s interests as much as they do their own. Based on this construct, trust acts as a mechanism on its own to reduce opportunism (Liu et al., 2009). Furthermore, the incentive that the act of goodwill is likely to trigger a similar response from the trading partner can result in major cost reductions or create an idiosyncratic relationship that is difficult to imitate for competitors (Dyer and Singh, 1998; Sako,1992). However, it should be noted that OCRs take substantial time and resources to develop. They are also more exposed to opportunism due to its ambiguous nature (Cannon et al., 2000; Dyer and Singh, 1998). Therefore, one should choose carefully choose with whom to engage in an OCR, considering both the opportunities and risks that come along in this type of governance.
Another discussion is raised to answer whether these two interorganizational relationships are substitutes or if they can complement each other (Poppo and Zenger, 2002; Cao and Lumineau, 2015). More specifically, they are substitutes when the use of one governance type decreases the use or the benefits of the other. The governance types complement each other when the use of one increases the use or the benefits of the other (Huber et al., 2013; Liu et al., 2009). Proponents of a substitutive relationship between contracts and relational governance have implicitly focused on the control function of contracts. As a result, the main assumption that contracts are solely a controlling mechanism enforcing partners to behave appropriately evokes the question of the partners’ good intentions. However, the coordination function of contracts may not signal a lack of trust but a commitment to the relationship. A coordinating function facilitates mutual understanding and trust, allowing contracts to support relational governance (Cao and Lumineau, 2015; Ryall and Sampson, 2009). Poppo and Zenger (2002) initially raised the discussion of relational governance being a substitute or complementary to contractual governance. They provide a conceptual framework that represents the interaction of the two mechanisms (See figure 1.) According to their findings, contractual governance was found to complement relational governance as contract complexity increases, because customized contracts specify contingencies, adaptive processes and controls likely to mitigate opportunistic behaviour and thereby support relational governance. In addition, relational governance complements the adaptive limits of contracts by fostering continuance of the exchange and entrusting both parties with mutually agreeable outcomes (Poppo and Zenger, 2002).
Figure 1: Conceptual model of Poppo and Zenger (2002) on the interaction of relational governance and contractual governance
Cao and Lumineau (2005) have revisited this discussion and focused on external factors to better explain the dynamics of the interaction between relational and contractual governance. The mutual relationship between the two is negatively moderated by the legal system and power distance but positively moderated by collectivism. Informal mechanisms are encouraged and more widely accepted in collectivist countries as China, fostering more relational governance (Zhou and Poppo, 2010; Wuyts and Geyskens, 2005) Vertical inter-‐organizational relationships advance the complementarity of relational and contractual governance, because the higher interdependence in these relationships requires more information sharing and mutual adjustments (Burkert et al., 2012; Rindfleisch, 2000; Krishnan et al., 2006). Finally, relationship length positively moderates the relationships between contractual and relational governance, because short-‐term partners rely more heavily on calculative logic and use contracts to control opportunism. Long-‐term partners give each party enough time to get to know each other and develop trust, which complements contracts through its coordinating and adaptation functions (Talay and Akdeniz, 2014; Cao and Lumineau, 2015). The conceptual model of Cao and Lumineau (2015) is shown in figure 2.
712 L. Poppo and T. Zenger
Relational Governance Customized Contracts Exchange Performance + or − + or − Notes:
+ = Positive relationship, support for Complements (H4a, H4b) − = Negative relationship, support for Substitutes (H3a, H3b)
Exchange Hazards IT Size Managerial Experience Previous Business Relations
Figure 1. Empirical Model effect on performance exists if both relational
gov-ernance and contract complexity positively influ-ence performance, but negatively influinflu-ence one another.
Following from the above arguments, we hypo-thesize (see Figure 1):
Hypothesis 3a: Increases in contractual com-plexity discourage the formation of relational governance.
Hypothesis 3b: Increases in relational gover-nance discourage the use of complex contracts. Hypothesis 3c: Contractual complexity and rela-tional governance will function as substitutes in explaining exchange performance.
RELATIONAL GOVERNANCE AND FORMAL CONTRACTS AS
COMPLEMENTS
Despite compelling arguments for viewing rela-tional governance and contractual complexity as substitutes, the logic for viewing them as com-plements appears equally compelling. In settings where hazards are severe, the combination of for-mal and inforfor-mal safeguards may deliver greater exchange performance than either governance
choice in isolation. The presence of clearly artic-ulated contractual terms, remedies, and processes of dispute resolution as well as relational norms of flexibility, solidarity, bilateralism, and continuance may inspire confidence to cooperate in interorga-nizational exchanges.
We noted earlier that economic models of rela-tional governance (Klein, 1996; Baker et al., 2002) highlight the role of simple repeated ex-change in motivating long-term cooperation. In such models the expected pay-offs from a pattern of future exchange deters the pursuit of short-run gains that undermine the longevity of the relationship. Contracts not only have this source of advantage because of their formal specifica-tion of a long-term commitment to exchange, but through clearly articulated clauses that specify punishments they also limit the gains from oppor-tunistic behavior. This reduction in short-run gains heightens comparatively the gains from cooper-ating in the exchange relationship. By contrast, failing to contractually specify elements of the exchange that are easily specified merely height-ens incentives for short-run cheating and low-ers expectations of cooperation (Baker, Gibbons and Murphy, 1994). Thus, the specification of contractual safeguards promotes expectations that the other party will behave cooperatively and thus complements the informal limits of relational
8
Figure 2: Conceptual model of Cao and Lumineau (2015) with external factors moderating the relationship between relational and contractual governance
2.2 Interdependence and power
Mutual dependence and power are closely related concepts. The supplier’s dependence on the buyer is a source of power for the buyer, and vice versa (Caniels and Gelderman, 2007). In asymmetric relationships, the most independent partner dominates the relationship, whereas in balanced relationships neither party is dominated (Buchanan, 1992). Asymmetry in this respect refers to the difference between the two partner’s levels of dependence. Buyer-‐supplier relationships that are characterized by power imbalances tend to be deficient, because the independent party experiences high power and might be attempted to exploit it (McDonald, 1999). However, unbalanced relationships do not automatically lead to misuses in power. Besides relative interdependence dyadic relationships also include total interdependence (Geyskens et al.,1996; Kumar et al., 1995). Total interdependence refers to the intensity of a relationship. Such interdependence indicates a strong, cooperative long-‐term relationship, in which both parties have invested (Caniels and Gelderman, 2007). Mutual trust and mutual commitment are the drivers that enhance these relationships (Geyskens et al., 1996). Consequently, the probability that either party acts opportunistically due to its high power is quite low, because the risk of retaliation is considered to be high (Ramsay, 1996). Additionally, a high total interdependence in the relationship leaves partners with high exit barriers, making them reluctant in taking advantage from each other (Geyskens et al., 1996). After having identified the two dimensions in interdependence, relative and total, the next step is to describe concepts that determine dependence. According to Caniels and Gelderman (2007), all empirical studies highlight ‘importance’ and ‘substitutability’ as concepts that determine dependence. Empirics have shown that importance is found to have a positive relationship with dependence and substitutability constitutes a negative relationship. Importance can refer to the financial magnitude or the criticality of the specific item on firm performance. If one of these attributes is high, the company will act on a strategic level, knowing that a small change can have a big impact on results.
22 Z.Cao,F.Lumineau/JournalofOperationsManagement33–34(2015)15–42
Fig.2. Factorsmoderatingtheinterplayofcontractualandrelationalgovernance.
numberof empiricalstudiesoncontractualandrelational gover-nancesurges,seeFig.1)(Changet al.,2009).7 Wefound another
setof170articlesoncontractualorrelationalgovernance.Fourth, wemanuallysearchedthereferencelistsofhighly-citedandnewly published studies such as Huber et al. (2013), Jayaraman et al. (2013), Liuet al.(2009), Yanget al.(2012), andZhouandPoppo (2010)tocheckifanystudycouldhavebeen lostintheprevious searchprocess.Wefound27additionalarticlesthatwerenot iden-tifiedintheprevioussteps. Finally,weemailed theauthorswho didnotreportacorrelationmatrixandaskedthemtoprovidethe matrixandtheirunpublishedstudies,ifany,onthistopicforus. Anotherfivearticleswereprovided.Insum,afterthesefivesteps, weretrievedatotalof3894articles.
We set up threeinclusion criteria to selectstudies (Heugens andLander,2009;Jiang et al.,2012).8 Theselected studies must
havemettherequirementsofallcriteria.Ifonestudyviolatedany ofthesecriteria,itwasexcluded fromfurtheranalysis.Ourthree criteriawereasfollows:first,theunitofanalysisofselected stud-iesmust havebeen aninterorganizational dyad. 3349articlesat theorganization(e.g.,Cruzetal.,2010;Gomez-Mejiaetal.,2001; RedikerandSeth,1995;Tosietal.,1997),team(e.g.,Chatmanand Flynn,2001;DeJongandElfring,2010),andindividuallevel(e.g.,
MalhotraandMurnighan,2002;McAllister,1995;Rajaetal.,2004) wereexcluded and 545 articles remained. Second, the selected studies must have been empirical and report at least one cor-relationbetweencontractual governance, relational governance, performance,andopportunism.Non-empiricalstudiessuchascase studies(e.g.,Faemsetal.,2008;Huberetal.,2013;Mahapatraetal., 2010;Vlaaretal., 2007;Zhengetal.,2008)andconceptual stud-ies(e.g.,InkpenandCurrall, 1998, 2004;Luo,2006)orempirical studiesthatdid notreport anyofthecorrelations weredropped fromoursampleforthemeta-analysis(e.g.,Saparitoetal.,2004; WastiandWasti,2008; Zhouet al., 2008).9 From theremaining
545articles,wefurtherexcluded402articles,and143articleswere selected.Third,selectedstudiesmusthavehadindependent sam-ples(Geyskens et al.,2006).Wechecked thesamplingprocesses
7 Wedidnotsetuptheconstraintsof2002fortheotherpartsofthesearch
pro-cess.ThesejournalsweretheAcademyofManagementJournal,JournalofInternational BusinessStudies,JournalofManagement,JournalofManagementStudies,Journalof Marketing,JournalofMarketingResearch,JournalofOperationsManagement, Organi-zationScience,andStrategicManagementJournal.
8 Wehadafourthinclusioncriterionaboutthelanguageandpublicationoutlet
descriptionofeachstudy.Studiessharingthesamesamplewere alldroppedexceptonethatwaspublishedinthejournalwiththe highestimpactfactor.10Fourstudieswereexcluded,andourfinal
databasethusincluded139articles.Theprocessofstudiessearch andselectionisillustratedinFig.3.
Followingpriorresearch(LipseyandWilson,2001),wedesigned a coding protocol to record information about the study (e.g., author,publicationdate,researchquestion,andabstract),sample (e.g., sample size, country, industry, unit of analysis, and
rela-tionship length mean), measurement (measurement items and
reliability),andeffectsize(correlation).Forstudiesonlyreporting correlations betweenmeasures(e.g.,Cavusgilet al.,2004;Poppo andZenger,2002)orbetweendifferentdimensions(e.g.,Luiand Ngo,2004;MalhotraandLumineau,2011)ofcontractualand rela-tionalgovernance, wecalculated thecompositecorrelationsand reliabilities according to the formulas provided by Hunter and Schmidt(2004:433–442)toapproachthecorrelationbetween con-tractual and relational governance. We averaged the inter-item correlations orinter-dimension correlationsonly when informa-tionfortheformulaswasnotavailable(Geyskensetal.,2006,2009). Wecheckedallrecordedinformationthreemonthslater,andfew discrepancies (less than 1%)were identified andsolved through discussions(Geyskensetal.,2006).
We calculated the sample-adjusted meta-analytic deviancy (SAMD) statistics to detect outliers (Huffcutt and Arthur, 1995; Geyskensetal.,2006).Oneoutlierwasdetectedandcheckedbefore being finally dropped.11 After dropping the outlier, wehad 149
studies across 138 articles reporting correlations of contractual andrelational governance.12 All studiesexcept twounpublished
studiesandonebookchapterwerepublishedinacademicjournals.
10 Liuetal.(2008,2009),andLuoetal.(2011)sharedthesamedataset,andweonly
keptLiuetal.(2009).Similarly,wedroppedCannonetal.(2000)andBianchiand Saleh(2010)butkeptCannonandPerreault(1999)andBianchiandSaleh(2011).
11 JapandGanesan(2000)wastheoutlierforthecontracts–relationalnorms
rela-tionship.Wedroppeditforthreereasons(Geyskensetal.,2009):(1)ithasextremely highnegativeSAMDstatistics(−30.41)whilethevaluesofSAMDofotherstudies rangefrom−1.36to7.93;(2)theunitofanalysisofthisstudyisdifferentfromall otherstudies;and(3)thefinalresultsarequitesensitivetoeffectsizeofthisstudy.
12 Theremaybemorethanonestudyinonearticle.Thereisnoconsistent
Substitutability refers to the availability of alternate sources of supply. Switching costs are an important element in this decision process. Dedicated investments in resources or relation specific investments exclusively in one customer/supplier result in higher switching costs, thereby limiting options when the relationship deteriorates (Caniels and Gelderman, 2007).
When further examining the concept of power we distinguish the sources of power and the use of power within a relationship. Complementary to the already discussed linkage between power and interdependence, resource dependence theory explains a source of power. Firms are embedded in a web of exchange relationships within an uncertain environment (Salancik and Pfeffer, 1978) and a firm’s power within the web resides in others’ dependence on it for resources (Emerson, 1962). Firms have power to the degree that others depend on them for resources (Crook and Combs, 2007). Dependence is elevated through the importance and concentration of resources. We already discussed how importance increases dependence through high financial magnitude and the criticality of resources. Benton and Maloni (2005) argue that concentrated industries where a few competitors generate most sales, have bargaining power due to their large volumes and the small number of alternatives. Thus, highly concentrated supply chains such as aircraft assembly and oil refining, cannot easily replace these important members, which enhances dependency. Supply chain members offering high magnitude or critical resources in highly concentrated industries are stronger as opposed to weaker members who lack such resources (Crook and Combs, 2007). In order for suppliers to be in a position of power, Bensao (1999) argues that offered products must be complex as in not easily imitable, have a proprietary technology, have a few suppliers of large size and have a concentrated market. The high competitive barriers between suppliers are then high, making them not easily interchangeable. At the same time, suppliers can sustain the levers of power if they successfully block competitors from market entry (Cox, 2001). The following question is how firms use this kind of bargaining power in the relationship. In Maloni and Benton’s (2000) paper, five bases of power are depicted: expert, referent and legitimate power belong to non-‐ mediated types of power and reward and coercive power are mediated types of power. Mediated power is controlled by the customer, which can reward a supplier by placing more orders or coerce it through negative consequences such as fines and cancelling orders for its non-‐ performance. In contrast, non-‐mediated power as expert, referent or legitimate power depends upon the decision of the supplier, whether and to what extent is influenced by the customer. Since we focus on the power perspective of the buyer, coercive and rewarding forms of mediated power are more relevant in this context.
proportion of informal mechanisms are included in the two concepts. Contractual governance is indicated by the adoption of formal contracts.
Figure 3: Conceptual model of the relationship between relational governance and contractual governance with the influence of interdependence and power as moderators on this relationship.
3.Methodology
3.1 Sample selection
In order to collect the data, we have selected four firms from the metal assembly and processing industry that are part of the NEVAT network. NEVAT is a Dutch business platform that connects suppliers with potential customers by organizing international networking activities. NEVAT stimulates innovation and cooperation between buyers and suppliers and this initiative may result in more complex contracts, which we can hopefully benefit from in the form of rich data. For the selection of cases we wanted to have some variety in sub-‐category, firm size and resources and possibly relate the findings to one of these attributes. Table 1. gives an overview of the selected cases and their attributes. Replication logic is applied by selecting contrasting characteristics e.g. small vs large firm, component subcategory vs system subcategory. This way differences between the cases are highlighted (Eisenhart, 1989; Yin, 1994). To get an evenly spread selection of cases, we targeted two firms from GPI with a firm size of 50-‐100, two firms from SYS with a firm size of >500 and two firms from GVE with a firm size of <50. Unfortunately, two of these firms, one from SYS and another from GVN, have not responded to our request in participating in our research. Nevertheless, with 4 cases, we still meet the recommendations by Eisenhardt (1989) to select a minimum of 4 cases in order to have reliable data.
The abbreviations GPI, SYS and GVN are Dutch and each stands for a specific sub-‐ category of firms in the NEVAT network. We will briefly depict each category to provide a better understanding of the different contexts. GPI refers to Groep Plaatverwerkende Industrie and means Sheet Metalworking Industry sector group. This group of firms generate revenue through processing sheets of metal with advanced processing machines and tools. Market conditions are rapidly changing and customers have customized wishes from the metalworking firms. Therefore, it is key that the metalworking firms respond swiftly and effectively to changing market demand or to new requirements. This guarantees a very short ‘time to market’ and is essential to stay ahead of international competition. Next are the group System Suppliers within the NEVAT network referred to as SYS. This group of suppliers are service-‐oriented relational leaders with a highly adaptable capacity, focused on customer intimacy. They are proactive lifecycle managers with relevant knowledge of various markets such as semiconductor, medical, multimedia, analysis, energy and industrial automation markets. System suppliers are different from other suppliers in the sense that they take responsibility in the field of product development, process development, serial production and end-‐of-‐life-‐ management. In addition, they contribute unique knowledge in the field of sheet metalwork, electronics, precision components and/or mechatronics. Lastly, GVN is Dutch for Groot Verspaners Nederland and means Dutch Heavy Machining Industry. Members of this group supply heavy machine processes or alternatively manufacture products using heavy machine process techniques. They have made significant investments in recent years to be able to process large complex pieces with a high degree of precision for various industry sectors including, energy, petrochemicals, heavy machine construction, the maritime sector (ship newbuilds and repairs) and offshore
(NEVAT website, 2015. Retrieved from http://.nevat.nl/en-‐GB/sectors-‐
Table 1: An overview of the selected cases and their characteristics
Case A Case B Case C Case D
Sub-‐category GPI GPI SYS GVN
Firm size (#Employees)
50-‐100 50-‐100 >500 <50
Interviewed
positionee(s) -‐General manager
-‐Purchasing manager
-‐General
manager -‐General manager (also
involved in purchasing) -‐General manager (also involved in purchasing)
Strategic item Pre-‐painted
tire 3D cutted metal
parts
Lathed and
milling parts Processed steel
Supplier
reference code Supplier W Supplier X Supplier Y Supplier Z
3.2 Data collection
We planned to perform all our data collecting activities within one month, which forced us to conduct the interviews and document study during the 2 hours we spent at each company. The secretaries of the companies reserved a closed office space, in which we could take the interviews. We provided the managers with a printed version of the interview before we started the interview protocol. This way we enabled them to follow the red line of our protocol. Next to that, the interviews were recorded and transcribed within 24 hours of the company visit. In order to fill in our document study template, we asked the managers directly after the interview if they could show us a contract that is used in the trading agreement between them and the strategic supplier. Fortunately, all managers cooperated and granted our request. The semi-‐structured interviews averagely took one hour and the document study approximately 15 to 20 minutes.
3.3 Development interview protocol and document study
In order to measure constructs such as trust, interdependence and power, we derived from literature on some measurement instruments that classify the interorganizational relationship as ACR or OCR. Based on the frameworks of Zaheer et al. (1998) and Corsten and Felde (2005) items for the interview were developed in the form of open questions. The complete interview can be found in Appendix I.
Document study or document analysis is often referred to content analysis in literature. Content analysis is used to gain data from text content and compare it with data or theories gathered beforehand. Three approaches can be distinguished; conventional, directed or summative. Conventional and directed approaches use categorization from the text or used theories, whereas for this research the summative approach is most desirable. With the summative approach the content from the documents is compared to the context the documents are used in (Hsieh & Shannon, 2005). The template in Appendix II is used to review contracts on their degree of explicitness. The contract that involves the trading agreement about the procured item is scanned and analyzed with this template. The items 1 to 13 in the template determine if a contract is more ACR or OCR related. The questions are based on elements used in sample supply chain contracts found on the Internet and which are commonly used in different types of settings where financial incentives play a role (Lawinsider, 2014). The questions are sorted in different groups: determined terms, information and privacy, clarity of roles (Stone, 2015).
3.4 Data analysis
After having completed the data collection, the next step was to make sense of the obtained data in a structured and plausible way. The used tactic is similar to Eisenhardt’s (1989) cross-‐case pattern analysis, where within group similarities are coupled with intergroup differences across several dimensions. Prior to the cross-‐case analysis, we performed a within-‐case analysis to get familiar with the results per case. After having established an overview of the variables for every case, pattern-‐coding was applied to identify patterns across cases. The most important patterns were discussed and put into perspective in regard to our research question. A chain of evidence (Yin, 2013) was established by linking the constructs developed in the interview protocol to the cross-‐case analysis, supported by the circumstances in which the data are collected e.g. time and venue (data collection). In order to get more transparency into the data and categorize the identified concepts and elements from the interviews, a coding tree was developed (see table 2). With the help of table 2, we were able to highlight patterns across cases by examining differences and similarities of interpretive codes. Before attaching interpretive codes, descriptive codes were established from our theoretical background and interview protocol. After each descriptive code, the strongest and most influential quotes about the specific concept was picked from all interviewees and translated into interpretive codes.
of formal contracting efforts, typical for an ACR (Sako,1992). Interdependence was broken down into three descriptive codes: availability of substitutes, switching costs and supplier’s dependence. With the help of these constructs, we get better insight into relative power of the buyer in the relationship, which is closely related to interdependence (Caniels and Gelderman, 2007; Geyskens et al. 1996). At first sight, Case A shows very high dependence on his supplier as opposed to other cases occupying a low dependency position. The implications of this finding are discussed during the within-‐case and cross-‐case analysis. Power, as in the adoption of power throughout the buyer-‐supplier relationship, was subdivided into coercive power or non-‐coercive power. These forms of power were found to be mediated by the buyer (Maloni and Benton, 2000) and hence are relevant for this context. We notice that Case C was the only case to use coercive power and relate to this during the analysis.
Table 2: Coding tree across all cases
Descriptive codes Quotes Interpretive codes
Relational governance
Interpersonal trust Case A: “We have good relations with the people
that frequently visit our company” Relational trust
Case B: “We have direct contact with the
management and strive to grow together as strategic partners”
Relational trust Case C: “Our relationship is very open in the sense
that I can express my price expectations and he can respond to that”
Price-‐driven trust Case D: “My contact person is very decent, honest
and customer-‐oriented”
Relational trust Inter-‐organizational trust Case A: “The supplier has a well-‐established
company but is also very rigid” Performance-‐driven trust
Case B: “The supplier is a healthy firm where odd
things are not likely to happen” Resource-‐based trust
Case C: “I trust the supplier because I know their
financial structure and we are the most important customer they have”
Resource-‐based trust Case D: “Suppliers in this market maintain stable
prices and can provide supply for the long-‐term because there is consistency”
Market-‐based trust Negotiations Case A: “We generally negotiate about the
conditions of the strategic item in terms of delivery speed and quantities”.
Performance-‐driven negotiations Case B: ”During negotiations prices are determined
and secondly strategic elements are discussed” Price-‐driven negotiations
Case C: “We explore opportunities to get
competitive prices and make our suppliers aware of the relative prices in the market”
Price-‐ driven negotiations Case D: “Our suppliers are involved in project
design talks with our customer and therefore make early preparations in production and delivery”
Supplier integration in project design
Contractual governance
Contracting efforts Case A:” Consensus is reached through dialogue
and by keeping each other up-‐to-‐date about processes”
Dialogue and information sharing
Case B: “Supplier X fulfills our demand through
contracts and performance is therefore higher than non-‐contracted items”
Contracts guarantee performance
Case C: “Contracts offer little meaning when
spontaneous decisions have to be made” Rigidness of contracts
Case D: ”Contracts lack problem solving capacity
Interdependence
Availability of substitutes Case A: “We have a big problem if this supplier cuts
the supply” Locked-‐in
Case B: “The supplier does face some competition
on the strategic item on a European level” Low dependence
Case C: “There are 100 other parties in the
Netherlands that can provide this product” Not dependent
Case D: “There are approximately 10 suppliers
worldwide but we buy in Europe” Low dependence
Switching costs Case A: “It is almost impossible to switch suppliers
on the strategic item because it is too specific and customized for our customer”
High costs of switching Case B: “It is possible to purchase from another
supplier although you have to start over in achieving the same quality and delivery reliability, which is not desirable”
Reluctant to switch Case C: “I can assign projects to other suppliers if
they offer better prices than my supplier but I have to take into account that longer delivery times may occur”
Price-‐focused Case D: “Other parties are able to provide the
product the way we want it to be but we need to invest some time in that”
Reluctant to switch Suppliers’ dependence Case A: “ We are among the top 50 customers of
supplier W” Routine customer
Case B: “ The suppliers’ dependence on us is not
really high, about 15-‐20%”
Moderately important customer Case C: “If we drop out as a customer, the supplier
has a big problem because we generate 30% of their revenue”
Important customer Case D: “The supplier is for about 10-‐15%
dependent on us”
Moderately important customer
Power
Coercive power Case C: “By showing my supplier the price offers of
other suppliers, I can get more competitive prices”
Exploitation
Non-‐coercive power Case A: “We try to push the supplier’s performance
back to the accepted norms, if they deviate from it” Joint problem solving
Case B: “I actually do have some leverage on my
supplier but I prefer to be honest and fair because the tide can always turn
Balanced interaction Case C: “I am not a proponent of fines, but I do
reward a supplier with more volume if he can decrease his price for example”
Competitive rewarding Case D: “We allocate more volume to suppliers that
we are content with” Performance rewards
4.Results
4.1 Within-‐case analysis
Case A Relational governanceThe managers of Case A expressed that they were content with the contact persons from supplier Y. One factor contributing to this is that the relationship stems back from 1970. “We exist for 53 years and the relationship with supplier W
them” stated the general manager. Furthermore, the frequent company visits
provided by both parties also indicate a positive atmosphere between the partners. The purchasing manager revealed that the people from supplier W were regularly visiting the company and that he knows them very well. “We do
not want to buy at supplier W today and tomorrow from another. We have good relations with the people that come here” says the purchaser; referring to the
amount of trust they have in this supplier. Despite the positive relations, the managers did express some concerns about the potential and consistency of this supplier. “Supplier W is a well-‐established company but also very rigid”. Sometimes
they drop a few stiches and are not able to compensate for it, which is very odd”,
the manager declared. Both managers referred to a conflict in the past, which damaged the relationship. Some other minor examples were given that indicated the inconsistency and their inability to quickly respond to that. The managers find it very odd of such a well-‐known company to perform like this. This means that although organizational trust is high, it is tempered by the drops in performance.
Contractual governance
Table 3: Document study results of Case A
Item category Outcome
Determined terms Very determined
Information sharing Less determined with
frequent result exchange
Clarity of roles Monitoring and planning
governed by the buying firm
The template indicates that terms and conditions are very determined in the contract. Quantitative data such as price, quantities and timing of payments/deliveries are mentioned and are also fixed. However, information sharing is less determined, not stating what and when information exchange occurs and by whom. Unlike the monitoring of results, which is governed by Case A. Results are thereby frequently exchanged in a timespan of every two months. In addition, the buying firm was solely in control of monitoring and planning.
The conflict that had risen between the buyer and supplier did not end in a termination of the relationship, although the problems were severe. The conflict could have easily been prevented if the supplier communicated the planned change to its customer but instead they decided to hide information. Despite very determined contracts and agreements, the buyer was not able to force compensation or take legal action but came to a resolution in revising agreements and tightening control through monitoring. The role of contracts was not of significance, because they could not prevent the problem nor provide a solution for the problem. Instead, the manager indicated that in general consensus is reached through dialogue and by joint problem solving efforts, especially when you have a long-‐lasting partnership with a supplier.
Interdependence
Case A occupies a supplier dependent position, because they do not have substitutes for the strategic item. The purchasing manager admitted that they would have a big problem if supplier W cuts the supply. According to him there are two main reasons why this item has become very critical and strategic: “the
item is very specific and customized for our customer and unfortunately there are no other parties at the moment that can provide it with the same or better quality”.
As a result, the switching costs are rather high. However, the manager sees the strategic item as a part of the overall relationship with supplier W. “We purchase
non-‐strategic items from supplier W as well and we can re-‐allocate these volumes to other suppliers if we want to. This way we somehow have a balance in power in our relationship”, the general manager declared. Furthermore, the company is
among the top 50 customers of supplier W, making them a routine customer.
Power
In general, Case A uses non-‐coercive power to manage the supplier. This became apparent during conflict management. “We try to push the supplier’s performance
back to the accepted norms, sounded the purchasing manager after being asked
for measures against failures. This was mainly done in a jointly fashion. In addition, the absence of fines and actions against supplier W after the conflict shows that Case A lacked the power and hence the determination in taking measures. The purchasing manager responded that after the conflict new agreements were made and ever since no major problems were detected.
Case B
Relational governance
The general manager of Case B emphasized the mutual interests between the company and its strategic supplier. He pointed to the strategic relevance of moving forward together, as they are part of the same supply chain. “We have
direct contact with the management and strive to grow together as strategic partners” he says. To further illustrate his point he went on about mutual
interests. “You have to see the whole chain where products are sold to the same
customer and it is important that the interests within the chain are aligned. If we cannot sell to a customer, our supplier cannot sell to us, which is bad for both parties. Our contact person is aware of this and therefore acts accordingly”. We
can say that the relational trust among the partners is playing a role in this setting. The manager was confident about the continuity and reliability of his supplier. He acknowledged: “The supplier has a healthy firm where odd things are
not likely to happen”. Hereby he specifically aimed at the supply of the strategic
item, because the supply of non-‐strategic items went less smooth. “Non-‐strategic
products purchased at this supplier are less consistent in quality and delivery because we do not have contracts for these items”, he added.
Contractual governance
