How To Overcome Supply Problems In Different Power Regimes

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How To Overcome Supply Problems In

Different Power Regimes

- A Remark On Agency Theory –

Final Version Master’s thesis Theme: supplier reliability

Master’s Thesis Supply Chain Management

University of Groningen, Faculty of Economics and Business June 21, 2013 Ernst-Johannes Prosman Student number: s2232022 Nieuwe Blekerstraat 50 9718 EK Groningen Tel: +31 (0)6 46 51 29 88 e-mail: e.j.prosman@student.rug.nl Supervisors Dr. N.D. van Foreest Dr. K. Scholten ABSTRACT

Agency Theory provides a starting point on how to deal with supply problems. One of Agency Theory’s prescriptions are Behavioral Based Governance Methods (BBGMs). BBGMs comprise a large set of methods which aim at the prevention of supply problems. However, Agency Theory discourages the employment of BBGMs when suppliers are powerful. On the opposite, other researchers argue that BBGMs are efficient when suppliers are powerful. This research, therefore, seeks to expose the detrimental and beneficial effects of power imbalances between buyers and suppliers on the application of BBGMs. This is done by investigating the applicability of the wide variety of BBGMs in different power regimes. By doing so, this research highlights the need for power awareness and sheds a light on how to prevent supply problems. A multiple case study among four Dutch companies and eight buyer-supplier relationships examines the effectiveness of the several BBGMs in cases of low and high supplier power. The main findings reveal that the effectiveness of a BBGM depends on the type of BBGM as well as on the power distribution between the buyer and the supplier. This finding puts a remark on Agency Theory.

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Recent trends show that buyers increasingly cooperate with suppliers to prevent supply problems such as late deliveries or quality issues (Gadde & Håkansson, 1994; Ganesan, George, Jap, Palmatier & Weitz, 2009; Giunipero, Handfield & Eltantawy, 2006). In fact, current supply chain literature suggests that cooperation is the holy grail for preventing supply problems, see for example Childerhouse and Towill (2011), Christopher (2005), Flynn, Huo and Zhao (2010) and Frohlich and Westbrook (2001). However, other authors doubt whether this holy grail is as holy as current supply chain literature claims it to be, especially in cases where suppliers are powerful (e.g. Cox, 2001; Cox, 2004; Hausman & Johnston, 2010).

The above dispute leads to an incongruent perception about the effectiveness of preventing supply problems by means of cooperation in settings where suppliers are powerful. Nonetheless, both fronts admit that cooperation is susceptible to power (Cox, 2001; Van Donk & Van der Vaart, 2005; Zhao Huo, Flynn & Yeung, 2008). Nonetheless, Cox (2001), Hausman and Johnston (2010) and McHugh, Humpreys and McIvor (2003) are more destructive in their statements than Childerhouse and Towill (2011), Christopher (2005), Flynn et al., (2010) and Frohlich and Westbrook (2001). The more destructive front argues that powerful suppliers deteriorate cooperation and that cooperation, therefore, should not be used in such situations. The less destructive front, on the other hand, argues that cooperation is still effective when confronted with powerful suppliers (Zhao, et al., 2008).

As a matter of fact, Agency Theory provides a platform to determine whether or not buyers should cooperate with their suppliers (see Literature Review). Therefore, Agency Theory is an useful avenue to solve the above dispute. In addition, Agency Theory is a relevant approach since it is widely used in practice (Mol, 2007).

When, according to Agency Theory, the situation lends itself for cooperation, so called

Behavioral Based Governance Methods, abbreviated as BBGMs, should be deployed (Eisenhardt,

1989; Logan, 2000). BBGMs comprise a set of methods to prevent supply problems. Examples of those methods are supplier development, information sharing and supplier certification (Zsidisin & Ellram, 2003). Clearly, the required level of cooperation differs among BBGMs as well as required supplier effort (Celly & Frazier, 1996); (Zsidisin & Ellram, 2003). Supplier development, for instance, requires a higher level of supplier effort than supplier certification.

Remarkable, however, is that Agency Theory does not consider the wide variety of existing BBGMs in their recommendations. A homogenous answer, as Agency Theory provides, for using or not using BBGMs when buyers face powerful or powerless suppliers seems therefore impossible. The research question of this study therefore is:

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With the effectiveness of BBGMs we mean the effectiveness of preventing supply problems. Considering the explorative nature of this research, we derive a case study research protocol and conduct multiple case studies among Dutch companies to answer this question.

This study contributes to literature by exploring the influence of power on BBGMs. Previous studies already focus on the influence of power imbalances on supplier cooperation. However, this is usually done without taking into account the various forms of BBGMs accompanied with their varying level of supplier effort (e.g. Cox, 2001; Cox, 2004). Furthermore, scholars call for new perspectives for examining foundational issues of corporate governance and therefore Agency Theory (Daily, Dalton & Cannella, 2003; Ghoshal, 2005). Since this study emphasizes how power influences different BBGMs, this study obeys the call for a new perspective. Moreover, it combines two separated research fields: power imbalances and Agency Theory. By doing so, this study strengthens the understanding of both research fields. In addition, empirical research on power in buyer-supplier relationships is still limited (Caniëls & Gelderman, 2007). This study also adds to this field or research.

While the above contribution seems to be rather academic, the novelty of this study for practice is that we explore the fringes of BBGMs in terms of applicability. This helps practitioners in applying the right BBGM in a particular power regime.

The remainder of this paper is organized as follows. After a synopsis of Agency Theory, we discuss the two constructs of this paper – BBGMs and power – and their relation with each other. In the same section, we develop the research propositions and the conceptual model. The subsequent section pertains to the research procedure used to answer the research question and the proposed research propositions. This section includes the case selection procedure, the development of the interview protocol, data reduction methods and data analysis. Thereafter, we provide a brief description of the cases studied. Subsequently, we describe the findings of this research along with a discussion on these findings. Suggestions for further research are interwoven in this section. We conclude with the limitations of this study, a brief conclusion and a small encore.

2. LITERATURE REVIEW

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2.1. Agency Theory

At its most basic sense, Agency Theory is concerned with resolving problems which might arise in the relationship between two (or more) parties. In this relationship, one party, designated as the principal (the buyer), engages another party, designated as the agent (the supplier), to perform tasks such as supply deliveries on the behalf of the principal (Eisenhardt, 1989; Jensen & Meckling, 1976). Problems arise when 1) there is goal conflict between the buyer and the supplier and 2) if it is difficult or expensive for the buyer to verify what the supplier is doing. This second cause is also known as information asymmetry (Eisenhardt, 1989; Fama & Jensen, 1983; Jensen & Meckling, 1976). The arising problems, better known as agency problems, manifest themselves in either or both adverse selection and moral hazard. Adverse selection refers to suppliers who misrepresent their capabilities by claiming that they can provide outcomes which they know they cannot. Moral hazard refers to the risk that suppliers put in less effort than agreed upon (Baiman, Fischer & Rajan, 2000; Eisenhardt, 1989). The underlying problem of adverse selection and moral hazard is that the total costs of transaction increases when agency problems occur.

As we have already mentioned, agency problems arise as a result of goal conflict and

information asymmetry. The nature of organizations (bounded rationality, self-interest and risk

aversion) completes the causes of agency problems (Eisenhardt, 1989; Fama & Jensen, 1983; Jensen & Meckling, 1976). The next paragraphs explain these three causes in more detail.

The nature of organizations characterizes itself by 1) bounded rationality, 2) self-interested behavior and 3) the level of risk aversion (Lubatkin, Lane, Collin & Very, 2007). First, bounded

rationality implies that buyers are not able to cover all possible supply risks in a contract.

Therefore, contracts with suppliers tend to be incomplete. In addition, this incompleteness is augmented by the complexity of contractual relations (Wright, Mukherji & Kroll, 2001). The incomplete contracts form a platform of opportunities for agency problems. In addition, due to bounded rationality, the buyer’s ability to distinguish between best behavior and self-serving behavior of suppliers is limited (Lubatkin, et al., 2007). Furthermore, Agency Theory assumes that suppliers are self-interested which implies that suppliers will rather behave in the best of their own interest than in the best of the buyer’s interest (Logan, 2000). Lastly, the level of risk

aversion determines the probability and impact of an agency problem. When suppliers are risk

averse, they are less likely to act self-interested. Suppliers are more risk averse when security and income are tied to a single buyer (Eisenhardt, 1989; Tate, Ellram, Bals, Hartmann & Van der Valk, 2010). The opposite of risk aversion is risk neutrality.

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Third, information asymmetries hinder monitoring of suppliers and increase the scope for agency problems. Due to this, the buyer’s dependence on the supplier’s dutiful initiatives increases (Heide, 2003; Hendry, 2002). Information asymmetries arise when buyers have only limited insight into suppliers’ actions (Lubatkin, et al., 2007). Indeed, information asymmetries increase when it is difficult or expensive to verify if the supplier behaves properly (Eisenhardt, 1989). In addition, suppliers can create information asymmetries by withholding information about their performance (Bhattacharya, Ecker, Olsson & Shipper, 2011).

The factors explained in the previous paragraph form the foundation of agency problems in terms of moral hazard and/or adverse selection. Buyers can respond to agency problems in mainly two ways: outcome-based methods and BBGMs (Eisenhardt, 1989; Hendry, 2002; Zsidisin & Ellram, 2003).

First, outcome-based methods comprise a set of methods which intend to shield buyers from the negative effects of agency problems (Pagell & Krause, 1999; Zsidisin & Ellram, 2003). Examples of outcome-based methods are safety stock, multiple supply sources and requiring suppliers to hold inventory (Zsidisin & Ellram, 2003). Secondly, BBGMs aim at reducing the likelihood of supply problems. This approach’s focus is on process of order fulfillment (Eisenhardt, 1989).

So, outcome-based methods rather cope with the negative consequences of poor supply performance whereas BBGMs reduce the likelihood of supply problems. This research is focused on BBGMs rather than on outcome-based methods because of the cooperative nature of BBGMs. The next section provides a more detailed presentation about BBGMs.

2.2. BBGMs

As mentioned, BBGMs comprise a set of methods which reduce the probability of unreliable supply (Eisenhardt, 1989; Hendry, 2002; Zsidisin & Ellram, 2003; Zsidisin, Ellram, Carter & Cavinato, 2004). This section starts with an elaboration on how BBGMs achieve their goals. Next, examples of BBGMs are given. We conclude this section with a discussion on the wide variety of BBGMs and a synopsis of the circumstances in which to employ BBGMs.

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TABLE 1 Examples of BBGMs

BBGM Description Citations

Supplier certification A method to communicate performance expectations. The certificate is awarded to

suppliers who consistently meet the buyer’s objectives in terms of performance. An important aspect of the certification process is providing feedback to suppliers. The feedback clarifies the buyer’s expectations and provides the supplier with directions for improvement.

Cox and Blackstone (1998); Krause, Scannell and Calantone (2000); Modi and Mabert (2007)

Awarding suppliers Providing incentives and aligning the incentives with performance objectives. These

incentives award suppliers based on their performance, thereby stimulating the supplier to improve performance.

Lee (2004); Krause et al. (2000)

Demand information sharing

Sharing information about demand allows the supplier to coordinate its activities in an effort to achieve reliable supply, for example by providing the supplier with forecasts, sales data and production schedules. The effectiveness of information sharing depends on two aspects: the information sharing support technology (hardware, software, etc.) and the accuracy of this information.

Handfield and Nichols

(1999); Lee (2004); Zhou and Benton Jr. (2007)

Target costing Target costing is a method of extensive discussion and negotiation between buyers

and suppliers. Sharing of (sales) information and buyer-supplier collaboration form the basis of target costing. Target costing aims at goal alignment between buyers and suppliers to improve supplier delivery performance.

Newman and McKeller

(1995); Ellram (2002) Monitoring supplier

performance

Monitoring the activities of the supplier leads to a clearer understanding of the likelihood and impact of supply risks caused by moral hazard and adverse selection.

Hallikas, Karvonen, Plukkinnen and Tuominen (2004); Zsidisin et al. (2004)

Supplier development The buyer directly involves itself in the processes of the supplier. Supplier development might entail investments in the supplier such as training and education of the supplier, employee exchange between the buyer and the supplier and capital investments in the supplier. Supplier development aims at improving the supplier’s capabilities, thereby making the supplier more reliable.

Krausse (1999); Krausse and

Ellram (1997); Krause et al. (2000)

BBGMs and the degree of required supplier effort

The level of required supplier efforts differs per BBGM. When looking at Table 1, we observe that BBGMs require efforts from suppliers (Krause, et al., 2000; Schönsleben, 2000). Monitoring supplier performance, for instance, requires the supplier to handover process information. More specifically, supplier efforts vary per BBGM. Supplier development, for instance, requires suppliers to adapt their processes whereas supplier certification, in principle, does not require that much effort from suppliers (Zsidisin & Ellram, 2003). Figure 1 (see next page) displays roughly the degree of supplier effort required for each of the BBGMs listed in Table 1. The findings of Krause et al., (2000) and Schönsleben (2000) stand on the basis of this division. Noteworthy is that required supplier effort is not fixed and might differ per situation, thereby deviating from Figure 1. The aim of Figure 1 is solely to show that BBGMs differ in their degree of required supplier effort.

When to employ BBGMs

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FIGURE 1

BBGMs and the Degree of Required Supplier Effort

Required supplier effort

Low High

Supplier certification Awarding suppliers Demand information sharing Target costing

Monitoring supplier performance Supplier development

2.3. The Correlation Between Risk Aversion And Power

Albeit risk aversion and power are distinct phenomena, the same underlying mechanisms are involved. Recall that the level of risk aversion of suppliers depends on the degree that security and income are tied to a particular buyer. When security and income are tied to a particular buyer, the supplier is dependent upon this buyer (Eisenhardt, 1989; Tate, et al., 2010). An appropriate measurement of dependence is power (Caniëls & Gelderman, 2007). Bacharach and Lawler (1981: 65) define power as ‘the dependence of one party [buyer or supplier] compared to the dependence of the other party’. Likewise, also Anderson and Narus (1990), Dickson (1983) and Hausman and Johnston (2010) state that power is a function of inter-firm dependence. Power, thereby, is in favor of either the buyer or the supplier (Buchanan, 1992; Caniëls & Gelderman, 2007; Geyskens, Steenkamp, Scheer & Kumar, 1996; Kumar, Scheer & Steenkamp, 1995).

So, powerful suppliers are risk neutral because their incomes are not tied to the buyer. On the other hand however, powerless suppliers are risk averse because their incomes are tied to the buyer.

When we combine the above discussion with the recommendations of Agency Theory (see previous paragraph), we see that Agency Theory recommends to employ BBGMs instead of outcome-based methods when 1) supply is considered to be uncertain, 2) when there is little or no goal conflict between the buyer and the supplier, 3) when supplier behavior is measurable and 4) when suppliers are powerless. Note that he variable ‘level of risk aversion’ is substituted for the variable ‘supplier power’.

2.4. Shortcomings Of Agency Theory

Agency Theory seems to be incapable in determining when BBGMs should be used instead of outcome-based methods. This incapability manifests itself in two manners which are presented below.

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suppliers are powerful (Celly & Frazier, 1996). As a matter of fact, supply chain scholars show that, while admitting the influence of power, powerless buyers perform better when they employ BBGMs instead of outcome-based methods (Childerhouse & Towill, 2011; Christopher, 2005; Frohlich & Westbrook, 2001; Zhao, et al., 2008). The role of power in the assessment between BBGMs and outcome-based methods is therefore doubtful. This has been the initial trigger of this research.

Secondly, when returning to the conditions under which BBGMs are preferred over outcome-based methods, we observe that Agency Theory does not take into account the various types of BBGMs and their level of required supplier effort (see Figure 1). Since there is a wide variety of BBGMs, this research investigates if Agency Theory should take the level of supplier effort into account when discouraging or recommending the employment of BBGMs.

These two reasons justify the research question ‘what is the influence of power on the

effectiveness of BBGMs?’.

In the next sections, we discuss the relation between BBGMs and power. By doing so, we discuss the discrepancy between Agency Theory and supply chain literature. Based on this discussion, we formulate the research propositions which summarizes the foundations of this study.

2.5. Power And BBGMs

BBGMs are less effective when suppliers are more powerful. First of all, recall that, when we follow the assumptions of Agency Theory, contracts tend to be incomplete and offer a platform for self-interested supplier behavior (Eisenhardt, 1989). As we have seen in the previous sections, suppliers become less risk averse the more powerful they become. In line with this, powerful suppliers are more likely to act self-interested and to reject BBGMs. BBGMs, as a consequence, are therefore less effective when suppliers are powerful. Beyond Agency Theory, also other scholars admit that power affects the effectiveness of BBGMs (e.g. Bates & Slack, 1998; Van Donk & Van der Vaart, 2005; Zhao, et al., 2008).

However, after a thorough literature review, it seems that no other study has done research to the effect of power specifically on the different BBGMs and their varying levels of required supplier effort (see Figure 1). In order to answer the research question, ‘what is the influence of

power on the effectiveness of BBGMs?’ we first need to find out if power indeed plays a role in

the effectiveness of BBGMs. Therefore, the first research proposition being investigated is:

P1: The effectiveness of BBGMs is influenced by power imbalances between buyers and suppliers

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The mechanism behind power’s influence on BBGMs

Unfortunately, empirical research on power in buyer-supplier cooperation is still limited (Caniëls & Gelderman, 2007). As a consequence, it is even more limited for power and its effect on BBGMs. However, it is appropriate to look at BBGMs from the perspective of buyer-supplier cooperation and to adapt this to BBGMs. This because BBGMs and buyer-supplier cooperation show many similarities (Eisenhardt, 1989). The next paragraph provides insight in how power affects supplier cooperation. Next, we make an important distinction between buyer-supplier cooperation and BBGMs. Thereafter, a discussion follows on how power affects the effectiveness of BBGMs. We conclude with the formulation of the second research proposition.

To start with how power affects buyer-supplier cooperation, we have to admit that there is an inconsistent view on what power imbalances imply for the effectiveness of buyer-supplier relationships. Below follows an explanation of this.

First, several authors claim that buyer-supplier cooperation is inefficient when one of the actors is more powerful than the other (Anderson & Weitz, 1989; Frazier & Rody, 1991). They argue that powerful actors might attempt to exploit their power advantage (Anderson & Weitz, 1989; Frazier & Rody, 1991). Furthermore, Geyskens et al., (1996) argue that greater power asymmetry is associated with a higher level of risk aversion by the weaker actor and with a lower level of risk aversion by the more powerful actor. This because powerless companies have a greater need to continue the cooperation whereas powerful companies experience a lower necessity to continue the cooperation (Geyskens, et al., 1996). Agency Theory confirms this since it assumes that the powerful actor is self-interested and exploits its position. In addition, this is also observed by Anderson and Weitz (1989: 312), who point out that ‘imbalanced channel relationships are characterized by less cooperation and greater conflict’.

However, other scholars claim that imbalanced power does not automatically result in the abuse of power and, in turn, inefficient cooperation (Provan & Gassenheimer, 1994). For instance, Maloni and Benton (2000) argue that the powerful actor can use its power as a tool to promote cooperation. This enhances the effectiveness of buyer-supplier cooperation.

In fact, there is an important difference between buyer-supplier cooperation and BBGMs. Making the safe assumption that buyers who are initiating BBGMs will not invoke agency problems, the employment of BBGMs is never thwarted by buyers. Therefore, in contrast with buyer-supplier cooperation, only suppliers might thwart BBGMs. Based on this distinction, we translate the above view on the influence of power on buyer-supplier cooperation to the influence of power on BBGMs.

To start with, BBGMs are less effective when suppliers are powerful. The first reason for this is that powerful suppliers are more likely to thwart BBGMs because of their risk neutral and

self-interested nature (Geyskens, et al., 1996; Lubatkin, et al., 2007). Furthermore, powerful

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to accept BBGMs of small buyers (Bates & Slack, 1998; Van Donk & Van der Vaart, 2005; Zhao, et al., 2008). In addition, the fact that suppliers, of course, do not experience the need to promote BBGMs amplifies the inefficiency of BBGMs. Therefore, we expect the effectiveness of BBGMs to be lower when suppliers are powerful.

However, when suppliers are powerless, suppliers have a greater need to accept BBGMs (Geyskens, et al., 1996). As a matter of fact, powerful buyers can use their power as a tool to promote the application of BBGMs (Maloni & Benton, 2000). This is likely to result in higher effectiveness of BBGMs (Cox, 2004). Success stories, of for instance Toyota, point out that BBGMs are effective when buyers have a power edge.

The above discussion takes away the inconsistent view. It seems that BBGMs are effective when buyers are powerful whereas BBGMs are less effective when suppliers are powerful. Therefore, the second research proposition is:

P2: BBGMs are more effective when buyers have more power

This proposition is in line with the recommendations of Agency Theory. Agency Theory recommends not to employ BBGMs when suppliers are powerful. Moreover, also current supply chain literature confirms this proposition (Bates & Slack, 1998; Van Donk & Van der Vaart, 2005; Zhao, et al., 2008). However, whereas Agency Theory discourages the employment of BBGMs when suppliers are powerful, other authors argue that BBGMs should still be used in such a context (Childerhouse & Towill, 2011; Christopher, 2005; Frohlich & Westbrook, 2001). This discrepancy justifies a further leap into the different types of BBGMs and their different levels of required supplier effort (see Figure 1). The next section elaborates on this.

The level of supplier effort and the effectiveness of BBGMs

As we have seen in Figure 1, some BBGMs require more effort from suppliers than other BBGMs. As a consequence, the effectiveness of high supplier effort requiring BBGMs is more dependent on the supplier’s willingness to cooperate. As we expect that powerful suppliers will neglect the efforts they need to make for BBGMs, high supplier effort requiring BBGMs are more susceptible to powerful suppliers than low supplier effort requiring BBGMs. Therefore, the third research proposition being investigated is:

P3: BBGMs which depend more on supplier efforts are less effective than BBGMs which depend

less on supplier efforts in settings where suppliers are powerful

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proposition proposes that for high supplier effort BBGMs Agency Theory and, among others, Cox (2001); Cox (2004); and Hausman and Johnston (2010) are right. However, for low supplier effort BBGMs, among others, Childerhouse and Towill (2011), Christopher (2005) and Frohlich and Westbrook (2001) are right.

The propositions can be captured in the following conceptual model: FIGURE 2

Conceptual Model

Figure 2 shows that the more powerful the supplier is, the less effective the BBGM is. When the employed BBGM requires a lot of effort from the supplier, the aforementioned relationship is even stronger.

3. METHODS

Rather than testing an existing theory or developing a completely new theory, theory refinement refers to refining a theory by means of empirical analysis aiming at specifying the circumstances in which it does or does not offer valid explanations (Karlsson, 2009: 165; Voss, Tsikriktsis & Frohlich, 2002). The present research can be best described as theory refinement of Agency Theory (McCutcheon & Meredith, 1993). Thereby are we investigating the circumstances in which BBGMs are effective. The variables are power imbalances between buyers and suppliers and the various types of BBGMs (see Figure 1).

In order to answer the research question, this study employs a multiple case study among Dutch companies. As we are exploring an area wherein Agency Theory is underdeveloped, a case study approach fits best with the empirical element of theory refinement (McCutcheon & Meredith, 1993; Van de Ven, 1989). Rich data, ensuing from the semi-structured interviews and site visits (McCutcheon & Meredith, 1993) is likely to accurately reflect the effectiveness of BBGMs when confronted with power imbalances. It shows thereby a great fit with the theory refining perspective of this research (Corrêa, 1992;Sousa & Voss, 2008; Voss, et al., 2002). The multiple case study approach, instead of a single case study approach, guards us against a misjudgment on an event and/or exaggerating easily available data (Leonard-Barton, 1990; Yin, 2009: 54). In addition, multiple-case studies improve the generalizability of the conclusions compared to single case studies (Voss, et al., 2002).

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Supplier power Effectiveness of the

BBGM Required supplier

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3.1. Research Settings

Instead of a random selection of cases, we applied theoretical sampling (Glaser & Strauss, 1967; Yin, 2009). First, the cases varied in the degree of buyer power. This sampling criterion was used to investigate if power imbalances affect the effectiveness of BBGMs. Second, the cases varied in the degree of supplier effort required for the employed BBGM. This sampling criterion was used to investigate if some BBGMs are less susceptible to power than others as BBGMs differ in their degree of required supplier effort (see Figure 1). Following the approach as suggested by Miles and Huberman (1984: 238), we selected the cases based on contrasting characteristics on these two variables. This resulted in the following matrix:

FIGURE 3 Research Settings

Low supplier effort BBGM High supplier effort BBGM

Buyer power Research setting 1 Research setting 2

Supplier power Research setting 3 Research setting 4

The research settings enabled us to select each case so that it either predicts similar results (literal replication) or produces contrary results but for predictable reasons (theoretical replication) (Eisenhardt & Graebner, 2007). To test the first proposition, the effectiveness of

BBGMs is influenced by power imbalances between buyers and suppliers, as well as the second

proposition, BBGMs are more effective when buyers have more power, we selected cases for both low- and high supplier effort BBGMs for the purpose of literal replication and we selected cases for both buyer power and supplier power for the purpose of theoretical replication. For the third proposition, BBGMs which depend more on supplier efforts are less effective than BBGMs

which depend less on supplier efforts in settings where suppliers are powerful, we selected cases

for both buyer power and supplier power for the purpose of literal replication and cases for both low supplier effort and high supplier effort BBGMs for the purpose of theoretical replication.

For each research setting, at least two cases at different companies were found. In doing so, we limit the chance of a misjudgment of a single event and of exaggerating easily available data (Leonard-Barton, 1990). As a consequence, at least eight cases were studied. Given this theoretical sampling, eight case studies are considered as an appropriate number (Eisenhardt, 1989b; Yin, 2009: 54). More cases would only increase the practical- and research complexity.

3.2. Sample Selection

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Company selection

Companies were selected from the personal network of the researcher as well as from the network of the University of Groningen. The case study companies were all large to medium sized companies1 and were selected on the following criteria:

1. Location of the company: only companies located in the Netherlands were approached in order to reduce the chance of observer-bias caused by language differences. Moreover, buyer-supplier relations are treated differently around the world. Imagine for instance the different perspectives on supplier cooperation between Japanese and Western companies. 2. Type of business: there is a significant and relevant difference between buyer-supplier

relationships where services are purchased or where tangible products are purchased (Van der Valk & Van Iwaarden, 2011). We opt for only selecting buyer-supplier relations where the focus is on the procurement of tangible products because the assessment between BBGMs and outcome-based methods is more relevant for the procurement of tangible products. This because outcome-based methods are mainly based on inventory keeping which is, in general, not possible when purchasing services (Axelsson & Wynstra, 2002).

3. Position in the buyer-supplier relation: only buyers were selected in order to enhance the practical relevance of this study. Because we focus on BBGMs which are initiated by buyers, it is more appropriate to base this study on the information that is known by buyers. By accomplishing this data with data retrieved from the supplier, we might get a biased view about the context the buyer thinks he is operating in. Therefore, by ignoring the supply side, the practical relevance of this study improves.

As suggested by Flynn, Sakakibara, Schoeder, Bates and Flynn (1990) and Frohlich (2002), the selected companies were asked to participate in the research by means of a phone call or by means of a face-to-face conversation whereby we tried to reach commitment. While we approached eight companies we were able to get access to four companies resulting in a response rate of 50%.

Case selection

Buyer-supplier relationships, as being the unit of analysis of this research, were treated as different cases. The cases were selected in close consultation with the purchase manager and/or the supply chain manager of the buying company. Besides the need that the case has to fit in one of the research settings (see Figure 3) and that the company has to meet the above listed requirements, the cases have to match the following criteria:

1_{Based on the criteria of the Dutch Chamber of Commerce}

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1. Agency problem: only cases where the buyer was confronted with an agency problem in terms of moral hazard or adverse selection are selected. This because the aim of this research is to investigate whether or not BBGMs are effective in solving agency problems in each of the four research settings (see Figure 3).

2. The application of BBGMs: only companies which indicate that they do not have start-up problems with BBGMs are selected (Eisenhardt, 1989). This in order to avoid biased results.

3. Situation: only cases were 1) supply is considered to be uncertain, 2) where there is little or no goal conflict between the buyer and the supplier and 3) where supplier behavior is measurable are selected for the purpose of this research. This because BBGMs are considered to be ineffective when this is not the case (Eisenhardt, 1989; Celly & Frazier, 1996). By controlling and stabilizing these variables, we are able to assess the influence of power imbalances.

The above requirements were checked during the interviews. If a case does not meet the requirements, the interview did not proceed as long as no new and sufficient case was found. Note that a company could offer more cases as long as they were not in the same research settings of Figure 3.

3.3. Interview Protocol

Semi-structured interviews form the basis of the data collection of this study. The interviews were held for each case with the purchase manager and/or supply chain manager of the buying company. The interview was divided into three parts. The first part of the interview is aimed at the collection of general information about the buying firm and the interviewee. The second part of the interview served to gain a better understanding of the contextual factors and how the BBGM fits within one of the four research settings of Figure 3. The third part of the interview served to gain insights in the effect of power on the applicability and the effectiveness of BBGMs. Appendix A provides an overview of the interview questions.

The first two parts of the interview consisted mainly of a brainstorming session wherein the interviewee was instructed to identify a case within their company. This case need to fit in one of the four research settings of Figure 3 and should meet the case criteria as listed in the previous section. After we have identified an appropriate case, the context was described in terms of the agency problem, general information about both the buyer and the supplier, the used BBGM, the required efforts on behalf of the supplier and the power relation between the buyer and the supplier.

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and Ellram (1997), Ragatz, Handfield and Scannell (2003) and Ring and Van der Ven (1994). These authors did research on how buyers and suppliers cooperate. In line with the theory refinement perspective of this research, the questions, of which most were closed questions designed for survey studies, were reframed into open questions. The adaption of the questions did not change the subject and the core of the original questions.

The third part of the interview was focused on gaining insight in the effectiveness of the BBGM. The effectiveness of a BBGM can be measured by looking at several factors as distinguished by Watts and Hann (1993) and Giunipero and Brewer (1993). By structuring the questions along these factors and relating them to power imbalances and required supplier efforts, a comprehensive view could be retrieved about the influence of power on the applicability of BBGMs. The questions of the second part of the interview were adapted from the questionnaires of Kannan and Tan (2002), Ragatz et al., (2003) and Caniëls and Gelderman (2007). In line with the theory refining perspective of this research, the questions, of which most were closed questions designed for survey studies, were duly reframed into open questions. The adaption of the questions did not change the subject and the core of the original questions.

In order to enhance the quality of the interview, the interview protocol was pre-tested (Yin, 2009: 93). The pilot entailed a discussion with the supervisor and fellow students. During these test sessions, several issues were discussed such as 1) whether the instructions were clear, 2) whether the questions were clear, and 3) whether there were any problems in understanding what kind of answers were expected (Fowler, 1993: 118). Moreover, several ways of asking questions were tried (Yin, 2009: 92). The insights of these discussions were used to refine the interview protocol, thereby improving the reliability of the research (Yin, 2009: 41/92). In addition, the protocol of the interview was standardized in order to improve the validity and reliability of the data (Yin, 2009: 92; Voss, et al., 2002).

3.4. Data Collection

The companies were visited once to conduct the interview. During the interviews, recording devices were used if allowed by the interviewee. These recordings, together with the field notes and observations, will help the researcher during the data analysis. After writing down the interview outcomes, the data was sent back to the interviewees and possible ambiguities were ascertained.

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3.5. Data Analysis

The rich amounts of qualitative data acquired by means of the interviews and site visits are expected to shed a light on the effectiveness of different BBGMs in different power relations. However, as poorly managed data results in poor data analysis, Miles and Huberman (1984: 152) suggest to start with data reduction in order make the data more manageable. Various forms of data reduction were applied, following the guidelines of Miles and Huberman (1984). Unordered meta-matrices form the basis for data reduction. Essentially, unordered meta-matrices enable researchers to work with the full set of data through data formatting, data standardization and data reduction. In doing so, the data set becomes more manageable and, in turn, results in better data analysis (Miles & Huberman, 1984: 152). The data was not analyzed before the data reduction was finished.

Data reduction

As mentioned, unordered meta-matrices form the basic building blocks for cross-site analysis (Miles & Huberman, 1984: 151). Unordered meta-matrices are master charts assembling descriptive data from each of the several cases in a standard format. We executed mainly two steps: juxtaposition and partition:

Data reduction starts with a juxtaposition of all the single-case data on one very large sheet. The basic principle is inclusion of all relevant data (Miles & Huberman, 1984: 152). The included data comprises the power regime between the buyer and the supplier, the applied BBGM, the required effort from the supplier and the effectiveness of the BBGM.

From there, we moved towards partitioning the data further by clustering data that falls together. When similar or identical issues were mentioned within or across cases, a code was created for those issues (e.g. improved delivery performance). The partitioned meta-matrix is more refined and entails short quotes and summarizing phrases.

After the completion of the unordered meta-matrix, the cases were ordered according to the main variables being examined in this study: power and supplier effort. This resulted in four, so called, site-ordered matrices. See Tables C2, C3, C4, and C5 in Appendix C. Due to the juxtaposition and partitioning, any lacking data could be identified and acted upon by contacting the interviewees. Moreover, the structured data provided a proper starting point for verifying the propositions, as is detailed next.

Verifying the propositions

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standalone scores. This counting method is in line with the recommendations of Miles and Huberman (1984: 215). They state that, when resorting to counting, researchers can verify a proposition whilst keeping themselves analytically honest. Moreover it protects them against bias (Miles & Huberman, 1984: 215).

The verification of the propositions was done by comparing the scores of the different cases with each other. By expressing the positive and negative achievements in ratios, the comparisons become more reliable. The reason for this is that some BBGMs are more focused on one or two objectives whereas other BBGMs are focus on a broader range of objectives. This results in short and long lists of positive and negative achievements. By expressing the positive and negative achievements in ratios, we were able to compare the results between cases without being misguided by long or short lists of achievements. By doing so, the differences among high- and low buyer power cases became clear as well as the differences among high- and low supplier effort BBGMs (Miles & Huberman, 1984: 160).

4. CASE DESCRIPTIONS

This section summarizes the contexts of the buyer-supplier relationship. We first provide an overview of the cases studied and the applied BBGM. Thereafter, we provide a view of the agency problems faced by the buyers.

Table 2 provides an overview of the selected companies, the cases they deliver and the employed BBGM. Appendix B provides a more comprehensive overview of the power context and the required supplier effort of the BBGM in each of the eight cases.

TABLE 2

Overview of the Cases Studied

Company Industry sector Size* Data sources research

setting **

Case names Applied BBGM

A Consumer goods Large Purchase manager

Site visit Purchase manager Site visit 1 2 Cons1 Cons2 Supplier certification Supplier development

B Electronics Medium-sized Purchase manager

Site visit Purchase manager Site visit Purchase manager Site visit 1 3 4 Elec1 Elec3 Elec4 Supplier certification Demand info sharing; evaluation moments Supplier development; target costing

C Media industry Medium-sized Supply chain manager

Site visit

3 Med3 Demand info sharing;

evaluation moments

D Industrial

equipment

Medium-sized Purchase manager

Purchase manager 2 4 Ind2 Ind4 Monitoring supplier performance; supplier development Info sharing; supplier development * Based on the criteria of the Dutch Chamber of Commerce

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In all buyer-supplier relationships, the buyers were, whether or not in the past, suffering from agency problems. Elec1, for instance, was confronted with quality problems. The supplier often tried to substitute components of the product with cheaper and lower quality components which could only be noticed through a ‘thorough and expensive product quality check’. A description of the agency problems of all the participating cases can be found in Appendix B.

5. RESULTS

This section summarizes the main results of this research. The presented results are a summary of the ordering, coding and rating process as described in the Method section and as presented in Appendix C. In Figure 4 and 5 we set the effectiveness of the BBGMs in the different research settings off against each other.

The collected data reveals that buyers employ BBGMs in all the research settings described in Figure 3 of the Method section. The employed BBGMs thereby aimed for one or more of the following objectives:

1. Higher product quality.

2. Improved delivery performance (on-time deliveries, smaller delivery time slots; accurate order quantities).

3. More agile suppliers (shorter lead times, higher flexibility to deal with demand fluctuations, quicker response in case of a rush order / emergency, higher accuracy of delivered quantities).

4. Lower costs (lower ordering costs, lower purchase price, lower quality inspection costs, costs of poor quality).

5. Higher innovation rate.

Figure 4 and 5 show the effectiveness of the BBGMs for the different objectives. The labels on the outside of the polar diagrams plot the above listed objectives. However, not all the BBGMs aimed for the same objectives. This is the reason behind the broken lines in Figure 4 and 5. The scales on the axes vary between 0 and 1, where 0 means that the BBGM is highly

ineffective and 1 means that the BBGM is highly effective in achieving the particular objective.

The calculation and the reasoning behind the scores can be found in Appendix C.

5.1. The Influence Of Power On BBGMs

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The effectiveness of the BBGMs in the cases of buyer power is related to the use of power. The powerful buyers use their power as a tool to promote or compel the employment of BBGMs. For example, Ind2’s supplier received ‘strongly recommended improvements’ and Cons1’s supplier constantly feels the pressure of being replaced by a better performing supplier.

In contrast, however, unmet objectives are plentiful when suppliers are more powerful than buyers. Some examples are canceled meetings in case Med3 and a supplier who did not improve the supply problems in case Elec3. Moreover, achieved objectives are rare in cases of supplier power. The next paragraph elaborates more thoroughly on the (in)effectiveness of BBGMs in cases of supplier power.

FIGURE 4

Effectiveness Of Low Effort BBGMs

FIGURE 5

Effectiveness Of High Effort BBGMs

5.2. The Effect Of Powerful Suppliers On Different BBGMs

When we compare the high- and low effort BBGMs with each other in cases where suppliers are powerful (dotted lines in Figures 4 and 5), we observe differences in effectiveness. We first elaborate on the effectiveness of high effort BBGMs and proceed with an elaboration on the low effort BBGMs.

High supplier effort BBGMs

To start with the high effort BBGMs, it appears that many of the objectives were achieved. The interviewees in case Elec4 and Ind4 argued that high supplier effort BBGMs turn their hostile and poor performing suppliers into ‘good business partners’. In fact, the purchase manager of Ind4 mentioned that high supplier effort BBGMs lead to ‘improved relationships and therefore increased supplier reliability’. This is illustrated by the attitude of the powerful

0 0,2 0,4 0,6 0,8 1 Higher product quality Improved delivery performance Higher agility of the supplier Lower costs Higher innovation rate

Buyer power (research setting 1, cases: Cons1 and Elec1)

Supplier power (research setting 3, cases: Med3 and Elec3) 0 0,2 0,4 0,6 0,8 1 Higher product quality Improved delivery performance Higher agility of the supplier Lower costs Higher innovation rate

Buyer power (research setting 2, cases: Cons2 and Ind2)

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suppliers. In both the case of Elec4 as in the case of Ind4, the powerful supplier treated the buyer as a ‘friend’. Furthermore, in both cases, the powerful supplier takes the required efforts of the BBGM seriously. The improved lead times in case Elec4 and increased agility of the supplier in case Ind4 demonstrates this. The supplier of Ind4, for example, immediately introduced a product substitute when the influx of raw materials was ceased by a strike. Furthermore, a second reason behind the effectiveness of the BBGMs, as putted forward by the purchase managers of both case Elec4 and Ind4, is that BBGMs create win-win situations and take away

goal incongruence. This because the process improvements deriving from the high effort

BBGMs leaded to an increased competitiveness of the supplier in relation to its competitors in terms of delivery performance and costs.

Albeit these achievements, the powerful suppliers were not willing to solve every problem. The too wide delivery time slots in case Elec4, for instance, remained unsolved and quality checks for incoming products in case Ind4 are still necessary. Nonetheless, even though the effectiveness of the high effort BBGMs is lower when suppliers have more power (see also Figure 5), the buyers consider the high effort BBGMs as effective in cases of supplier power. The purchase manager of Elec4, for instance, mentioned that ‘the collaboration [BBGM] was fruitful because the costs of collaboration are lower than the costs of the prevented supply risk’. Furthermore, the purchase manager of Ind4 insisted that the employment of high supplier effort BBGMs is effective in cases where suppliers are powerful’.

A side note, however, is that, although the suppliers under investigation have a significant power edge, the power edges were not extreme. The purchase managers in both case Elec4 and Ind4 agreed upon the fact that the giants of this century, for example Microsoft, Sony, etc., do not accept high effort BBGMs from small buyers. As the purchase manager of Cons2 pointed out: ‘working together with supplier X makes no sense because they are too big’. The purchase manager of Ind4 agreed upon this by saying ‘the really big suppliers do not want to cooperate with us’.

Low supplier effort BBGMs

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6. DISCUSSION

As we will see in the discussion, the results of this study suggest that not all propositions hold. However, before we proceed with the discussion, let us first briefly recall the research propositions and the reasoning behind this. The main proposition of this research is that BBGMs are susceptible to powerful suppliers. The more powerful the supplier, the stronger its tendency to reject BBGMs. Therefore, we proposed that BBGMs are ineffective when suppliers have a power edge. As suppliers can only thwart BBGMs by refusing to do their efforts, high supplier effort BBGMs are more susceptible to powerful suppliers than low supplier effort BBGMs and should, therefore, not be used in cases of high supplier power. This section interprets the results and discusses whether or not the data supports the propositions as well as the above mentioned reasoning.

6.1. The Effect Of Power On The Effectiveness Of BBGMs

The message emerging from the data in the Results section suggests that power indeed affects the effectiveness of BBGMs (see Figure 4 and 5). The subset of cases where buyers have more power (the solid lines in Figure 4 and 5) recorded a higher effectiveness of BBGMs than the cases where suppliers have more power (the dotted lines in Figure 4 and 5). This strongly supports the first and second proposition as the first proposition stated that power plays a role and the second proposition stated that BBGMs are more effective when buyers are powerful.

As a matter of fact, the results reveal that the effectiveness of BBGMs in cases of buyer power is associated with the use of power. Furthermore, suppliers acted indeed more risk averse, and therefore less self-interested, when buyers are powerful. Not surprisingly, the opposite holds when suppliers have more power. This is in line with the reasoning behind the first two propositions (see Literature Review).

Moreover, the above discussion supports Agency Theory. Likewise, the findings are also in line with research of, among others, Anderson and Weitz (1989), Bates and Slack (1998), Cox (2001), Frazier and Rody (1991), Geyskens et al., (1996), Van Donk and Van der Vaart (2005), and Zhao et al., (2008). These authors, implicitly or explicitly, state that BBGMs become less effective when suppliers are powerful.

6.2. High Supplier Effort BBGMs And Powerful Suppliers

A difference of our findings with the recommendations of Agency Theory is the occurrence of effective BBGMs in cases of supplier power (see Figure 5, dotted line). This observation indicates that the direct relation between powerful suppliers and ineffective BBGMs may be spurious. This, however, is in contrast with Agency Theory. We posit two possible explanations of this finding below.

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of delivery performance and costs. Those win-win situations make high effort BBGMs more attractive for suppliers which, plausibly, result in less resistance from the supplier.

Secondly, the cases studied in this research indicate that high effort BBGMs turn hostile or neutral suppliers into more friendly suppliers. The reason behind this is the extensive cooperation and the long enduring relationships which arise from the employment of BBGMs.

These two explanations, along with the emerging empirical findings of effective BBGMs in settings of supplier power (e.g. Childerhouse and Towill, 2011; Christopher, 2005; Flynn et al., 2010 and Frohlich and Westbrook, 2001), argue for more research on the pros and cons of employing BBGMs in cases of supplier power. Future research, therefore, needs to include ‘deep’ studies on all the variables of Agency Theory.

However, we have to place an important remark on the above discussion and the tentative explanations. From the results we can derive that the above explanations do not hold for settings where suppliers are extremely more powerful. This remark is in line with the research of Cox (2001) who, although implicitly, suggested that high supplier effort BBGMs are deemed to be ineffective when suppliers are more powerful than buyers. Exploring and capturing the difference between powerful and extremely powerful suppliers provides an opportunity for further research.

6.3. Implications For Agency Theory

The results of this study have implications for the interpretation of Agency Theory. As we have seen, our findings regarding Agency Theory are in some ways consistent and in some ways in contrast with Agency Theory. In line with Agency Theory, we found that BBGMs are indeed less effective when suppliers are powerful. However, from the results it appears that the general recommendations of Agency Theory regarding the employment of BBGMs in settings of supplier power falls short. Our findings show that high supplier effort BBGMs are still effective in cases of supplier power whereas low supplier effort BBGMs are ineffective in cases of supplier power. Therefore, Agency Theory should distinguish between several types of BBGMs. Unfortunately, however, is that this research does not unravel the underlying factors behind the effectiveness of high supplier effort BBGMs in settings of powerful suppliers. Therefore, further research should reveal which factors are important in the distinction between the several BBGMs. Based on our findings, possible directions for further research are the presence of win-win situations and the BBGM’s contribution to the improvement of buyer-supplier relationships.

7. LIMITATIONS AND CONCLUSIONS

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should provide more clarity about this before we can claim the validity of our study. A second limitation is the potential of hindsight bias and a biased perception of an individual at a specific moment in time. This last mentioned factor, the perception of an individual, might, according to Kahneman (2011), differ at different moments in time and can be boosted or put down in a short time frame. While our measures of BBGM effectiveness were combined with site visits as well as sending back the results to the interviewees for a final check, the potential of a bias cannot completely ruled out. A final limitation is that this research is only focused on the supply chains of tangible products. We are, therefore, careful in claiming the validity and the degree of application in which our results hold.

An important contribution of this research stems from its emphasis on the different types of BBGMs and their fluctuating levels of required supplier effort. Our findings add to the limitations of existing research, which does not take into account the various types of BBGMs while expressing critique on the employment of BBGMs in cases of powerful suppliers (e.g. Cox, 2001; Cox, 2004; Hausman and Johnston, 2010 and McHugh et al., 2003). Moreover, this research obeys the call of Daily et al., (2003) and Ghoshal (2005) who asked for new perspectives for examining the foundational issues of Agency Theory.

This research also adds to practice. In line with Childerhouse and Towill (2011), Christopher (2005), Flynn et al., (2010) and Frohlich and Westbrook (2001), we state that applying BBGMs is an effective approach to improve supply chain performance even when suppliers are powerful, at least as long as the suppliers are not extremely powerful. Nonetheless, the results of this study should be considered along with the principals of Transaction Cost Economics. This implies that, although BBGMs might be effective, it might be more cost effective to employ outcome based methods such as keeping inventory or doing nothing at all.

Using the data from both low- and high effort BBGMs which were employed under different power settings, this study examines the applicability of BBGMs in different power contexts. The results show that all types of BBGMs are effective when buyers are powerful but that only high effort BBGMs are effective in settings where suppliers are powerful. Therefore, we are allowed to put a remark on Agency Theory by stating that Agency Theory should take into account the various types of BBGMs. Furthermore, this research exposes several possible underlying reasons for our findings, thereby arguing the need for additional research on power imbalances between buyers and suppliers and their effect on the applicability of BBGMs.

7.1.Encore

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How To Overcome Supply Problems In Different Power Regimes